Question

The EG Company produces and sells one product. The following data refer to the year just completed:

Beginning inventory		0
Units produced		34,100
Units sold		28,100
Sales price per unit	$	452
Selling and administrative expenses:
Variable per unit	$	23
Fixed (total)	$	393,400
Manufacturing costs:
Direct materials cost per unit	$	208
Direct labor cost per unit	$	58
Variable manufacturing overhead cost per unit	$	38
Fixed manufacturing overhead	$	716,100

Assume that direct labor is a variable cost.

Required:

a.	Compute the cost of a single unit of product under both the absorption costing and variable costing approaches. (Omit the "$" sign in your response.)

	Cost per unit
Absorption costing	$
Variable costing	$

b.	Prepare an income statement for the year using absorption costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Absorption Costing Income Statement
(Click to select)  Sales  Selling and administrative expenses  Net operating income (loss)  Gross margin  Cost of goods sold	$
(Click to select)  Net operating income (loss)  Gross margin  Sales  Cost of goods sold  Selling and administrative expenses
(Click to select)  Sales  Selling and administrative expenses  Cost of goods sold  Net operating income (loss)  Gross margin
(Click to select)  Gross margin  Cost of goods sold  Sales  Net operating income (loss)  Selling and administrative expenses
(Click to select)  Net operating income (loss)  Gross margin  Cost of goods sold  Selling and administrative expenses  Sales	$

c.	Prepare a contribution format income statement for the year using variable costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Variable Costing Income Statement
(Click to select)  Selling and administrative expenses  Variable cost of goods sold  Contribution margin  Sales  Manufacturing overhead  Variable selling and administrative expenses  Net operating income (loss)		$
Variable expenses:
(Click to select)  Fixed manufacturing overhead  Variable cost of goods sold  Net operating income  Sales  Variable selling and administrative expenses  Fixed selling and administrative expenses  Contribution margin	$
(Click to select)  Net operating income  Sales  Variable cost of goods sold  Fixed manufacturing overhead  Fixed selling and administrative expenses  Contribution margin  Variable selling and administrative expenses
(Click to select)  Selling and administrative expenses  Net operating income (loss)  Manufacturing overhead  Variable selling and administrative expenses  Contribution margin  Variable cost of goods sold  Sales
Fixed expenses:
(Click to select)  Net operating income  Fixed selling and administrative expenses  Contribution margin  Sales  Variable cost of goods sold  Fixed manufacturing overhead  Variable selling and administrative expenses
(Click to select)  Sales  Variable cost of goods sold  Contribution margin  Variable selling and administrative expenses  Net operating income  Fixed selling and administrative expenses  Fixed manufacturing overhead
(Click to select)  Variable selling and administrative expenses  Variable cost of goods sold  Net operating income (loss)  Manufacturing overhead  Selling and administrative expenses  Sales  Contribution margin		$

d.	Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above. (Omit the "$" sign in your response.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Net operating income under variable costing	$
(Click to select)  Add  Deduct  :  (Click to select)  Fixed manufacturing overhead costs deferred in inventory under absorption costing  Fixed manufacturing overhead costs released from inventory under absorption costing
Net operating income under absorption costing

Answer 1

Solution:

Part a –

Absorption Costing System

- Product Cost refers to the costs used to fabricate/make/produce a product.

- Under Absorption Costing, product cost includes both fixed and variable manufacturing expenses incurred in fabrication of the product or service.

- It includes cost of direct material used, cost of direct labor, consumable supplies used and manufacturing/factory overheads (both variable as well as fixed factory overhead).

- Ending Inventory is valued on Production Cost.

- Product Cost does not include Selling, General and Administrative Expenses.

Hence, only Variable Production Cost and Fixed Production Costs are considered as Product Cost and the ending inventory is valued at product cost.

Unit Product Cost (Absorption Costing)	$$
Direct Materials	$208
Direct Labor	$58
Variable Overhead	$38
Allocated Fixed Manufacturing Overhead ($716,100 / 34,100 Produced Units)	$21
Unit Product Cost	$325

Variable Costing System

1) Product Cost refers to the costs used to fabricate/make/produce a product.

2) Under Variable Costing System, product cost includes only following variable manufacturing costs:

- Cost of direct material used

- Direct labor cost

- Variable manufacturing overheads.

3) Under this system, fixed costs are not considered in product cost and for valuation of closing stock of finished goods. Fixed costs are treated as period cost in this system.

4) The value of finished goods and work in process is also comprised only of Manufacturing Variable Costs.

5) Selling and administrative expenses are not included because these are not the expenses incurred in production department. These expenses relate to selling and admin department.

Unit Product Cost (Variable Costing)	$$
Direct Materials	$208
Direct Labor	$58
Variable Overhead	$38
Allocated Fixed Manufacturing Overhead	0
Unit Product Cost	$304

Cost Per Unit Absorption Costing = $325 per unit

Cost per unit Variable costing = $304 per unit

Part b – Income Statement using Absorption Costing

Income Statement (Absorption Costing)
	$$
Sales (28,100 Units * $452)	$12,701,200
Less: Cost of Goods Sold (28,100 Units * $325)	$9,132,500
Gross Profit	$3,568,700
Selling and Administrative Expenses (Note 1)	$1,039,700
Net Operating Income (loss)	$2,529,000
Note 1 - Selling and Administrative Expenses
Variable (28,100 Units * $23)	$646,300
Fixed	$393,400
Total Selling and administrative expense	$1,039,700

Part c – Contribution Format Income Statement using Variable Costing

Contribution Format Income Statement (Variable Costing)
Sales (28,100 Units * $452)		$12,701,200
Variable Expenses:
Variable Cost of Goods Sold (28,100 Units * $304)	$8,542,400
Variable Selling and administrative expense (28,100 units * $23)	$646,300	$9,188,700
Contribution Margin		$3,512,500
Fixed Expenses:
Fixed manufacturing overhead	$716,100
Fixed selling and administrative expense	$393,400	$1,109,500
Net Operating Income (loss)		$2,403,000

Part d – Reconciliation

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Net operating income under variable costing	$2,403,000
Add or (Deduct): Fixed manufacturing overhead costs deferred in inventory under absorption costing / Fixed manufacturing overhead costs released from inventory under absorption costing    (34,100 - 28,100)Units * Fixed Manufacturing Overhead per unit $21)	$126,000
Net operating income under absorption costing	$2,529,000

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