Question

A manufacturing company has provided the following data concerning its most recent month of operations: Selling price……………………………………. $12.00 Units in beginning inventory…………………… 0 Units produced…………………………………. 70,000 Units sold………………………………………. 60,000 Units in ending inventory……………………… 10,000 Variable costs per unit: Direct materials………………………………… $2.00 Direct labor…………………………………….. 1.00 Variable manufacturing overhead……………… 1.00 Variable selling and administrative……………. 1.50 Fixed costs: Fixed manufacturing overhead…………………. $140,000 Fixed selling and administrative……………….. 150,000

Required: (a) Calculate the unit product cost under absorption costing.

(b) Calculate the unit product cost under variable costing.

(c) Prepare an income statement for the month using absorption costing.

(d) Prepare a contribution format income statement for the month using variable costing.

(e) Reconcile the variable costing and absorption costing net operating incomes for the month.

Answer 1

a)

Cost per unit	Absorption costing
Direct material cost	$                                 2
Direct Labour	$                                 1
Variable manufacturing overhead	$                                 1
Fixed manufacturing overhead ($140,000/70,000)	$                                 2
Cost per unit	$                                 6

b)

Cost per unit	Variable costing
Direct material cost	$                              2
Direct Labour	$                              1
Variable manufacturing overhead	$                              1
Cost per unit	$                              4

c)

Income Statement (Absorption Costing)
Sales (60,000*$12)		$ 720,000
Cost of goods sold (60,000*$6)		$ 360,000
Gross margin		$ 360,000
Selling and administrative expenses
Variable (60,000*$1.5)	$    90,000
Fixed	$ 150,000
Total Selling and administrative expenses		$ 240,000
net operating income (Loss)		$ 120,000

d)

Income Statement (Variable costing)
Sales (60,000*$12)		$ 720,000
Variable Expenses
Variable cost of goods sold (60,000*$4)	$ 240,000
Variable selling and administrative expenses (60,000*$1.5)	$    90,000
Total Variable cost		$ 330,000
Contribution margin		$ 390,000
Fixed Expenses
Fixed manufacturing overhead	$ 140,000
Fixed selling and administrative expense	$ 150,000
Total Fixed Expenses		$ 290,000
net operating income (Loss)		$ 100,000

e)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing net operating income	$100,000
Add:Fixed manufacturing overhead costs deferred in inventory under absorption costing ($2 * 10,000)	$ 20,000
Absorption costing net operating income	$120,000

You can reach me over comment box if you have any doubts. Please rate this answer