Question

Zurgot Inc. has just organized a new division to manufacture and sell specially designed computer tables, using select hardwoods. The division’s monthly costs are shown in the schedule below:

Manufacturing costs:
Variable costs per unit:
Direct materials	$	192
Variable manufacturing overhead	$	19
Fixed manufacturing overhead costs (total)	$	500,850
Selling and administrative costs:
Variable		15	% of sales
Fixed (total)	$	343,440

Zurgot regards all of its workers as full-time employees, and the company has a long-standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labour costs in its fixed manufacturing overhead. The tables sell for $528 each.

During the first month of operations, the following activity was recorded:

Units produced		4,770
Units sold		3,720

Required:

1. Compute the unit product cost under each of the following costing method.

2. Prepare an income statement for the month using absorption costing. (Do not leave any empty spaces; input a 0 wherever it is required.)

3. Prepare a contribution format income statement for the month using variable costing. (Do not leave any empty spaces; input a 0 wherever it is required.)

4. Not available in Connect.

5. Reconcile the absorption costing and variable costing operating income figures in (2) and (3) above.

Answer 1

Working :

(1)

Unit product cost in Absorption Costing and Variable Costing :

Particulars	Cost per Unit
Absorption Costing	$ 316
Variable Costing	$ 211

(2) Absorption Costing Income Statement :

Particulars	Working	Amount
(A) Sales	3,720 * $ 528	$ 1,964,160
(B) Cost of Goods Sold :
Beginning Inventory	0
Add : Cost of Goods Manufactured	4,770 * $ 316 = $ 1,507,320
Cost of Goods Avilable for Sale	$ 1,507,320
Less : Ending Inventory	1050 * $ 316 = $ 331,800	$ 1,175,520
(C) Gross Profit (A - B)		$ 788,640
(D) Selling and Administrative Expenses	( $ 1,964,160 * 15%) + $ 343,440	$ 638,064
(E) Net Profit (C - D)		$ 150,576

(3) Variable Costing Income Statement :

Particulars	Working	Amount
(A) Sales	3,720 * $ 528	$ 1,964,160
Variable Expenses :
Variable Cost of Goods Sold :
Beginning Invenntory	0
Add : Variable Manufacturing Cost	4,770 * $ 211 = $ 1,006,470
Goods Available for Sale	$ 1,006,470
Less : Ending Inventory	1050 * $ 211 = $ 221,550
Variable Cost of Goods Sold	$ 784,920
Variable Selling and Administrative Expenses	$ 1,964,160 * 15% = $ 294,624
(B) Total Variable Expenses	$ 784,920 + $ 294,624	$ 1,079,544
(C) Contribution		$ 884,616
Fixed Expenses :
Fixed Manufacturing Overhead	$ 500,850
Fixed Selling and Administrative Overhead	$ 343,440
(D) Total Fixed Expenses		$ 844,290
(E) Net Profit (C -D)		$ 40,326

(5) Reconciliation of Absorption Costing and Variable Costing Income :

Net Operating Income ( Loss ) under Variable Costing	$ 40,326
Add : Fixed Manufacturing Overhead deferred in Absorption costing ( 1,050 * $ 105)	$ 110,250
Net Operating Income ( Loss ) under Absorption Costing	$ 150,576

Working :

Units Product Cost :

Absorption Costing :

Particulars	Amount
Direct Material Cost per Unit	$ 192
Variable Manufacturing Overhead Cost per Unit	$ 19
Fixed Manufacturing Overhead per Unit ( $ 500,850 / 4,770)	$ 105
Unit Cost	$ 316

Variable Costing :

Particulars	Amount
Direct Material Cost per Unit	$ 192
Variable Manufacturing Overhead Cost per Unit	$ 19
Unit Cost	$ 211

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