Absorption vs. Variable Costing Approach

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Date Submitted: 09/12/2011 11:26 AM

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Absorption vs. Variable Costing Approach

For this week’s assignment we are to prepare two financial statements for the E-company, one using the absorption approach and another one using the variable costing approach. We are supposed to tell the CEO of the company about the advantages and disadvantages of the two different approaches and suggest which one should be used.

Below is the income statement using the absorption approach:

Absorption Approach

Sales (29*345000) $ 10,005,000.00 100%

less costs of goods sold

Beginning Inventory $ -

Add Costs of goods manufactured ((4.9+4)*400000) $ 3,560,000.00

=Goods available for sale $ 3,560,000.00

Less ending inventory (55000*8.9) $ 489,500.00

=costs of goods sold $ 3,070,500.00

Gross Margin (Sales-cost of goods sold) $ 6,934,500.00 69.31%

Less Operating Expenses (fixed & variable) $ 1,734,000.00

Net Income $ 5,200,500.00 51.98%

Below is the income statement using the variable costing approach:

Variable Costing Approach

Sales $ 10,005,000.00 100%

Less variable expenses

Variable costs of goods sold

Beginning Inventory $ -

Add Variable Manufacturing Cost $ 1,960,000.00

Goods available for sale $ 1,960,000.00

Less ending inventory (ending Inventory*variable manufacturing costs) $ 269,500.00

Variable Costs of Goods Sold $ 1,690,500.00

Variable Selling and Admin Expenses $ 414,000.00

$ 2,104,500.00

Contribution Margin $ 7,900,500.00 78.97%

Fixed Costs $ 2,800,000.00

Net Income $ 5,100,500.00 50.98%

Net income is not the same under the two different approaches because there was an ending inventory. Under the absorption approach net income is...