Question

Mahugh Corporation, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price		199
Units in beginning inventory		0
Units produced		3,390
Units sold		3,010
Units in ending inventory		380
Variable costs per unit:
Direct materials		55
Direct labor		56
Variable manufacturing overhead		13
Variable selling and administrative		15
Fixed costs:
Fixed manufacturing overhead	$	115,260
Fixed selling and administrative	$	9,030 Required: a. What is the unit product cost for the month under variable costing? (Do not round intermediate calculations.) b.  What is the unit product cost for the month under absorption costing? c.  Prepare a contribution format income statement for the month using variable costing. d.  Prepare an income statement for the month using absorption costing. e.  Reconcile the variable costing and absorption costing net operating incomes for the month

Answer 1

Solution:

Answer (a): The unit product cost for the month under variable costing:

Details	Amount ($)
Direct material	$55
Direct labour	$56
Variable manufacturing overhead	$13
Total product cost	$124

Answer (b): The unit product cost for the month under absorption costing:

Details	Amount ($)
Direct material	$55
Direct labour	$56
Variable manufacturing overhead	$13
Fxed manufacturing overhead ($115,260 / 3,390) = $34	$34
Total product cost	$158

Answer (c): The income statement for the month using variable costing:

	Amount ($)	Amount ($)
Sales (3010 * $199)		$598,990
Less: Cost of goods sold (3010 * 124)		$373,240
Gross profit		$225,750
Less:   Fixed expenses:
Fixed manufacturing overhead	$115,260
Variable selling and administrative expenses ($15 * 3010)	$45,150
Fixed selling and administrative	$9,030
Total fixed expenses		$169,440
Net income		$56,310

Answer (d): Income statement for the month using absorption costing:

	Amount ($)	Amount ($)
Sales (3010 * $199)		$598,990
Less: Cost of goods sold (3010 * $158)		$475,580
Gross profit		$123,410
Less:   Fixed expenses:
Variable selling and administrative expenses ($15 * 3010)	$45,150
Fixed selling and administrative	$9,030
Total fixed expenses		$54,180
Net income		$69,230

Answer (e): The variable costing and absorption costing net operating incomes for the month:

Reconciliation
Difference in product cost:
Variable costing	$124
Absorption costing	$158
Difference	$34
Change in inventory:
Opening inventory	0
Closing inventory	380
Change in inventory	380
Value of change in inventory (380 * $34)	$12,920
Difference in Net income:
Variable costing		$56,310
Absorption		$69,230
Difference		$12,920