Question

The Western Corporation manufactures a single product and has provided the following data for its most recent year of operations:

Selling price per unit $68 Manufacturing costs:
Variable manufacturing cost per unit produced:
Direct materials $10 Direct labor $6 Variable manufacturing overhead $4
Fixed manufacturing overhead per year $220,000 Selling and administrative expenses:

Variable selling and administrative expense per unit sold $6 Fixed selling and administrative expense per year $61,000

During the year, 11,000 units were produced, and 10,000 units were sold. There was no beginning inventory.

1. Prepare an income statement to find the company’s net operating income under variable costing.

2. Prepare an income statement to find the company’s net operating income under absorption costing.

3. Using a different method (without preparing an income statement), find the company’s net operating income under absorption costing.

Answer 1

1.

Variable Costing Income Statement
Sales (10,000*$68)		$680,000
Less: Variable expenses:
Variable manufacturing costs (10,000*$20)	$200,000
Variable selling and administrative (10,000*$6)	60,000	260,000
Contribution margin		420,000
Less: Fixed expenses:
Fixed manufacturing overhead	220,000
Fixed selling and administrative	61,000	281,000
Net operating income		$139,000

2.

	Absorption costing
Direct material	$10
Direct labor	6
Variable manufacturing overhead	4
Fixed manufacturing overhead ($220,000/11,000)	20
Unit product cost	$40

Absorption Costing Income Statement
Sales	$680,000
Less: Cost of goods sold (10,000*$40)	400,000
Gross margin	280,000
Less: Selling and administrative expenses $60,000(10,000*$6)+$61,000	121,000
Net operating income	$159,000

3.

Net operating income = Variable costing net operating income + Fixed manufacturing overhead deferred in ending inventory

Net operating income = $139,000 + $20,000 (1,000*$20) = $159,000