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 $(25,600\backslash$times $$91)$ $$2,329,600$

Manufacturing costs $(25,600$ units$)$:

Direct materials $1,400,320$

Direct labor $332,800$

Variable factory overhead $153,600$

Fixed factory overhead $184,320$

Fixed selling and administrative expenses $50,100$

Variable selling and administrative expenses $60,600$

The company is evaluating a proposal to manufacture $28,800$ units instead of $25,600$ 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 $25,600$ and $28,800$ units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Lemke Inc.

Absorption Costing Income Statement

For the Month Ending January $31$

Line Item Description $25,600$ Units

Manufactured $28,800$ Units

Manufactured

$$-$ Select $-$ $$-$ Select $-$

Cost of goods sold:

$$-$ Select $-$ $$-$ Select $-$

$-$ Select $--$ Select $-$

$$-$ Select $-$ $$-$ Select $-$

$$-$ Select $-$ $$-$ Select $-$

$-$ Select $--$ Select $-$

$$-$ Select $-$ $$-$ Select $-$

Question Content Area

a$.2.$ Prepare an estimated income statement, comparing operating results if $25,600$ and $28,800$ units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Lemke Inc.

Variable Costing Income Statement

For the Month Ending January $31$

Line Item Description $25,600$ Units

Manufactured $28,800$ Units

Manufactured

$$-$ Select $-$ $$-$ Select $-$

Variable cost of goods sold:

$$-$ Select $-$ $$-$ Select $-$

$-$ Select $--$ Select $-$

$$-$ Select $-$ $$-$ Select $-$

$$-$ Select $-$ $$-$ Select $-$

$-$ Select $--$ Select $-$

$$-$ Select $-$ $$-$ Select $-$

Fixed costs:

$$-$ Select $-$ $$-$ Select $-$

$-$ Select $--$ Select $-$

Total fixed costs $Total fixed costs $Total fixed costs

$$-$ Select $-$ $$-$ 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 fill in the blank $1$ of $5$

overhead cost over a fill in the blank $2$ of $5$

number of units. Thus, the cost of goods sold is fill in the blank $3$ of $5$

$.$ The difference can also be explained by the amount of fill in the blank $4$ of $5$

overhead cost included in the fill in the blank $5$ of $5$

inventory.