Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:

Beginning inventory		0
Units produced		29,500
Units sold		20,400
Selling price per unit	$	469
Selling and administrative expenses:
Variable per unit	$	19
Fixed per year	$	346,800
Manufacturing costs:
Direct materials cost per unit	$	203
Direct labor cost per unit	$	50
Variable manufacturing overhead cost per unit	$	30
Fixed manufacturing overhead per year	$	442,500

Assume that direct labor is a variable cost.

Required:

a. Compute the unit product cost under both the absorption costing and variable costing approaches.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.

d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Answer 1

a.	Under Absorption Costing
	Unit product cost:
	Direct Material		$             203
	Direct Labour		$               50
	Variable Manufaturing overhead		$               30
	Total Variable Cost		$             283
	Fixed Manufacturing overhead ($4,42,500/29,500)		$               15
	Unit product cost		$             298
	Under Variable Costing
	Unit product cost:
	Direct Material		$             203
	Direct Labour		$               50
	Varialble Manufaturing overhead		$               30
	Unit product cost		$             283
b.	Absorbtion Costing Income Statement
	Sales(20,400 X $469)		$ 95,67,600
Less:	Cost of Goods Sold
	Beginning Inventory	0
Add:	Cost of Goods manufactured (29,500 X $298)	$ 87,91,000
	Goods available for sale	$ 87,91,000
Less:	Ending Inventory (9,100 X $298)	$ 27,11,800	$ 60,79,200
	Gross Margin		$ 34,88,400
Less:	Selling and Administrative expenses [(20,400 X $19) + $3,46,800]		$   7,34,400
	Net Operating Income		$ 27,54,000
c.	Variable Costing Income Statement
	Sales(20,400 X $469)		$ 95,67,600
Less:	Variable expenses:
	Variable Cost of goods sold:
	Beginning Inventory	0
Add:	Cost of Goods manufactured (29,500 X $283)	$ 83,48,500
	Goods available for sale	$ 83,48,500
Less:	Ending Inventory (9,100 X $283)	$ 25,75,300
	Variable Cost of goods sold	$ 57,73,200
Add:	Variable selling expenses (20,400 X $19)	$   3,87,600	$ 61,60,800
	Contribution margin		$ 34,06,800
Less:	Fixed Expenses:
	Fixed Manufacturing overhead	$   4,42,500
	Fixed Selling and Administrative expenses	$   3,46,800	$   7,89,300
	Net operating Income		$ 26,17,500
d.	Net operating income under variable costing	=	$ 26,17,500
Add:	Fixed Manufacturing overhead cost deferred in inventory under absorbtion costing (9,100 X $15)	=	$   1,36,500
	Net operating income under absorbtion costing	=	$ 27,54,000