Pennsylvania Manufacturing CompanyAbsorption (Full) vs. Variable Costing PROBLEM InformationFor the Year Ended December 31, 2020

Required: Using the data provided, prepare typed income statements under absorption costing and variable costing on the form provided at the first tab in this workbook. See the "Notes" below the data regarding income statement format.

Pennsylvania Manufacturing Company manufactures horse hair brushes that sell for $3.00 each. Production, sales, and cost data for 2020 are provided below.

Production Information:

Finished Goods, January 1, 2020 0

Units produced 3,000

Units sold 2,500

Cost Information:

Direct materials per unit$0.20

Direct labor per unit 0.09

Variable factory overhead per unit0.15

Total variable factory cost per unit0.44

Fixed factory overhead 2,100.00

Variable marketing per unit sold0.80

Fixed selling and administrative costs700.00

NOTES:

For absorption costing, use the traditional (generally accepted accounting principles) income statement format.

Sales - Cost of goods sold = Gross margin

Gross margin - Operating expenses = Operating income

For variable costing, use the contribution margin income statement format.

Sales - Variable costs = Contribution margin

Contribution margin - Fixed costs = Operating Income

Aside: Changing the format of the income statement does NOT change operating income, but changing rom absorption to variable costing does. In other words, when operating income changes, it is because we changed how we do the costing, not because you changed how we lay out the income statement.