Question

Baxtell Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	25
Direct labour		12
Variable manufacturing overhead		3
Variable selling and administrative		5
Fixed costs per year:
Fixed manufacturing overhead		200,000
Fixed selling and administrative expense		110,000

During the year, the company produced 25,000 units and sold 21,000 units. The selling price of the company’s product is $65 per unit.

Required:

1. Assume that the company uses absorption costing.

a. Compute the unit product cost.

b. Prepare an income statement for the year. (Do not leave any empty spaces; input a 0 wherever it is required.)

2. Assume that the company uses variable costing.

a. Compute the unit product cost.

b. Prepare an income statement for the year. (Do not leave any empty spaces; input a 0 wherever it is required.)

Answer 1

1. Absorption costing

a.

Unit product cost = Direct materials + Direct labor +, Variable manufacturing overhead + Fixed manufacturing overhead

= $25 + $12 + $3 + $8

= $48

Fixed manufacturing overhead per unit = $200,000 / 25,000

= $8

b.

Sales (21,000 * $65)		$1,365,000
Cost of goods sold :
...Beginning Finished goods inventory	$0
...(+) Cost of goods manufactured	$1,200,000
... Cost of goods available for sale	$1,200,000
...(-) Ending Finished goods inventory	$192,000	$1,008,000
Gross Profit		$357,000
Selling and administrative expenses :
.. Variable selling and administrative expenses	$105,000
.. Fixed selling and administrative expenses	$110,000	$215,000
Net operating income		$142,000

Cost of goods manufactured = $48 * 25,000 units

= $1,200,000

Ending finished goods inventory = $48 * 4,000 units

= $192,000

Variable selling and administrative expenses = $5 * 21,000 units

= $105,000

2. Variable costing

a. Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead

= $25 + $12 + $3

= $40

b.

Sales		$1,365,000
(-) Variable expenses
.. Cost of goods sold (21,000 * $40)	$840,000
.. Variable selling and administrative expenses	$105,000	$945,000
Contribution margin		$420,000
(-) Fixed expenses
.. Fixed manufacturing overhead	$200,000
.. Fixed selling and administrative expenses	$110,000	$310,000
Net operating income		$110,000