Question

Nelter Corporation, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price	$	120
Units in beginning inventory		320
Units produced		6,540
Units sold		6,260
Units in ending inventory		600
Variable costs per unit:
Direct materials	$	41
Direct labor	$	23
Variable manufacturing overhead	$	2
Variable selling and administrative expense	$	12
Fixed costs:
Fixed manufacturing overhead	$	156,960
Fixed selling and administrative expense	$	93,900

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.

Required:

a. Prepare a contribution format income statement for the month using variable costing.

b. Prepare an income statement for the month using absorption costing.

Answer 1

a.

Nelter Corporation
Variable costing Income Statement
Sales (6,260 x 120)		$751,200
Less: Variable expense:
Direct materials (6,260 x 41)	256,660
Direct labor (6,260 x 23)	143,980
Variable manufacturing overhead (6,260 x 2)	12,520
Variable selling and administrative expenses (6,260 x 12)	75,120
Total Variable expenses		-488,280
Contribution Margin		$262,920
Less: Fixed expense:
Fixed manufacturing overhead	156,960
Fixed selling and administrative expenses	93,900
Total fixed expenses		-250,860
Net Income		$12,060

b.

Variable manufacturing cost per unit = Direct materials + Direct labor + Variable manufacturing overhead

= 41+23+2

= $66

Fixed manufacturing overhead = $156,960

Beginning inventory = 320

Cost of beginning inventory = ( Variable manufacturing cost per unit x Beginning inventory) + ( Fixed manufacturing overhead x Beginning inventory/Number of units produced)

= 66 x 320 + 156,960 x 320/6,540

= 21,120+7,680

= $28,800

Ending inventory = 600

Cost of beginning inventory = ( Variable manufacturing cost per unit x Beginning inventory) + ( Fixed manufacturing overhead x Beginning inventory/Number of units produced)

= 66 x 600 + 156,960 x 600/6,540

= 39,600+14,400

= $54,000

Nelter Corporation
Absorption Costing Income Statement
Sales (6,260 x 120)		$751,200
Cost of goods sold:
Direct materials (6,540 x 41)	268,140
Direct labor (6,540 x 23)	150,420
Variable manufacturing overhead (6,540 x 2)	13,080
Fixed manufacturing overhead	156,960
Cost of goods manufactured	588,600
Add: Beginning inventory	28,800
Cost of goods available for sale	617,400
Less: Ending inventory	-54,000
Cost of goods sold		-563,400
Gross profit		$187,800
Operating expenses:
Variable selling and administrative expenses (6,260 x 12)	75,120
Fixed selling and administrative expenses	93,900
Total operating expense		-169,020
Net Income		$18,780