Exercise 20-2

Variable Costing for Management Analysis Warren / Reeve / Duchac Exercise 20-2 solution

Income statements under absorption costing and variable costing.
Digital Edge Inc. assembles and sells MP3 players. The company began operations on May 1, 2010, and operated at 100% of capacity during the first month. The following data summarize the results for May:

a. Prepare an income statement according to the absorption costing concept.

DIGITAL EDGE INC.
Absorption Costing Income Statement
For the Month Ended May 31, 2010

Sales $1,820,000
Cost of goods sold $1,274,000
Gross profit $546,000
Selling and administrative expenses $354,800
Income from operations $191,200

b. Prepare an income statement according to the variable costing concept.

DIGITAL EDGE INC.
Variable Costing Income Statement
For the Month Ended May 31, 2010

Sales $1,820,000
Variable cost of goods sold $1,164,800
Manufacturing margin $655,200
Variable selling and administrative expenses $254,800
Contribution margin $400,400
Fixed costs:
Fixed factory overhead costs $140,400
Fixed selling and administrative expenses $100,000 / $240,400
Income from operations $160,000