In: Accounting
High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation:
Beginning inventory | 0 | |
Units produced | 43,000 | |
Units sold | 38,000 | |
Selling price per unit | $ | 79 |
Selling and administrative expenses: | ||
Variable per unit | $ | 4 |
Fixed (per month) | $ | 556,000 |
Manufacturing costs: | ||
Direct materials cost per unit | $ | 15 |
Direct labor cost per unit | $ | 7 |
Variable manufacturing overhead cost per unit | $ | 3 |
Fixed manufacturing overhead cost (per month) | $ | 774,000 |
Management is anxious to assess the profitability of the new camp cot during the month of May.
Required:
1. Assume that the company uses absorption costing.
a. Determine the unit product cost.
b. Prepare an income statement for May.
2. Assume that the company uses variable costing.
a. Determine the unit product cost.
b. Prepare a contribution format income statement for May.
Answer:-1-a)-Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead
=$15+ $7+$3+$18= $43 per unit
Explanation:- Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced
=$774000/43000 units =$ 18 per unit
b)-
HIGH COUNTRY INC. | |||
Income statement (Using absorption costing approach) | |||
Particulars | Amount | ||
$ | |||
Sales (a) | 38000 units*$79 per unit | 3002000 | |
Less:- Variable cost of goods sold (b) | |||
Opening inventory | |||
Add:- Variable cost of goods manufactured | 1075000 | ||
Direct materials | 43000 units*$15 per unit | 645000 | |
Direct labor | 43000 units*$7 per unit | 301000 | |
Variable manufacturing overhead | 43000 units*$3 per unit | 129000 | |
Fixed manufacturing overhead | 774000 | ||
Variable cost of goods available for sale | 1849000 | ||
Less:- Closing inventory | 5000 units*$43 per unit | 215000 | 1634000 |
Gross contribution margin C= a-b | 1368000 | ||
Less:-Variable selling & administrative exp. | 38000 units*$4 per unit | 152000 | |
Contribution margin | 1216000 | ||
Less:- Fixed costs | |||
Selling & administrative exp. | 556000 | ||
Net Income | 660000 |
2-a)-
Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead
=$15+$7+$3=$25 per unit
b)-
HIGH COUNTRY INC. | |||
Income statement (Using variable costing approach) | |||
Particulars | Amount | ||
$ | |||
Sales (a) | 38000 units*$79 per unit | 3002000 | |
Less:- Variable cost of goods sold (b) | |||
Opening inventory | NIL | ||
Add:- Variable cost of goods manufactured | 1075000 | ||
Direct materials | 43000 units*$15 per unit | 645000 | |
Direct labor | 43000 units*$7 per unit | 301000 | |
Variable manufacturing overhead | 43000 units*$3 per unit | 129000 | |
Variable cost of goods available for sale | 1075000 | ||
Less:- Closing inventory | 5000 units*$25 per unit | 125000 | 950000 |
Gross contribution margin C= a-b | 2052000 | ||
Less:-Variable selling & administrative exp. | 38000 units*$4 per unit | 152000 | |
Contribution margin | 1900000 | ||
Less:- Fixed costs | |||
Manufacturing overhead | 774000 | ||
Selling & administrative exp. | 556000 | ||
Net Income | 570000 |