PB15.

LO 6.5Trail Outfitters has this information for its manufacturing:

Its income statement under absorption costing is as follows:

Prepare an income statement with variable costing and a reconciliation statement between both methods.

Trail Outfitters

Income statement using variable costing $

Sales 3,200,000 Less: Variable costs:

Beginning inventory (8,000 X $33) 264,000

Direct material (30,000 x $15) 450,000

Direct labour (30,000 x $15) 450,000

Variable manufacturing overhead (30,000 x $3) 90,000

1,946,000

Less: Closing stock 0

Less: Variable selling and administrative expenses 266,000

Contribution 1,680,000

Less: Fixed costs:

Fixed manufacturing overhead (30,000 x $25) 750,000

Fixed selling and administrative overhead 300,000

Net operating income 630,000

Opening inventory Net operating income

$ $

Variable costing 264,000 630,000

Absorption costing (464,000) (430,000)

Difference 200,000 200,000

The difference in net operating income of $200,000 is as a result of difference in opening inventory by $200,000.

Explanation:

In Variable costing, we need to obtain contribution, which is the excess of sales over variable cost. Variable cost is the aggregate of direct material, direct labour, variable manufacturing overhead and variable selling and administrative overhead.

Finally, we will deduct fixed costs from the contribution margin in order to obtain the net operating income. Fixed cost is the sum of fixed manufacturing cost and fixed selling and administrative cost.