Question

Absorption and Variable Costing Problem

The first month of operations ended Nov 30, 2016. Flexo Company produced 47,200

hammers of which 39,800 were sold. Operating data for the month are as follows:

Sales: $325,000

Manufacturing costs:

Direct materials: $90,000

Direct labor: $28,000

Variable manufacturing costs: $15,500

Fixed manufacturing costs: $11,000

=$144,500

Selling and administrative expenses:

Variable: $19,000

Fixed: $11,000

=$30,000

1. How much is the Gross Profit (Gross Margin) under the absorption costing method?

2. How much is the Net Income under the absorption costing method?

3. How much is the Contribution Margin under the variable costing method?

4. How much is the Net Income under the variable costing method?

Answer 1

Income Statement under Absorption Costing:

For the Month Ended Nov 30, 2016

Particulars	Amount ($)	Amount ($)
Sales (39,800 units)		$ 325,000
Less: Cost of Goods Sold (of 39,800 units)
Cost of Goods Manufactured (39,800* units x $ 3.06)		121,788
1. Gross Profit		203,212
Less: Selling and Administrative Expenses
Variable Selling and Administrative Expenses	19,000
Fixed Selling and Administrative Expenses	11,000	(30,000)
2. Net Income from Operations		$ 173,212

Income Statement under Variable Costing:

Sales (39,800 units)		$325,000
Variable cost of goods sold:
Variable cost of goods sold (39,800*$2.83)		-112,634
Manufacturing margin		212,366
Variable selling and administrative expenses		-19,000
3)Contribution margin		$193,366
Fixed costs:
Fixed manufacturing costs	$11,000
Fixed selling and administrative expenses	11,000	-22,000
4) Net Income from operations		$171,366

Working note:

**Manufacturing Cost per unit

Particulars	Absorption costing	Variable costing
Direct material	90,000	90,000
Direct labor	28,000	28,000
Variable manufacturing costs	15,500	15,500
Fixed manufacturing costs	11,000	---
Total Manufacturing Cost	144,500	133,500
Units Produced	47,200 units	47,200
Manufacturing Cost per unit	$3.06	$2.83