The traditional income statement uses absorption costing to create the income statement. This income statement looks at costs by dividing costs into product and period costs. In order to complete this statement correctly, make sure you understand product and period costs.

Make more money now! Try our JOB search.

The format for the traditional income statement is:

TIS1

Let’s use the example from the absorption and variable costing post to create this income statement.

AB1

When doing an income statement, the first thing I always do is calculate the cost per unit. Under absorption costing, the cost per unit is direct materials, direct labor, variable overhead, and fixed overhead. In this case, fixed overhead per unit is calculated by dividing total fixed overhead by the number of units produced (see absorption costing post for details).

AB2

Once you have the cost per unit, the rest of the statement is fairly easy to complete. All variable items are calculated based on the number of units sold. This includes sales, cost of goods sold, and the variable piece of selling and administrative expenses. The matching principle states that we must match revenue with expenses. Therefore, we can only expense the cost of the units that are sold. The units that are not sold end up in inventory.

Start with sales. Take your price per unit and multiply it by the number of units sold.

Sales = Price X Number of units sold

Sales = $100 X 8,000

Sales = $800,000

TIS2

Using the cost per unit that we calculated previously, we can calculate cost of goods sold by multiplying the cost per unit by the number of units sold.

Cost of goods sold = Cost per unit X Number of units sold

Cost of goods sold = $48.80 X 8,000

Cost of goods sold = $390,400

TIS3

Calculate gross profit by subtracting cost of goods sold from sales.

TIS4

Selling and administrative expenses can be variable or fixed. Therefore, you should treat the selling and administrative costs like a mixed cost. In this case, the variable rate is $5 per unit and the fixed cost is $112,000. Write your cost formula and plug in the number of units sold for the activity.

Total selling and administrative expense = $5 X 8,000 + $112,000

Total selling and administrative expense = $40,000 + $112,000

Total selling and administrative expense = $152,000

TIS5

Last but not least, calculate the operating income by subtracting selling and administrative expenses from gross profit.

TIS6

Final Thoughts

Having a solid grasp of product and period costs makes this statement a lot easier to do. Calculate unit cost first as that is probably the hardest part of the statement. Once you have the unit cost, the rest of the statement if fairly straight forward.

Share This:


Related pages


what is federal withholding taxhow to compute profit margin ratioexamples of variable expensesfifo inventory method examplecontribution margin ratio increases whenhow to find notes payablemanagerial accounting variance formulasdiscount bonds vs premium bondsjournal entry for income tax paiddebits and credits journal entriesperpetual vs periodic inventorysales commissions paid to the company's salespeoplelifo inventory method examplediscounted merchandisehow to prepare an accounting worksheetadjusting entries worksheet examplescompanies that use job order costingcheck premium bonds balancewip in accountingworksheet trial balance and adjustmentshow to calculate federal withholding on paycheckmeaning of perpetual inventoryweighted calcformula to calculate operating profitwhat is double declining balance methodreceived advance payment journal entrycost accounting absorptionadjusting entries depreciationwhy is an adjusting entry importantperpetual and periodichow to calculate contribution margin ratiowhy is labor a variable costhow much is the federal withholding tax percentageaccounting unearned revenuenet income on paycheckthe meaning of roi1000000 annuitysalvage in accountingcogs financejournal entry for depreciationjob costing journal entriesthe difference between perpetual and periodic inventory systemworksheet trial balance and adjustmentsunit labour cost formularaw materials requisitioned journal entrydepreciation cost calculatorpresent value of an ordinary annuity tablewhen is the balance in a prepaid expense account reducedwhat does the adjusted trial balance showfwt taxesretail inventory method formulais a p&l the same as an income statementasset turnover calculationpresent value calculator with paymentscontra expenseprepaid assets accountingpayroll accounting journal entriesprofit and loss summary accountdouble declining depreciation calculatorending inventory calculationjournal entries for merchandise transactionsunamortized premium on bonds payablerevenue turnover formulaare supplies a current assetthe journal entries for a bank reconciliationhow to calculate fifototal inventoriable product costcalculate present value annuityoverhead allocation baseexamples of closing entriesifrs warranty revenue recognitionhow to calculate simple interest per annumperiodic perpetual