Question

Short Question 2 (16 marks, 2 marks per sub-question)

Fly Ltd is a manufacturer making smart watches for some local wholesalers. Its fiscal year end falls on 31 December. The company uses standard costing. The cost driver for variable manufacturing costs is production volume. The cost driver for variable selling expenses is sale volume. The company writes off variances to cost of goods sold in the year in which they occur.

For both 2018 and 2019, the budgeted price and cost data are the same as the actual price and cost data. The budgeted production volume is 2,000 units. The company sells its products at $500 per unit. Direct material cost of $30 per units and direct manufacturing labor of $15 per unit are traced to products. Variable manufacturing overhead is $10 per unit. Variable selling expenses is $40 per unit. Fixed manufacturing overhead is $80,000 per year. Fixed selling expenses is $50,000 per year.

For 2018, there is no work-in-process inventory, and the budgeted production volume is 2,000 units which is the same as actual production volume. The budgeted sales volume and actual sales volume are the same at 1,500 units.

For 2019, the actual production volume is 1,250 units and actual sales volume is 1,625 units.

A number of managers whose performance is measured by operating income are concerned about how the income is reported. The CEO is now asking the management accountant to prepare income statements under the two most common methods of costing inventories in manufacturing companies: absorption costing and variable costing.

Requirements: (Put your answers below. No steps are required)

What is the contribution margin for 2018 under variable costing?  

What is the operating income for 2018 under variable costing?  

What is the contribution margin for 2019 under variable costing?  

What is the operating income for 2019 under variable costing?  

What is the cost of goods sold for 2018 under absorption costing?  

What is the operating income for 2018 under absorption costing?  

What is the ending inventory for 2019 under absorption costing?  

What is the operating income for 2019 under absorption costing?  

Answer 1

Answer:

Answer-1:
	2018
Sales (1,500 × $500)		$              750,000
Less: Cost of goods sold
Direct material costs (2,000 × $30)	$                 60,000
Direct manufacturing labor costs (2,000 × $15)	30,000
Variable manufacturing overhead (2,000 × $10)	20,000
Cost of goods available for sale	110,000
Less: Ending inventory (500 × $55)	27,500
Cost of goods sold		$                82,500
Variable selling expense (1,500 × $40)		$                60,000
Contribution margin		$              607,500
Answer-2:
	2018
Contribution margin		$              607,500
Less: Fixed costs:
Manufacturing overhead	$                 80,000
Selling overhead	50,000
Total fixed costs		130,000
Net operating income		$              477,500
Answer-3:
	2019
Sales (1,625 × $500)		$              750,000
Less: Cost of goods sold:
Beginning inventory	$                 27,500
Direct material costs (1,250 × $30)	37,500
Direct manufacturing labor costs (1,250 × $15)	18,750
Variable manufacturing overhead (1,250 × $10)	12,500
Cost of goods available for sale	96,250
Less: Cost of ending inventory (125 × $55)	6,875
Cost of goods sold		$                89,375
Variable selling expense (1,625 × $40)		$                65,000
Contribution margin		$              595,625
Answer-4:
	2019
Contribution margin		$              595,625
Less: Fixed costs:
Manufacturing overhead	$                 80,000
Selling overhead	50,000
Total fixed costs		130,000
Net operating income		$              465,625