Question

1. Calculate the unit cost and the cost of ending inventory under absorption costing. (Round unit cost to the nearest cent and cost of ending inventory to the nearest dollar.)

Under the absorption costing method, the unit cost is $4.23

The cost of ending inventory is $5288

2. Calculate the unit cost and the cost of ending inventory under variable costing. (Round unit cost to the nearest cent and cost of ending inventory to the nearest dollar.)

Under the variable costing method, the unit cost is $2.47

The cost of ending inventory is $3088

3. What is the contribution margin per unit? (Round to the nearest cent.)

The contribution margin per unit is $3.92

Zeitgeist believes that multicolored sleeves will really take off after one year of sales. Management thinks sales this August will be twice as high as sales last August. (Be sure to complete 4(b) below the income statement.)

4(a) Prepare an income statement for August of this year using the assumed higher level of sales. Refer to the list of Labels and Amount Descriptions for the exact wording of text items within your income statement.

Zeitgeist Company

Income Statement

For August of This Year

1	Sales		205,025.00
2	Less variable expenses
3	Variable cost of goods sold	??????
4	Commissions	16,402.00	??????
5	Contribution margin		??????
6	Less fixed expenses
7	Fixed overhead	28160.00
8	Fixed administrative	37890.00	66,050.00
	Operating income		49708

4(b) Which costing method should be used—absorption costing or variable costing?

Zeitgeist should choose the  variablecosting method.

Answer 1

Answer:

1.	Absorption costing:
	Direct materials…………………...………………………...	$1.68
	Direct labor………………...………………………...………	0.42
	Variable overhead………………...………………………...	0.37
	Fixed overhead………………...………………………..…	1.76
	Unit cost………………...………………………..…………	$4.23
	Cost of Ending Inventory = $4.23 × 1,250 units = $5,288
2.	Variable costing:
	Direct materials………………...………………………...…	$1.68
	Direct labor………………...………………………...………	0.42
	Variable overhead………………...………………………...	0.37
	Unit cost………………...………………………...……………	$2.47
	Cost of Ending Inventory = $2.47 × 1,250 units = $3,088
3.	Selling price………………...………………………...………	$ 6.95
	Less:
	Variable cost of goods sold………………...………………	2.47
	Commission ($6.95 × 0.08)………………...………………	0.56
	Contribution margin per unit………………...……………	$ 3.92
4.   Sales ($6.95 × 29,500)………………………...………………		$205,025
	Less variable expenses:
	Variable cost of goods sold……………………………	$72,865
	Commissions………………………………………………	16,402	89,267
	Contribution margin…………………………………………			$115,758
	Less fixed expenses:	$28,160
	Fixed overhead………………………………………..…
	Fixed administrative……………………………………..	37,890	66,050
	Operating income……………………………………………			$ 49,708

Variable costing should be used, since the fixed costs will not increase as production and sales increase and this type of income statement will give better information on the impact of increased production on costs and income.