Question

Zot-Ice Corp. has provided the following data for the current year.

Units produced	2,500 units
Sales price	$400 per unit
Direct materials	$75 per unit
Direct labor	$65 per unit
Variable manufacturing overhead	$25 per unit
Fixed manufacturing overhead	$225,000 per year
Variable selling and administrative costs	$30 per unit
Fixed selling and administrative costs	$150,000 per year

Part A Calculate the unit product cost using variable costing and absorption costing.

Part B Assuming that Zot-Ice Corp. sells 2,000 units, prepare an income statement in proper format using variable costing and absorption costing. (There are no beginning inventories.)

Answer 1

A.

	Variable costing	Absorption costing
Direct material	$75	$75
Direct labor	65	65
Variable manufacturing overhead	25	25
Fixed manufacturing overhead		90 ($225,000/2,500)
Unit product cost	$165	$255

B.

Variable Costing Income Statement
Sales (2,000*$400)		$800,000
Variable costs:
Variable cost of goods sold (2,000*$165)	330,000
Variable selling and administrative cost (2,000*$30)	60,000
Total variable costs		390,000
Contribution margin		410,000
Fixed costs:
Fixed manufacturing overhead	225,000
Fixed selling and administrative cost	150,000
Total fixed costs		375,000
Net operating income		$35,000

Absorption Costing Income Statement
Sales		$800,000
Less: Cost of goods sold:
Beginning inventory	$0
Add: Cost of goods manufactured (2,500*$255)	637,500
Cost of goods available for sale	637,500
Less: Ending inventory (500*$255)	(127,500)
Total Cost of goods sold		510,000
Gross profit		290,000
Less: Selling and administrative costs:
Variable selling and administrative cost (2,000*$30)	60,000
Fixed selling and administrative cost	150,000
Total selling and administrative cost		210,000
Net operating income		$80,000