Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:

Beginning inventory		0
Units produced		34,500
Units sold		26,800
Selling price per unit	$	490
Selling and administrative expenses:
Variable per unit	$	16
Fixed per year	$	616,400
Manufacturing costs:
Direct materials cost per unit	$	254
Direct labor cost per unit	$	55
Variable manufacturing overhead cost per unit	$	33
Fixed manufacturing overhead per year	$	552,000

Assume that direct labor is a variable cost.

Required:

a. Compute the unit product cost under both the absorption costing and variable costing approaches.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.

d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Answer 1

Answer-a)- Unit product cost under Absorption costing= $358 per unit.

Explanation- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$254+$55+33+$16

= $358 per unit

Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$552000/34500 units

=$16 per unit

Unit product cost under Variable costing= $342 per unit.

Explanation-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

= $254+$55+$33          

= $342 per unit

b)-

Dorset Corporation
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	26800 units*$490 per unit		13132000
Less:- Cost of goods sold (b)
Opening inventory
Add:-Cost of goods manufactured		12351000
Direct materials	34500 units*$254 per unit	8763000
Direct labor	34500 units*$55 per unit	1897500
Variable manufacturing overhead	34500 units*$33 per unit	1138500
Fixed manufacturing overhead		552000
Cost of goods available for sale		12351000
Less:- Closing inventory	7700 units*$358 per unit	2756600	9594400
Gross margin C= a-b			3537600
Less:-Variable selling & administrative exp.	26800 units*$16 per unit		428800
			3108800
Less:- Fixed costs
Selling & administrative exp.			616400
Net Income			2492400

c)-

Dorset Corporation
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	26800 units*$490 per unit		13132000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		11799000
Direct materials	34500 units*$254 per unit	8763000
Direct labor	34500 units*$55 per unit	1897500
Variable manufacturing overhead	34500 units*$33 per unit	1138500
Variable cost of goods available for sale		11799000
Less:- Closing inventory	7700 units*$342 per unit	2633400	9165600
Gross contribution margin C= a-b			3966400
Less:-Variable selling & administrative exp.	26800 units*$16 per unit		428800
Contribution margin			3537600
Less:- Fixed costs
Manufacturing overhead			552000
Selling & administrative exp.			616400
Net Income			2369200

d)-

Reconcilation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		2369200
Less:-Fixed manufacturing overheads brought in (opening inventories)	Nil
Add:-Fixed manufacturing overheads carried forword in(closing inventories)	7700 units*$16 per unit	123200
Net income under absorption costing method		2492400