Question

Nelson 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		330
Units produced		6,010
Units sold		6,090
Units in ending inventory		250
Variable costs per unit:
Direct materials	$	42
Direct labor	$	24
Variable manufacturing overhead	$	2
Variable selling and administrative	$	17
Fixed costs:
Fixed manufacturing overhead	$	108,180
Fixed selling and administrative	$	97,440

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

Answer-a)-

NELSON CORPORATION
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	6090 units*$120 per unit		730800
Less:- Variable cost of goods sold (b)
Opening inventory	330 units*$68 per unit	22440
Add:- Variable cost of goods manufactured		408680
Direct materials	6010 units*$42 per unit	252420
Direct labor	6010 units*$24 per unit	144240
Variable manufacturing overhead	6010 units*$2 per unit	12020
Variable cost of goods available for sale		431120
Less:- Closing inventory	250 units*$68 per unit	17000	414120
Gross contribution margin C= a-b			316680
Less:-Variable selling & administrative exp.	6090 units*$17 per unit		103530
Contribution margin			213150
Less:- Fixed costs
Manufacturing overhead			108180
Selling & administrative exp.			97440
Net Income			7530

b)-

NELSON CORPORATION
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	6090 units*$120 per unit		730800
Less:- Variable cost of goods sold (b)
Opening inventory	330 units*$68 per unit	28380
Add:- Variable cost of goods manufactured		408680
Direct materials	6010 units*$42 per unit	252420
Direct labor	6010 units*$24 per unit	144240
Variable manufacturing overhead	6010 units*$2 per unit	12020
Variable cost of goods available for sale		437060
Less:- Closing inventory	250 units*$86 per unit	21500	415560
Gross contribution margin C= a-b			315240
Less:-Variable selling & administrative exp.	6090 units*$17 per unit		103530
Contribution margin			211710
Less:- Fixed costs
Fixed manufacturing overhead			108180
Selling & administrative exp.			97440
Net Income			6090

Explanation-

Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + Fixed manufacturing overhead

=$42+$24+$2+$18 = $86 per unit

Explanation:- Unit fixed manufacturing overhead= Fixed manufacturing overhead/No. of units produced

=$108180/6010 units =$18 per unit

Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$42+$24+$2 = $68 per unit