Question

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

Beginning inventory		0
Units produced		28,000
Units sold		24,000
Selling price per unit	$	466
Selling and administrative expenses:
Variable per unit	$	21
Fixed per year	$	336,000
Manufacturing costs:
Direct materials cost per unit	$	296
Direct labor cost per unit	$	57
Variable manufacturing overhead cost per unit	$	34
Fixed manufacturing overhead per year	$	448,000

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

Part-a-1 The Absorption Costing Unit Product Cost
	$
Direct Material	$296.00
Direct Labour	$57.00
Variable Manufacturing Overhead	$34.00
Variable Manufacturing cost (a)	$387.00
Fixed Manufacturing overhead cost (448000/28000)	$16.00
Unit Product cost	$403.00

Part-a-2 Computation of Unit Product cost- Variable Costing
	$
Direct Material	$296.00
Direct Labour	$57.00
Variable Manufacturing Overhead	$34.00
Variable Manufacturing cost	$387.00

Part-b The Absorption Costing Income Statement
	$
No. of Unit Sold	24000
Sales @$466	$11,184,000
Less: Cost of Goods sold @$403	$9,672,000
Gross Margin	$1,512,000
Less: Other Expense
Variable Selling & Admin cost @21	$504,000
Fixed Selling & Admin Cost	$336,000
Net operating income	$672,000

Part-c: The Variable Costing Income Statement
	$
No. of Unit Sold	24000
Sales @$466	$11,184,000
Less: Variable cost
variable Manaufacturing cost @387	$9,288,000.00
Variable Selling & Admin cost @21	$504,000
Contribution margin	$1,392,000.00
Fixed expense:
Fixed Manufacturing Overhead	$448,000.00
Fixed Selling & Admin Cost	$336,000.00
Net operating Income	$608,000.00

Part-d: Reconciliation Statement of Income
	$
Income under variable c osting	$608,000.00
Fixed OH in Invenry (4000X 16)	$64,000.00
Income under Absorption Costing	$672,000.00