Question

This problem is for Cost Accounting Exercise 10-3 (chapter 10 Ex. 3)

The chief executive officer of Acadia, Inc. attended a conference in which one of the sessions was devoted to variable costing. The CEO was impressed by the presentation and was asked that the following data of Acadia, Inc. be used to prepare comparative statements using variable costing and the company's absorption costing. The data follow:

Direct Materials....................................................................... $90,000

Direct Labor............................................................................. 120,000

Variable Factory Overhead........................................................ 60,000

Fixed Factory Overhead............................................................. 150,000

Fixed Marketing and Administrative Expense............................ 180,000

The factory produced 80,000 units during the period, and 70,000 units were sold for $700,000.

1. Prepare an income statement using variable costing.

2. Prepare an income statement using absorption costing.

(Rounding unit costs to three decimal places.)

Answer 1

SOLUTION

1. Income statement using variable costing

Particulars	Amount ($)	Amount ($)
Sales (a) (70000 units*$10 per unit)		700,000
Less:- Variable cost of goods sold (b)
Opening inventory	Nil
Add:- Variable cost of goods manufactured (80,000 units*$3.375 per unit)	270,000
Variable cost of goods available for sale	270,000
Less:- Closing inventory (10000 units*$3.375 per unit)	(33,750)	236,250
Gross contribution margin c= a-b		463,750
Less: Fixed expenses
Fixed Factory overhead		150,000
Fixed marketing & Administrative expenses		180,000
Net Operating Income		133,750

Manufacturing expense per unit =$90 000+$120 000+$60 000 / 80 000 units

= $3.375 per unit

2. Income statement using Absorption costing

Particulars	Amount ($)	Amount ($)
Sales (a) (70,000 units*$10 per unit)		700,000
Less:- Cost of goods sold (b)
Opening inventory	Nil
Add:-Cost of goods manufactured (80,000 units*$5.25 per unit)	420,000
Cost of goods available for sale	420,000
Less:- Closing inventory (10,000 units*$5.25 per unit)	(52,500)	367,500
Gross profit c= a-b		332,500
Less:- Operating Expenses
Fixed marketing & Administrative expenses		180,000
Net Operating Income		152,500

Manufacturing expense per unit =($90,000+$120,000+$60,000+150,000) / 80,000 units

=$5.25 per unit