Question

Buddy, Inc. produces and sells only one product. The following data refer to the year just completed:

Beginning Inventory 0 units

Units produced........................... 10,000

Units sold...................................... 8,000

Sales price per unit.................... $250

Variable selling and administrative expenses per unit $ 12

Fixed Selling and administrative expenses (Total) $190,000

Manufacturing Costs:

Direct materials cost per unit..................................................$ 50

Direct labor cost per unit..........................................................$ 75

Variable manufacturing overhead cost per unit..............$ 15

Fixed manufacturing overhead (Total).................................$160,000

Required:
a. What is the unit product cost for the month under variable costing?

b. What is the unit product cost for the month under absorption costing?
c. Prepare a contribution format income statement for the year using variable costing.

d. Prepare an income statement for the year using absorption costing.

Answer 1

a. Under variable costing, the unit cost is only the variable manufacturing cost per unit.
Unit product cost under variable costing
Particulars	Cost per unit
Direct materials	$50
Direct labor	$75
Variable manufacturing overhead	$15
Unit cost under variable costing	$140
b. Under absorption costing, the unit cost includes the variable and the fixed manufacturing cost per unit.
Unit product cost under absorption costing
Particulars	Cost per unit
Direct materials	$50
Direct labor	$75
Variable manufacturing overhead	$15
Add: Fixed manufacturing overhead per unit (Fixed manufacturing overhead / units produced)
($160,000 / 10,000 units)	$16
Unit product cost under absorption costing	$156
c. Income statement using variable costing
Under variable costing, the cost of goods sold is based on the units produced.
Particulars	Amount
Sales revenue (8,000 units @ $250 per unit) - A	$2,000,000
Direct materials (10,000 units produced @ $50 per unit) - B	$500,000
Direct labor (10,000 units produced @ $75 per unit) - C	$750,000
Variable manufacturing overhead (10,000 units produced @ $15 per unit) - D	$150,000
Cost of goods sold (B+C+D)	$1,400,000
Variable selling and administrative (10,000 units produced @ $12 per unit) - E	$120,000
Contribution margin (A-B-C-D-E)	$480,000
Less: Fixed manufacturing overhead	$160,000
Less: Fixed selling and administrative overhead	$190,000
Net Operating income	$130,000
d. Income statement using absorption costing
Under absorption costing, the cost of goods sold is based on the units sold.
Particulars	Amount
Sales revenue (8,000 units @ $250 per unit) - A	$2,000,000
Direct materials (8,000 units sold @ $50 per unit) - B	$400,000
Direct labor (8,000 units sold @ $75 per unit) - C	$600,000
Variable manufacturing overhead (8,000 units sold @ $15 per unit) - D	$120,000
Fixed manufacturing overhead (8,000 Units sold @ $16 per unit) - E	$128,000
Cost of goods sold (B+C+D+E)	$1,248,000
Variable selling and administrative (8,000 units sold @$12 per unit)	$96,000
Operating income	$656,000
Less: Fixed selling and administrative overhead	$190,000
Net Operating income	$466,000