Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:

Beginning inventory 0 Units produced 32,700 Units sold 27,100 Selling price per unit $ 459 Selling and administrative expenses: Variable per unit $ 20 Fixed per year $ 406,500 Manufacturing costs: Direct materials cost per unit $ 298 Direct labor cost per unit $ 52 Variable manufacturing overhead cost per unit $ 30 Fixed manufacturing overhead per year $ 425,100 Assume that direct labor is a variable cost.

Required:

a. Compute the unit product cost under both the absorption costing and variable costing approaches.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.

d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Answer 1

a. Compute the unit product cost under both the absorption costing and variable costing approaches.

	Variable Costing	Absorption costing
Direct material	298	298
Direct labour	52	52
Variable manufacturing overhead	30	30
Fixed manufacturing overhead (425100/32700)		13
Total unit product cost	380	393

b. Prepare an income statement for the year using absorption costing.

Sales (27100*459)	12438900
Less: Cost of goods sold (27100*393)	(10650300)
Gross profit	1788600
Less: Selling and administrative exp (27100*20+406500)	(948500)
Net operating income	840100

c. Prepare an income statement for the year using variable costing.

Sales	12438900
Less: Variable cost of goods sold (27100*380)	(10298000)
Less: Variable selling and administrative exp (27100*20)	(542000)
Contribution margin	1598900
Less: Fixed manufacturing overhead	(425100)
Less: Fixed selling and administrative expen	(406500)
Net operating income	767300

d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Net operating income under variable costing	767300
Less: Fixed manufacturing overhead in ending inventory (5600*13)	72800
Net operating income under absorption costing	840100