In: Accounting
Exercise C Dancing Diva produced 115,000 units this year and sold 110,000 units. The following costs were incurred:
Direct materials $517,500
Direct labor $1,840,000
Variable overhead $805,000
Fixed overhead $400,000
Sales Commissions $550,000
Fixed Selling Expenses $80,000
Fixed Administrative Expenses $300,000
Each unit sells for $40 each. Calculate the production cost per unit under the VARIABLE costing method and prepare a Contribution Margin Income Statement for the year ended December 31.
Calculation of the production cost per unit under the VARIABLE costing method
Variable costs of production; |
Amount |
Direct Materials |
$517,500 |
Direct Labor |
$1,840,000 |
Variable Overhead |
$805,000 |
Total Product Cost |
$3,162,500 (a) |
Total Units Produced |
115000 (b) |
Production cost per unit (a)/(b) |
$27.50 |
Explanation; Under variable costing method, company takes all variable manufacturing cost which increase with the volume. This does not include any other variable cost like; sales commission, variable selling expense, etc.
Preparation of a Contribution Margin Income Statement for the year ended December 31.
Sales (110,000 x $40 per unit) |
$ 4,400,000 |
|
Variable Costs: |
||
Production cost (110,000 x $27.50 per unit) |
30,25,000 |
|
Sales Commission (Selling expenses) |
5,50,000 |
|
Total variable costs |
35,75,000 |
|
Contribution Margin |
8,25,000 |
|
Fixed Costs: |
||
Fixed overhead |
4,00,000 |
|
Fixed Selling expenses |
80,000 |
|
Fixed Administrative expenses |
3,00,000 |
|
Total Fixed expenses |
780,000 |
|
Net Operating Income |
|
$45,000 |
Explanation; Under variable costing method, company is preparing Contribution Margin Income statement for internal purpose. In this statement, “production cost” is calculated on the basis of the “Production cost per unit ( $27.50)” , which calculated under Variable costing. “Sales commission” is taken as variable cost, which varies with the volume of product.