Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending January 31, Lemke Inc. estimated the following operating results:

Line Item Description	Amount
Sales (27,200 $96)	$2,611,200
Manufacturing costs (27,200 units):
Direct materials	1,572,160
Direct labor	372,640
Variable factory overhead	174,080
Fixed factory overhead	206,720
Fixed selling and administrative expenses	56,200
Variable selling and administrative expenses	68,000

The company is evaluating a proposal to manufacture 30,400 units instead of 27,200 units, thus creating an ending inventory of 3,200 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.

Question Content Area

a. 1. Prepare an estimated income statement, comparing operating results if 27,200 and 30,400 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Line Item Description	27,200 Units Manufactured	30,400 Units Manufactured
Contribution marginFixed manufacturing costsInventory, January 31SalesSelling and administrative expensesSales	$Sales	$Sales
Cost of goods sold:
Cost of goods manufacturedCost of goods soldFixed manufacturing costsInventory, January 31SalesCost of goods manufactured	$Cost of goods manufactured	$Cost of goods manufactured
Contribution marginCost of goods manufacturedFixed manufacturing costsInventory, January 31Selling and administrative expensesInventory, January 31	Inventory, January 31	Inventory, January 31
SalesSelling and administrative expensesTotal cost of goods manufacturedTotal cost of goods soldTotal fixed manufacturing costsTotal cost of goods sold	$Total cost of goods sold	$Total cost of goods sold
Fixed manufacturing costsFixed selling and administrative expensesGross profitInventory, January 31SalesGross profit	$Gross profit	$Gross profit
Contribution marginCost of goods soldInventory, January 31SalesSelling and administrative expensesSelling and administrative expenses	Selling and administrative expenses	Selling and administrative expenses
Operating incomeOperating lossOperating income	$Operating income	$Operating income

Question Content Area

a. 2. Prepare an estimated income statement, comparing operating results if 27,200 and 30,400 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Line Item Description	27,200 Units Manufactured	30,400 Units Manufactured
Contribution marginFixed factory overheadSalesVariable cost of goods manufacturedVariable cost of goods sold	$- Select -	$- Select -
Variable cost of goods sold:
InventorySalesVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expenses	$- Select -	$- Select -
Contribution marginFixed factory overheadInventory, January 31Manufacturing marginSales	- Select -	- Select -
Contribution marginInventoryTotal variable cost of goods manufacturedTotal variable cost of goods soldTotal variable selling and administrative expenses	$- Select -	$- Select -
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufactured	$- Select -	$- Select -
Contribution marginFixed factory overheadManufacturing marginVariable cost of goods soldVariable selling and administrative expenses	- Select -	- Select -
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufactured	$- Select -	$- Select -
Fixed costs:
Fixed factory overheadFixed inventoryFixed manufacturing marginFixed salesVariable selling and administrative expenses	$- Select -	$- Select -
Fixed contribution marginFixed inventoryFixed selling and administrative expensesVariable cost of goods soldVariable selling and administrative expenses	- Select -	- Select -
Total fixed costs	$Total fixed costs	$Total fixed costs
Operating incomeOperating loss	$- Select -	$- Select -

Question Content Area

b. What is the reason for the difference in operating income reported for the two levels of production by the absorption costing income statement?

The increase in operating income under absorption costing is caused by the allocation of ____________(fixed factory or variable) overhead cost over (fewer or larger) _____________number of units. Thus, the cost of goods sold is (less or more)_______________. The difference can also be explained by the amount of ______________(fixed factory or variable) overhead cost included in the ______________(beginning or ending) inventory.