Question

Audiophonics Limited manufactures and sells high-quality and durable ear buds for use with personal electronics that are custom moulded to each customer’s ear. Cost data for the product follow: Variable costs per unit: Direct materials $ 12 Direct labour 17 Variable factory overhead 7 Variable selling and administrative 6 Total variable costs per unit $ 42 Fixed costs per month: Fixed manufacturing overhead $ 235,400 Fixed selling and administrative 214,000 Total fixed cost per month $ 449,400 The product sells for $65 per unit. Production and sales data for May and June, the first two months of operations, are as follows: Units Produced Units Sold May 21,400 16,200 June 21,400 26,600 Income statements prepared by the Accounting Department using absorption costing are presented below: May June Sales $ 1,053,000 $ 1,729,000 Cost of goods sold: Beginning inventory 0 244,400 Add cost of goods manufactured 1,005,800 1,005,800 Goods available for sale 1,005,800 1,250,200 Less ending inventory 244,400 0 Cost of goods sold 761,400 1,250,200 Gross margin 291,600 478,800 Selling and administrative expenses 311,200 373,600 Operating income $ (19,600) ) $ 105,200 Required: 1. Determine the unit product cost under each of the following methods. 2. Prepare variable costing income statements for May and June using the contribution approach. (Do not leave any empty spaces; input a 0 wherever it is required.) 3. Reconcile the variable costing and absorption costing operating income figures. (Loss amounts should be indicated with a minus sign.)

Answer 1

1.

	Variable	Absorption
Direct materials	$12	$12
Direct labour	17	17
Variable factory overhead	7	7
Fixed manufacturing overhead	0	11 (235,400/21,400)
Unit product cost	$36	$47

2.

Variable Costing Income Statement
	May	June
Sales	$1,053,000	$1,729,000
Variable cost of goods sold:
Beginning inventory	0	187,200
Add: Variable cost of goods manufactured	770,400 (21,400*$36)	770,400
Cost of goods available	770,400	957,600
Less: Ending inventory	187,200 (5,200*$36)	0
Variable cost of goods sold	583,200	957,600
Variable selling and administrative	97,200 (16,200*$6)	159,600 (26,600*$6)
Total variable costs	680,400	1,117,200
Contribution margin	372,600	611,800
Fixed costs:
Fixed manufacturing overhead	235,400	235,400
Fixed selling and administrative	214,000	214,000
Total fixed costs	449,400	449,400
Operating income	-$76,800	$162,400

3.

	May	June
Variable costing operating income (loss)	-$76,800	$162,400
Add: Fixed manufacturing overhead deferred in ending inventory (5,200*$11)	57,200
Less: Fixed manufacturing overhead released from ending inventory		-57,200
Absorption costing operating income (loss)	-$19,600	$105,200