Answered Essay: On July 31, 2016, the end of the first month of operations, Rhys Company prepared the following income statement, based

On July 31, 2016, the end of the first month of operations, Rhys Company prepared the following income statement, based on the absorption costing concept: Rhys Company Income Statement – Absorption Costing For the Month Ended July 31, 2016 1 Sales (96,000 units) \$4,440,000.00 2 Cost of goods sold: 3 Cost of goods manufactured \$3,120,000.00 4 Less ending inventory (24,000 units) 624,000.00 5 Cost of goods sold 2,496,000.00 6 Gross profit \$1,944,000.00 7 Selling and administrative expenses 288,000.00 8 Income from operations \$1,656,000.00 Required: A. Prepare a variable costing income statement, assuming that the fixed manufacturing costs were \$132,000 and the variable selling and administrative expenses were \$115,200. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries. “Less” or “Plus” and colons will automatically appear if it is required. In your computations, round unit costs to two decimal places and round final answers to the nearest dollar. B. Reconcile the absorption costing income from operations of \$1,656,000 with the variable costing income from operations determined in (A).

Solution

Units manufactured=units sold +units in ending inventory

=96000+24000

=120,000 units

Variable cost of good manufactured:

=Cost of good manufactured-fixed manufacturing cost

=3120,000-132,000

=\$2,988,000

Unit cost of ending inventory=2988000/120,000

=\$24.90

Variable costing income statement:

 Sales \$4,440,000 Variable cost of good sold: Variable cost of good manufactured \$2,988,000 Less ending inventory (24000×24.90) \$97,600 Variable cost of good sold \$2,390,400 Manufacturing margin \$2,049,600 Less variable selling and administrative expense \$115,200 Contribution margin \$1,934,400 Fixed cost: Fixed manufacturing expense \$132,000 Fixed selling and administrative expense \$172,800 \$304,800 Income from operation \$1,629,600

2.

Absorption costing income from operation=\$1,656,000

Variable costing income from operation=\$1,629,600

Difference=\$26,400

Reconciliation:

Unit change in inventory=24000 units

Fixed manufacturing cost per unit=×\$1.10. (132,000/120,000)

Income from operation difference=\$26,400

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