Question:
1. Lyon Furnaces prepares the income statement under variable costing for its managerial reports, and it prepares the income statement under absorption costing for external reporting. For its first month of operations, this company prepares the following income statement information under variable costing.
Sales (225 A? $1,600) . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . $360,000
Variable production cost (225 A? $625) . . . . . . . . . . . . . . . . . . . . 140,625
Variable selling and administrative expenses (225 A? $65) . . . . . . 14,625
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,750
Fixed overhead cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,250
Fixed selling and administrative expense . . . . . . . . . . . . . . . . . . . 75,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,500
Additional Information
During this first month of operations, 375 furnaces were produced and 225 were sold; this left 150 furnaces in ending inventory.
1. Prepare this company's income statement for its first month of operations under absorption costing.
2. Explain the difference in income between the variable costing and absorption costing income statement.