Question

Problem 6-20A Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income [LO6-1, LO6-2, LO6-3] High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation: Beginning inventory 0 Units produced 36,000 Units sold 31,000 Selling price per unit $79 Selling and administrative expenses: Variable per unit $2 Fixed per month $ 563,000 Manufacturing costs: Direct materials cost per unit $16 Direct labor cost per unit $8 Variable manufacturing overhead cost per unit $2 Fixed manufacturing overhead cost per month $ 540,000 Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May. Required: 1. Assume that the company uses absorption costing. a. Determine the unit product cost. b. Prepare an income statement for May. 2. Assume that the company uses variable costing. a. Determine the unit product cost. b. Prepare a contribution format income statement for May.

Answer 1

• All working forms part of the answer
• Requirement 1

PART A

Unit Product Cost

	Variable manufacturing cost:
	Direct material	$                  16
	Direct Labor	$                     8
	Manufacturing Overhead	$                     2
A	Total Variable cost per unit	$                  26
B1	Fixed manufacturing overhead	$        540,000
B2	Units produced	36,000
B = B1/B2	Fixed manufacturing Overhead per unit	$                  15
C = A+B	Unit product Cost	$                  41 = ANswer

PART B

Absorption Costing Income Statement
Sales Revenue [31000 units x $ 79]		$ 2,449,000.00
Less:
Cost of Goods Sold [31000 units x $ 41]		$ 1,271,000.00
Gross Profits		$ 1,178,000.00
Less: Operating expenses
Variable selling & admin expenses	$    62,000.00
Fixed Selling & admin expense	$ 563,000.00	$      625,000.00
Net Operating Income		$      553,000.00

• Requirement 2

PART A: Unit Product Cost

Variable manufacturing cost:
Direct material	$                  16
Direct Labor	$                     8
Manufacturing Overhead	$                     2
Total Variable cost per unit = Unit Product Cost	$                  26 = ANswer

PART B

Contribution format Income Statement
Sales Revenue [31000 units x $ 79]		$ 2,449,000.00
Less:
Variable manufacturing cost [31000 x $26]	$ 806,000.00
Variable selling & admin expense [31000 x $ 2]	$    62,000.00	$      868,000.00
Contribution margin		$ 1,581,000.00
Less:
Fixed manufacturing overhead	$ 540,000.00
Fixed selling & admin expense	$ 563,000.00	$ 1,103,000.00
Net Operating Income		$      478,000.00