Question

QUESTION ONE:

Absorption and Variable Costing: Prepare and Reconcile Variable costing Statements

Audiophonics Limited manufactures and sells high-quality and durable ear buds for use with personal electronics that are custom moulded to each customer’s ear. Cost data for the product follows:

Variable costs per unit:

           Direct materials                                       $12

           Direct labour                                            24

           Variable factory overhead                            8

           Variable selling and administrative               6

Total variable costs per unit                               $50

Fixed costs per month:

           Fixed manufacturing overhead                $240,000

           Fixed selling and administrative              180,000

Total fixed costs per month                                $420,000

The product sells for $80 per unit. Production and sales data for May and June, the first two months of operations, are as follows:

Units Produced                 Units Sold

May                         15,000                     13,000

June                        15,000                     17,000

Income statements prepared by the Accounting Department using absorption costing are presented below:

May        June

Sales                                                             $1,040,000   $1,360,000

Cost of goods sold:

           Beginning inventory                                           0              120,000

           Add cost of goods manufactured            900,000           900,000

           Goods available for sale                          900,000        1,020,000

           Less ending inventory                              120,000                        0

Cost of goods sold                                             780,000        1,020,000

Gross margin                                                      260,000             340,000

Selling and administrative expenses                  258,000            282,000

Operating income                                               $2,000           $58,000

REQUIRED:

1. Determine the unit cost under
   1. Absorption costing.
   2. Variable costing.

2. Prepare variable costing income statements for May and June using the contribution approach.

3. Reconcile the variable costing and absorption costing operating income figures.

4. The company’s Accounting Department has determined the break-even point to be 14,000 units per month, computed as follows:

Fixed cost per month         =           $420,000      = 14,000 units

Unit contribution margin                $30 per unit

On receiving this figure, the president commented, “There’s something peculiar here. The comptroller says that the break-even point is 14,000 units per month. Yet we sold only 13,000 units in May, and the income statement we received showed a $2,000 profit. Which figure do we believe?” Prepare a brief explanation of what happened on the May income statement.

Answer 1

Ans 4 : This is happening because the fixed overhead is included in the Contribution amount while calculating the break even point .

Actual Break even Point should be = 420000 /(80-44) = 11667 units.

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