Question

Baxtell Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	28
Direct labour		18
Variable manufacturing overhead		4
Variable selling and administrative		10
Fixed costs per year:
Fixed manufacturing overhead		393,000
Fixed selling and administrative expense		120,000

During the year, the company produced 32,750 units and sold 24,000 units. The selling price of the company’s product is $84 per unit.

Required:

1. Assume that the company uses absorption costing.

a. Compute the unit product cost.

b. Prepare an income statement for the year. (Do not leave any empty spaces; input a 0 wherever it is required.)

2. Assume that the company uses variable costing.

a. Compute the unit product cost.

b. Prepare an income statement for the year. (Do not leave any empty spaces; input a 0 wherever it is required.)

Answer 1

Answer-1-a)- Unit product cost under Absorption costing= $62 per unit.

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

=$28+$18+$4+$12

= $62 per unit

Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$393000/32750 units

=$12 per unit

b)-

BAXTELL COMPANY
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	24000 units*$84 per unit		2016000
Less:- Cost of goods sold (b)
Opening inventory		0
Add:- Cost of goods manufactured		2030500
Direct materials	32750 units*$28 per unit	917000
Direct labor	32750 units*$18 per unit	589500
Variable manufacturing overhead	32750 units*$4 per unit	131000
Fixed manufacturing overhead		393000
Cost of goods available for sale		2030500
Less:- Closing inventory	8750 units*$62 per unit	542500
Cost of goods sold			1488000
Gross Income (c= a-b)			528000
Less:-Variable selling & administrative exp.	24000 units*$10 per unit		240000
			288000
Less:- Fixed costs
Selling & administrative exp.			120000
Net Income			168000

2-a)- Unit product cost under Variable costing= $50 per unit.

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

=$28+$18+$4               

= $50 per unit

b)-

BAXTELL COMPANY
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	24000 units*$84 per unit		2016000
Less:- Variable cost of goods sold (b)
Opening inventory		0
Add:- Variable cost of goods manufactured		1637500
Direct materials	32750 units*$28 per unit	917000
Direct labor	32750 units*$18 per unit	589500
Variable manufacturing overhead	32750 units*$4 per unit	131000
Variable cost of goods available for sale		1637500
Less:- Closing inventory	8750 units*$50 per unit	437500
Cost of goods sold			1200000
Gross contribution margin C= a-b			816000
Less:-Variable selling & administrative exp.	24000 units*$10 per unit		240000
Contribution margin			576000
Less:- Fixed costs
Manufacturing overhead			393000
Selling & administrative exp.			120000
Net Income			63000