APL, Inc. began operations on January 1, 2016. The company does not generally carry Work inProcess Inventories at the end of the year. Variable product costs per unit were the same for 2016,2017 and 2018 and total $68 per unit. Total Fixed Overhead Costs are $600,000 per year. VariableSelling and Administrative Costs are $9 for each unit sold. Fixed Selling and Administrative Costs are$230,000 per year. The Selling Price is $450 per unit for all three years. Production and Salesfigures (in units) for three years are below.201620172018Production (units)4,000 units5,000 units3,000 unitsSales (units)2,000 units2,500 units5,000 unitsThe company uses the FIFO method to assign cost to any units left in ending Finished GoodsInventory.TASKS:A.Prepare, in good form (to include a proper heading), two Income Statements for 2017: Oneusing Absorption Costing and one using Variable Costing. Use the formats that I used in theclass example for Chapter 6. Then, prepare a Reconciliation to explain the difference in theNet Income figures. Again, use the format that I used in the class example.B.Now, assume that the Variable Costing Net Income is $1,035,000 for 2018. Prepare aReconciliation Schedule to compute the Absorption Costing Net Income for the same year.DO NOT PREPARE AN ABSORPTION COSTING INCOME STATEMENT.

Question
Asked Oct 17, 2019
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APL, Inc. began operations on January 1, 2016. The company does not generally carry Work in
Process Inventories at the end of the year. Variable product costs per unit were the same for 2016,
2017 and 2018 and total $68 per unit. Total Fixed Overhead Costs are $600,000 per year. Variable
Selling and Administrative Costs are $9 for each unit sold. Fixed Selling and Administrative Costs are
$230,000 per year. The Selling Price is $450 per unit for all three years. Production and Sales
figures (in units) for three years are below.
2016
2017
2018
Production (units)
4,000 units
5,000 units
3,000 units
Sales (units)
2,000 units
2,500 units
5,000 units
The company uses the FIFO method to assign cost to any units left in ending Finished Goods
Inventory.
TASKS:
A.
Prepare, in good form (to include a proper heading), two Income Statements for 2017: One
using Absorption Costing and one using Variable Costing. Use the formats that I used in the
class example for Chapter 6. Then, prepare a Reconciliation to explain the difference in the
Net Income figures. Again, use the format that I used in the class example.
B.
Now, assume that the Variable Costing Net Income is $1,035,000 for 2018. Prepare a
Reconciliation Schedule to compute the Absorption Costing Net Income for the same year.
DO NOT PREPARE AN ABSORPTION COSTING INCOME STATEMENT.
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Expert Answer

Step 1

Income statement of a company is a report of the company which shows the net loss or profit for the year. It shows the balance of revenue and expenses of the year.

Step 2

Part (a)

For year 2017:

Given information:

Sales units are 2,500 and selling price is $450 per unit.

Income statement under absorption costing is as follows:

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Amount (S) Amount ($) 1,125,000 Particular Sales (2,500 units $450) Less: COGS From year 2016 (2,000 unitsx$218) From year 2017 (500 unitsx$188) Total COGS Gross profit Less: selling & administrative expenses Fixed Variable (2,500 unitsx$9) Total expenses Net income 436,000 94,000 (530,000) 595,000 230,000 22,500 (252,500) 342,500 Working notes Particular Unit cost under absorption costing For year 2016: Variable product cost Fixed overhead cost (600,000/4000 units) COGS For year 2017: Variable product cost Fixed overhead cost (600,000/5000 units) COGS Amount (S) Amount ($) 68.0 150.0 218.0 68.0 120.0 188.0

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Step 3

Income statement under variable costing for year...

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Particular Sales (2,500 unitsx$450) Less: variable expenses: Variable product cost (2,500 unitsx$68) Variable S&A expenses (2,500 unitsx $9) Total variable cost Contribution margin Less: fixed expenses Amount ($) Amount ($) 1,125,000 170,000 22,500 (192,500) 932,500 600,000 230,000 Fixed OH cost Fixed S&A expenses Total fixed expenses Net income (830,000) 102,500 Particular Reconciliation: Net income using absorption costing Less Fixed OH cost adjustment ($120x2,000) Net income using variable costing Amount ($) 342,500 (240,000) 102,500

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