Question

. Company B, manufactures a unique device that is used by internet users to boost internet signals. The following data relates to the first month of operation: Beginning inventory: 0 units Units produced: 40,000 units Units sold: 35,000 units Selling price: $120 per unit Marketing and administrative expenses: Variable marketing and administrative expenses per unit: $4 Fixed marketing and administrative expenses per month: $1,120,000 Manufacturing costs: Direct materials cost per unit: $30 Direct labor cost per unit: $14 Variable manufacturing overhead cost per unit: $4 Fixed manufacturing overhead cost per month: $1,280,000 Management is anxious to see the success as well as profitability of newly designed unique booster. 1. Calculate unit product cost and prepare income statement under variable costing system and absorption costing system. 2. Prepare income statement under two costing system. 3. Prepare a schedule to reconcile the net operating income under variable and absorption costing system.

Answer 1

1) calculation of unit product cost:

		Absorption costing	variable costing
1	Direct material	$30	$30
2	Direct labour	$14	$14
3	variable manufacturing overhead	$4	$4
4	fixed manufacturing overhead(1280000/40000)	$32	-
5	unit product cost	$80	$48

2)

a) Income statement under Absorption costing:

Particulars	Amount	Amount
Sales(35000×$120)		$4200000
Less: COGS:
Opening inventory	-
Add: cost of goods manufactured(40000×80)	$3200000
Cost of goods available for sales	$3200000
Less:closing inventory ((40000-35000)×80)	$400000	$2800000
Gross profit(4200000-2800000)		$1400000
Less: marketing and administrative expense:
Variable(35000×4)	$140000
Fixed	$1120000	$1260000
Net operating income(1400000-1260000)		$140000

b) Income statement under variable costing:

Particulars	Amount	Amount
Sales(35000×$120)		$4200000
Less:COGS:
Opening inventory	-
Add: cost of goods manufactured(40000×48)	$1920000
Cost of goods available for sale	$1920000
Less: closing inventory(5000×48)	$240000	$1680000
Gross contribution profit(4200000-1680000)		$2520000
Less: variable marketing and administrative expense(35000×4)		$140000
Contribution margin(2520000-140000)		$2380000
Less: fixed expenses:
Manufacturing overhead expenses	$1280000
Marketing and administrative expenses	$1120000	$2400000
Net operating income(2380000-2400000)		-20000

C) Reconciliation schedule:

Net operating loss under variable costing	-$20000
Add: fixed manufacturing overhead deferred in inventory(5000×32)	$160000
Net operating income under absorption costing	$140000