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Absorption costing income statement On July 31, the end of the first month of operations, Del Ray Equipment Company prepared the following income statement, based on the variable costing concept: Del Ray Equipment Company Variable Costing Income Statement For the Month Ended July 31, 2016 Sales (50,000 units) 56,250,000 Variable cost of goods sold: Variable cost of goods manufactured $3,100,000 Less inventory, July 31 (12,000 units) 600,000 Variable cost of goods sold 2,500,000 Manufacturing margin $3,750,000 Variable selling and administrative expenses 1.575,000 Contribution margin $2,175,000 Fixed costs: Fixed manufacturing costs $ 620,000 Fixed selling and administrative expenses 487,500 1,107,500 Income from operations $1,067,500 Prepare an income statement under absorption costing.

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Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307

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Section
BuyFindarrow_forward

Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307
Chapter 20, Problem 20.6EX
Textbook Problem
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Absorption costing income statement

On July 31, the end of the first month of operations, Del Ray Equipment Company prepared the following income statement, based on the variable costing concept:

Del Ray Equipment Company Variable Costing Income Statement For the Month Ended July 31, 2016
Sales (50,000 units) 56,250,000
Variable cost of goods sold:
Variable cost of goods manufactured $3,100,000
Less inventory, July 31 (12,000 units) 600,000
Variable cost of goods sold 2,500,000
Manufacturing margin $3,750,000
Variable selling and administrative expenses 1.575,000
Contribution margin $2,175,000
Fixed costs:
Fixed manufacturing costs $ 620,000
Fixed selling and administrative expenses 487,500 1,107,500
Income from operations $1,067,500

Prepare an income statement under absorption costing.

To determine

Absorption Costing

Absorption costing is compulsory under Generally Accepted Accounting Principles (GAAP) for financial statements circulated to the external users. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Fixed factory overhead and variable factory overhead included as a part of factory overhead.

To Prepare: The income statement under the absorption costing concept of Company DRE.

Explanation of Solution

Prepare the income statement under the absorption costing concept of Company DRE as shown below:

Company DRE
Absorption Costing Income Statement
For the Month Ended July 31, 2016
Particulars Amount Amount
Sales   $6,250,000
Less: Cost of goods sold:    
Cost of goods manufactured $3,720,000  
Less: Ending inventory $720,000  
Total cost of goods sold   $3,000,000
Gross profit   $3,250,000
Less: Selling and administrative expenses:    
Variable $1,575,000  
Fixed $487,500  
Total selling and administrative expenses   $2,062,500
Income from operations   $1,187,500

Table (1)

Working notes:

Calculate cost of goods manufactured under absorption costing as shown below:

Cost of goods manufactured =(Variable cost of goods manufactured +fixed manufacturing cost)=$3,100,000+$620,000=

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Chapter 20 Solutions

Financial & Managerial Accounting
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