Question

Kelly Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations:

Variable cost per unit:
Direct materials	$	15.50
Fixed costs per year:
Direct labor	$	793,000
Fixed manufacturing overhead	$	532,500
Fixed selling and administrative expenses	$	202,000

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Kelly produced 61,000 units and sold 48,250 units. During its second year of operations, it produced 61,000 units and sold 73,750 units. The selling price of the company’s product is $53 per unit.

Required:

1. Assume the company uses super-variable costing:

a. Compute the unit product cost for Year 1 and Year 2.

b. Prepare an income statement for Year 1 and Year 2.

2. Assume the company uses a variable costing system that assigns $13.00 of direct labor cost to each unit produced:

a. Compute the unit product cost for Year 1 and Year 2.

b. Prepare an income statement for Year 1 and Year 2.

3. Reconcile the difference between the super-variable costing and variable costing net operating incomes in Years 1 and 2.

Answer 1

1a. Year 1 Unit product cost = 15.50

Year 2 Unit Product Cost = 15.50

1b.

	Year 1	Year 2
Sales	2,557,250.00	3,908,750.00
Variable Cost of Goods	747,875.00	1,143,125.00
Contribution margin	1,809,375.00	2,765,625.00
Fixed Expense
Direct Labor	793,000.00	793,000.00
Fixed Manufacturing overhead	532,500.00	532,500.00
Fixed Selling and Administrative Expense	202,000.00	202,000.00
Total Fixed Expense	1,527,500.00	1,527,500.00
Net Operating Income	281,875.00	1,238,125.00

2a.

Year 1 Unit product cost = 28.50

Year 2 Unit Product Cost = 28.50

2b.

	Year 1	Year 2
Sales	2,557,250.00	3,908,750.00
Variable Cost of Goods	1,375,125.00	2,101,875.00
Contribution margin	1,182,125.00	1,806,875.00
Fixed Expense
Fixed Manufacturing overhead	532,500.00	532,500.00
Fixed Selling and Administrative Expense	202,000.00	202,000.00
Total Fixed Expense	734,500.00	734,500.00
Net Operating Income	447,625.00	1,072,375.00

3

	Year 1	Year 2
Super Variable Costing Net Operating Income	281,875.00	1,238,125.00
Direct Labor	165,750.00	-     165,750.00
Variable Costing Net Operating Income	447,625.00	1,072,375.00