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

1. Using Super Variable Costing.

Super-variable costing only considers totally variable costs to be part of the cost of inventory. All other costs are charged to expense in the period incurred. This typically means that only direct materials are included in the cost of inventory.

Income Statement

Particulars	Year 1	Year 2
Sales per unit	53	53
Less Direct Materials	(15.5)	(15.5)
Contribution per unit	37.5	37.5
Total products sold	48,250	73,750
Total Contribution	1,809,375	2,765,625
Less Direct Labour	(793,000)	(793,000)
Fixed Manufacturing cost	(532,500)	(532,500)
Fixed Selling & Administrative expenses	(202,000)	(202,000)
Profit	278,875	1,238,125

2. Using Super Variable Costing.

Income Statement

Particulars	Year 1	Year 2
Sales per unit	53	53
Less Direct Materials	(15.5)	(15.5)
Less Direct Labour	(13)	(13)
Contribution per unit	24.5	24.5
Total products sold	48,250	73,750
Total Contribution	1,182,125	1,806,875
Fixed Manufacturing cost	(532,500)	(532,500)
Fixed Selling & Administrative expenses	(202,000)	(202,000)
Profit	447,625	1,072,375