Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:

Beginning inventory		0
Units produced		30,300
Units sold		24,700
Selling price per unit	$	465
Selling and administrative expenses:
Variable per unit	$	25
Fixed per year	$	469,300
Manufacturing costs:
Direct materials cost per unit	$	211
Direct labor cost per unit	$	53
Variable manufacturing overhead cost per unit	$	36
Fixed manufacturing overhead per year	$	454,500

Assume that direct labor is a variable cost.

Required:

a. Compute the unit product cost under both the absorption costing and variable costing approaches.

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

c. Prepare an income statement for the year using variable costing.

d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Answer 1

Requirement a		Unit product cost	Absorption costing	Variable costing
		Direct materials costs	211	211
		Direct labor costs	53	53
		Variable manufacturing overhead costs	36	36
		Fixed manufacturing overhead costs	15
		Unit product cost	315	300
	Note	Fixed manufacturing overhead costs	15
		=454500/30300 units
Requirement b		Income statement using absorption costing
		Sales		11485500
		Cost of goods sold
		Cost of goods manufactured
		Direct materials costs	6393300
		Direct labor costs	1605900
		Variable manufacturing overhead costs	1090800
		Fixed manufacturing overhead costs	454500
		Total cost of goods manufactured	9544500
		Less : Ending inventory	1764000
		Cost of goods sold		7780500
		Gross margin		3705000
		Operating expenses
		Variable selling and administrative expense	617500
		Fixed selling and administrative expense	469300
		Total Operating expenses		1086800
		Operating Income		2618200
Requirement c		Income statement using variable costing
		Sales		11485500
		Variable costs
		Cost of goods sold
		Cost of goods manufactured
		Direct materials costs	6393300
		Direct labor costs	1605900
		Variable manufacturing overhead costs	1090800
		Total cost of goods manufactured	9090000
		Less : Ending inventory	1680000
		Cost of goods sold		7410000
		Variable selling and administrative expense		617500
		Total Variable costs		8027500
		Contribution Margin		3458000
		Fixed costs
		Fixed manufacturing overhead	454500
		Fixed selling and administrative expense	469300
		Total Operating expenses		923800
		Operating Income		2534200
Requirement d		Reconciliation
		Operating Income under absorption costing		2618200
	Subtract :	Fixed manufactured overhead not included in stock under variable costing		84000
		Operating Income under Variable costing		2534200