Question

Type or paste question here

Problem 4:
Using the information below, create an absorption income statement
Chapter 7	and a Variable income statement.
	Pleae show your work.
			Traditional Income Statement				Variable Income Statement
Beginning Units	0
Units Produced	9000
Units Sold	8000
Ending Units	1000
Sales Price	130
Direct Materials	25
Direct Labor	30
Variable Overhead	20
Variable SG&A	5
Fixed Overhead	180000
Fixed SG&A	75000

Answer 1

Ans. 1	In Absorption costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	Unit product cost under Absorption Costing:
	Direct materials	$25.00
	Direct labor	$30.00
	Variable Overhead per unit	$20.00
	Fixed overhead per unit   ($180,000 / 9,000)	$20.00
	Product Cost per unit	$95.00
	*Fixed overhead per unit = Fixed overhead / Units produced
	Absorption Costing Income Statement
	PARTICULARS		Amount
	Sales   (8,000 * $130)		$1,040,000
	Less: Cost of goods sold
	Opening inventory	$0
	Add: Cost of goods manufactured (9,000*$95)	$855,000
	Cost of goods available for sale	$855,000
	Less: Ending inventory (1,000 * $95)	-$95,000
	Cost of goods sold (total)		$760,000
	Gross margin		$280,000
	Selling & Administrative expenses:
	Fixed	$75,000
	Variable      (8,000*$5)	$40,000
	Total Selling and administrative expenses		$115,000
	Net operating income		$165,000
	*Ending inventory   = (Units produced - Units sold) * Production cost per unit
Ans. 2	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Direct materials	$25.00
	Direct labor	$30.00
	Variable Overhead per unit	$20.00
	Total production cost per unit	$75.00
	Variable Costing Income Statement
	PARTICULARS		Amount
	Sales   (8,000 * $130)		$1,040,000
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (9,000 * $75)	$675,000
	Variable cost of goods available for sale	$675,000
	Less: Ending inventory (1,000 * $75)	-$75,000
	Variable cost of goods sold		$600,000
	Gross Contribution Margin		$440,000
	Less: Variable Selling and Administrative Expenses (8,000*$5)	$40,000
	Contribution Margin		$400,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$180,000
	Fixed selling and administrative expenses	$75,000	$255,000
	Net operating income		$145,000
	*Variable cost of goods manufactured = Units produced * Variable unit product cost