Question

Maher Corporation, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price $ 186 Units in beginning inventory 0 Units produced 3,690 Units sold 3,120 Units in ending inventory 570 Variable costs per unit: Direct materials $ 56 Direct labor $ 52 Variable manufacturing overhead $ 8 Variable selling and administrative expense $ 18 Fixed costs: Fixed manufacturing overhead $ 121,770 Fixed selling and administrative $ 9,360

Required:

a. What is the unit product cost for the month under variable costing?

b. What is the unit product cost for the month under absorption costing?

c. Prepare a contribution format income statement for the month using variable costing.

d. Prepare an income statement for the month using absorption costing.

e. Reconcile the variable costing and absorption costing net operating incomes for the month.

Answer 1

a.

Computation of Unit Product Cost
	Variable Costing
Direct Meterial	$                         56
Direct Labour	$                         52
Variable Manufactoring Overhead	$                            8
Unit Product Cost	$                       116

b.

Computation of Unit Product Cost
	Absorption Costing
Direct Meterial	$                               56
Direct Labour	$                               52
Variable Manufactoring Overhead	$                                  8
Fixed Manufactoring Overhead ($121,770 / 3,690)	$                               33
Unit Product Cost	$                             149

c.

Variable Costing income statement
Sales (3,120*$186)		$ 580,320
Less: Variable Expenses
Direct Meterial (3,120*$56)	$ 174,720
Direct Labour (3,120*$52)	$ 162,240
Variable Manufactoring Overhead (3,120*$8)	$   24,960
Variable Selling and admin exp. (3,120*$18)	$   56,160
Total Variable Expenses		$ 418,080
Contribution Margin		$ 162,240
Fixed Expenses:
Fixed manufacturing overhead	$ 121,770
Fixed selling and admin	$      9,360
Total Fixed Expenses		$ 131,130
Net Operating Income		$    31,110

d.

Absorption Costing Income statement
Sales (3,120*$186)	$ 580,320
Cost of Goods Sold (3,120*$149)	$ 464,880
Gross Margin	$ 115,440
Selling and Administrative Exp. (3,120*$18)+$9,360)	$    65,520
Net Operating Income	$    49,920

e.

Reconciliation
Net Income (Variable costing)	$ 31,110
Add: Fixed Manufacturing overhead carried forward (closing inventories) ($33 * 570)	$ 18,810
Net Income (Absorption Costing)	$ 49,920