Question:
Prior to the first month of operations ending April 30, 2011, Powell Industries Inc. estimated the following operating results:
Sales (18,000 A? $62.00) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,116,000
Manufacturing costs (18,000 units):
Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 684,000
Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,000
Variable factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,600
Fixed factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Fixed selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . 24,500
Variable selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . 29,600
The company is evaluating a proposal to manufacture 20,000 units instead 18,000 units, thus creating an ending inventory of 2,000 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.
a. Prepare an estimated income statement, comparing operating results if 18,000 and 20,000 units are manufactured in
(1) The absorption costing format and
(2) The variable costing format.
b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?