Sims Company, a manufacturer of tablet computers, began operations on January 1, 2019. Its cost and sales information for this year follows. Manufacturing costs Direct materials $ 35 per unit Direct labor $ 55 per unit Overhead costs Variable $ 40 per unit Fixed $ 6,300,000 (per year) Selling and administrative costs for the year Variable $ 700,000 Fixed $ 4,250,000 Production and sales for the year Units produced 105,000 units Units sold 75,000 units Sales price per unit $ 360 per unit 1. Prepare an income statement for the year using variable costing. 2. Prepare an income statement for the year using absorption costing.

Instructions are below.

Explanation:

Giving the following information:

Manufacturing costs:

Direct materials = $35 per unit

Direct labor = $55 per unit

Overhead costs

Variable = $40 per unit

Fixed = $6,300,000

Selling and administrative costs for the year:

Variable $700,000

Fixed $4,250,000

Units produced = 105,000

Units sold = 75,000 units

Sales price per unit $ 360 per unit

The difference between the absorption costing and variable costing method is that the first one includes the fixed overhead in the product cost.

1) Variable costing:

Unitary variable cost = direct material + direct labor + variable overhead

Unitary variable cost = 35 + 55 + 40 = 130

Sales = 75,000*360 = 27,000,000

Variable costs = (75,000*130) + 700,000 = (10,450,000)

Contribution margin = 16,550,000

Fixed overhead = (6,300,000)

Fixed Selling and administrative costs = (4,250,000)

Net operating income = 4,250,000

2) Absorption costing:

Unitary product cost = direct material + direct labor + total unitary overhead

Unitary fixed overhead = 6,300,000/105,000 = 60

Unitary product cost = 130 + 60 = 190

Sales = 75,000*360 = 27,000,000

Cost of goods sold = (75,000*190) = (14,250,000)

Gross profit = 12,750,000

Total Selling and administrative costs = (4,950,000)

Net operating income = 7,800,000