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The vice president of sales at Wildlife Corporation has received the income statement for January 2018. This statement,
which was prepared on the basis of variable costing, is reproduced below. The firm has just adopted a variable costing
system for internal reporting.
Wildlife Corporation
Income Statement
For the Month of January 2018
The unit rate for fixed manufacturing costs is based on monthly production of 150,000 units. Production for January was
50,000 units above sales. Inventory on January 30 was 50,000 units.
REQUIRED
1. The vice president for sales is uncomfortable with using variable costing and wonders what operating income
would have been using absorption costing. Therefore, you have been asked to do the following:
a. Prepare the January income statement using absorption costing.
b. Reconcile and explain the difference between income figures when variable costing and absorption
costing are used.
2. Provide the vice president of sales with sound reasons for using variable costing for income measurement.
1.
a)
Sales 2,400,000
- COGS (16*100,000) 1,600,000
= GM 800,000
- S&A FC 400,000
= OI 400,000
2)
The Income statement of the company should be prepared as per variable costing due to following reasons:
The variable costing statement provides a clear picture of the company's profit by considering fixed costs as period costs
which is a correct treatment of fixed costs.
Profit under Absorption costing is higher than variable costing when closing stock is higher than opening stock.