Question

Problem 2

Harball Company makes skateboards., began operations on January 1, 2019. During the year, the company made 90,000 skateboards and sold 60,000 skateboards at a sales price of $30 per unit. Production and non-production costs for 2019 are shown in the following table:

Production costs
Direct materials	$4.00 per unit
Direct labor	$5.00 per unit
Variable overhead	$3.00 per unit
Fixed overhead	$540,000 total
Non-production costs
Variable selling and administrative	$2 per unit
Fixed selling and administrative	$50,000 total

a. Prepare Peapod’s December 31, 2019 income statement under absorption costing.

DO NOT LUMP THE VARIOUS COST ONTO 1 LINE. EACH COST SHOULD BE ON A SEPARATE LINE AND SHOW CALCULATIONS FOR EACH LINE

b. Prepare Peapod’s December 31, 2019 income statement under variable costing.

DO NOT LUMP THE VARIOUS COST ONTO 1 LINE. EACH COST SHOULD BE ON A SEPARATE LINE AND SHOW CALCULATIONS FOR EACH LINE

c. Explain and reconcile the difference between the net incomes

Answer 1

Construct The Absorption Costing Unit Product Cost
Direct Material			4
Direct labour			5
Variable Manufacturing overheads	3
Fixed Manufacturing overheads		6.00	(540000/90000)
Absorption costing unit prroduct cost	18.00
Construct the Absorption Costing Income Statement
				Year 1
Sales				$18,00,000
Cost of Goods sold			1080000
Gross Margin			$7,20,000
Selling and distribution expense		1,70,000
Net operating income		5,50,000
Compute the Variable costing Unit Product cost
Direct Material			4
Direct labour			5
Variable Manufacturing overheads	3
Variable costing unit prroduct cost	12
Construct The Variable Costing Income Statement under FIFO
Sales				18,00,000
Less: Variable cost
variable cost of goods sold		720000
Variable selling expense		1,20,000
Total Variable cost			8,40,000
Contribution margin			9,60,000
Fixed expense:
Fixed Manufacturing overheads	5,40,000
Fixed selling expense		50,000
Total Fixed cost			5,90,000
Net operating Income		3,70,000
Reconciliation:
Net Income as per Variable costing			370000
Add: Fixed Mfg oh deferred in Ending Inventory (30000 units @6)	180000
Net Income as per Absorption costing			550000