Question

Bracey Company manufactures and sells one product. The following information pertains to the company’s first year of operations:

Variable cost per unit:
Direct materials	$	20
Fixed costs per year:
Direct labor	$	225,500
Fixed manufacturing overhead	$	309,550
Fixed selling and administrative expenses	$	50,000

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Bracey produced 20,500 units and sold 19,500 units. The selling price of the company’s product is $51 per unit.

Required:

1. Assume the company uses super-variable costing:

a. Compute the unit product cost for the year.

b. Prepare an income statement for the year.

2. Assume the company uses a variable costing system that assigns $11.00 of direct labor cost to each unit produced:

a. Compute the unit product cost for the year.

b. Prepare an income statement for the year.

3. Assume the company uses an absorption costing system that assigns $11.00 of direct labor cost and $15.10 of fixed manufacturing overhead cost to each unit produced:

a. Compute the unit product cost for the year.

b. Prepare an income statement for the year.

4a. Reconcile the difference between the super-variable costing and variable costing net operating incomes.

4b. Reconcile the difference between the super-variable costing and absorption costing net operating incomes.

Answer 1

1	Super variable costing (only material cost is part of cost of unit)
	Unit product cost	$20	per unit
2	Variable costing
	Direct material	$20
	Direct labour	$11
	Total	$31	per unit
3	Absorption costing
	Direct material	$20
	Direct labour	$11
	Fixed manufacturing overhead	$15.10
	Totol cost	$46	per unit
4	Income statement
		Super variable	Variable	Absorption
	Total sales	$994,500	$994,500	$994,500	(51*19500)
	Less:
	Cost of goods sold	$390,000	$604,500	$898,950
	Gross margin	$604,500	$390,000	$95,550
	Less: Total direct labour	-225500
	Less: Fixed manufacturing overhead	-309550	-309550
	Less: Fixed selling and admin	-50000	-50000	-50000
	Net operating income	$19,450	$30,450	$45,550
	Reconciliation (Super variable and variable)	Amount
	Net operating income ( Variable)	$30,450
	Less: Direct labour on closing stock	-$11,000
	(1000*11)
	Net operating income ( super variable)	$19,450
	Reconciliation ( vairbal and absorption)	Amount
	Net operating income(absorption)	$45,550
	Less: Fixed manufacturing overhead in closing stock	-$15,100
	(1000*15.1)
	Net operating income ( variable)	$30,450