Question

Shellborn Company incurred manufacturing overhead cost for the year as follows.

Direct materials	$	39.50	/unit
Direct labor	$	27.10	/unit
Manufacturing overhead
Variable	$	10.30	/unit
Fixed ($19.70/unit for 1,100 units)	$	21,670
Variable selling and administrative expenses	$	3,660
Fixed selling and administrative expenses	$	14,200

The company produced 1,100 units and sold 600 of them at $180.60 per unit. Assume that the production manager is paid a 1 percent bonus based on the company’s net income.

Required

1. Prepare an income statement using absorption costing.

2. Prepare an income statement using variable costing.

3. Determine the manager’s bonus using each approach. Which approach would you recommend for internal reporting?

Answer 1

	(a)	Product Cost under Absorptoin costing
		Direct material	$39.50
		Direct labor	$27.10
		Variable manufacturing overhead	$10.30
		Fixed overhead	$19.70
		cost per unit	$96.60
		ABSORBTION COSTING INCOME Statement
		Sales revenue		$108,360	(600*180.6)
		Cost of goods sold
		Cost of production	$106,260		(1100*96.6)
		Less: Closing stock	$48,300		(500*96.6)
		Cost of goods sold		$57,960
		Gross profit		$50,400
		Less: Variable selling and admin expense	$3,660
		Less: Fixed selling and admin expense	$14,200	$17,860
		Net Income		$32,540
	(b)	Product Cost under Variable costing
		Direct material	$39.50
		Direct labor	$27.10
		Variable manufacturing overhead	$10.30
		cost per unit	$76.90
		VARIABLE COSTING INCOME Statement
		Sales revenue		$108,360
		Variable cost of goods sold
		Add: cost of production	$84,590		(1100*76.90)
		Less: Closing inventory	$38,450		(500*76.90)
		Variable cost of goods sold		$46,140
		Contribution		$62,220
		Fixed Expenses:
		Fixed manufacturing overhead	$21,670
		Fixed selling and admin expenses	$14,200
		Variable selling cost	$3,660	$39,530
		Net income		$22,690
	(c )	Mangers' bonus
		Absorption costing income statement	$325.40
		variable cost income statement	$226.90
		Managers' bonus is higher in variable absorption costing income statement