Question

Lantern Family Co., a manufacturer of Halloween and cosplay costumes, has a fiscal year ending October 31. Its costs and sales information for this year are:

Production costs

Direct materials $40 per unit

Direct labor $60 per unit

Overhead costs for the year

Variable overhead $2,100,000

Fixed overhead $8,400,000

Non-production costs for the year

Variable selling and administrative $750,000

Fixed selling and administrative $5,000,000

Production and sales for the year

Units produced 105,000 units

Units sold 75,000 units

Sales price per unit $360 per unit

Requirement: Prepare the Company’s income statement using variable costing as of October 31.

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Bonus: If Lantern Family were to prepare an income statement using absorption costing:

A. Net income would be the same as the variable costing’s net income

B. Net income would be greater than the variable costing’s net income by $2,400,000.

C. Net income would be less than the variable costing’s net income by $2,400,000.

D. Net income would be greater than the variable costing’s net income by $3,360,000.

Answer 1

In variable costing method, the unit product cost is the sum of the only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Direct materials	$40
	Direct labor	$60
	Variable Overhead per unit (2,100,000/105000)	$20
	Total production cost per unit	$120
	Lantern Family Co
	Variable Costing Income Statement
	Particulars		Amount
	Sales   (75,000 * $360)		$27,000,000
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (105,000 * $120)	$12,600,000
	The variable cost of goods available for sale	$12,600,000
	Less: Ending inventory [(105,000 - 75,000) * $120]	-$3,600,000
	Variable cost of goods sold		$9,000,000
	Gross Contribution Margin		$18,000,000
	Less: Variable Selling and Administrative expenses		$750,000
	Contribution Margin		$17,250,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$8,400,000
	Fixed selling and administrative expenses	$5,000,000	$13,400,000
	Net operating income		$3,850,000
	*Variable cost of goods manufactured = Units produced * Variable unit product cost
	*Ending inventory   = (Units produced - Units sold) * Production cost per unit