On January 1 of the current year, Townsend Co. commenced operations. It operated its plants at 100% of capacity during January. The following data summarized the results for January:
Units
Production 50,000
Sales ($18 per unit) 42,000
Inventory, January 31 8,000
Total Cost or Expense:
Manufacturing costs variable 575,000
Fixed 80,000
Total 655,000
Selling and administrative expenses:
Variable $35,000
Fixed 10,500
Total 45,500
(a) Prepare an income statement in accordance with absorption costing.
(b) Prepare an income statement in accordance with variable costing.

Results are below.

Explanation:

The absorption costing method includes all costs related to production, both fixed and variable. The unit product cost is calculated using direct material, direct labor, and total unitary manufacturing overhead.

The variable costing method incorporates all variable production costs (direct material, direct labor, and variable overhead).

a) First, we need to calculate the unitary production cost under absorption costing:

Unitary production cost= (575,000 / 50,000) + (80,000 / 50,000)

Unitary production cost= $13.1

Now, the absorption costing income statement:

Sales= 42,000*18= 756,000

COGS= 13.1*42,000= (550,200)

Gross profit= 205,800

Total Selling and administrative expenses= (45,500)

Net operating income= 160,300

b) First, we need to calculate the total unitary variable cost:

Total unitary variable cost= (575,000/50,000) + (35,000 / 42,000)

Total unitary variable cost= $12.33

Now, the income statement:

Sales= 756,000

Total variable cost= 12.33*42,000= (517,860)

Total contribution margin= 238,140

Fixed overhead= (80,000)

Fixed selling and administrative= (10,500)

Net operating income= 147,640