Exercise 20-3

Variable Costing for Management Analysis Warren / Reeve / Duchac Exercise 20-3 solution

Rugged Gear Inc. manufactures and sells men's athletic clothes. The company began operations on July 1, 2010, and operated at 100% of capacity (44,000 units) during the first month, creating an ending inventory of 4,000 units. During August, the company produced 40,000 garments during the month but sold 44,000 units at $110 per unit. The August manufacturing costs and selling and administrative expenses were as follows:

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

RUGGED GEAR INC.
Absorption Costing Income Statement
For the Month Ended August 31, 2010

Sales $4,840,000
Cost of goods sold:
Beginning inventory $240,000
Cost of goods manufactured $2,464,000
Cost of goods sold $2,704,000
Gross profit $2,136,000
Selling and administrative expenses $1,269,600
Income from operations $866,400

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

RUGGED GEAR INC.
Variable Costing Income Statement
For the Month Ended August 31, 2010

Sales $4,840,000
Variable cost of goods sold $1,936,000
Manufacturing margin $2,904,000
Variable selling and administrative expenses $919,600
Contribution margin $1,984,400
Fixed costs:
Fixed manufacturing costs $704,000
Fixed selling and administrative expenses $350,000 / Total $1,054,000
Income from operations $930,400