Question

John’s Company uses variable costing for internal reporting and absorption costing for external reporting. Below is the costs incurred for the current year.

Units sold – 1,000

Units produced – 1,100

Selling price per unit - $300

Direct labor - $15 per unit

Direct materials - $25 per unit

Variable manufacturing overhead - $10 per unit

Variable selling costs - $10 per unit

Fixed manufacturing overhead - $22,000

Fixed Selling & Administrative costs - $100,000

Required:

a. What is the product costs per unit under variable costing?

b. What is the product costs per unit under absorption costing?

c. Prepare the income statements - contribution format and multiple step – under the two methods

Answer 1

a)

	Variable costing
Direct material	$                           25
Direct labor	$                           15
Variable manufacturing overhead	$                           10
Product costs	$                           50

b)

	Absorption costing
Direct material	$                               25
Direct labor	$                               15
Variable manufacturing overhead	$                               10
Fixed manufacturing overhead ($22,000/1,100)	$                               20
Product costs	$                               70

c)

John's Company
Income Statement (Absorption costing)
Sales ($300*1,000)		$ 300,000
Less: Cost of goods sold ($70*1,000)		$    70,000
Gross profit		$ 230,000
Less: Selling and administrative expenses
Variable selling expenses ($10*1,000)	$    10,000
Fixed selling expenses	$ 100,000
Total selling and administrative expenses		$ 110,000
Net income		$ 120,000

John's Company
Income Statement (Variable costing)
Sales ($300*1,000)		$ 300,000
Less: Variable expenses
Direct material ($25*1,000)	$    25,000
Direct labor ($15*1,000)	$    15,000
Variable manufacturing overhead ($10*1,000)	$    10,000
Variable selling expenses ($10*1,000)	$    10,000
Total Variable expenses		$    60,000
Contribution margin		$ 240,000
Less: Fixed expenses
Fixed manufacturing expenses	$    22,000
Fixed selling expenses	$ 100,000
Total Fixed expenses		$ 122,000
Net income		$ 118,000

You can reach me over comment box if you have any doubts. Please rate this answer