Question

QUESTION# 3   Zhou Inc. has the following cost data for its past year of operations. Zhou Inc. produces tables and sells them for $150 each. You must show all your work in order to receive all the points available.

                                                $$/ Per unit

Variable Costs:

Direct Materials (DM)            $25

Direct Labour (DL)                $20

Variable Mf’g Overhead         $ 5

Variable Selling & Admin      $10

Total Variable costs                $60

Fixed Costs:

Fixed Mf’g Overhead             $360,000

Fixed Selling & Admin          $200,000

Total Fixed Costs                   $560,000

Unit data

Beginning Inventory               0

Units produced                       12,000

Units sold                                10,000

Required:

1) Calculate the unit cost per table under Variable Costing.

2) Calculate the unit cost per table under Absorption Costing.

3) Prepare a Contribution Margin format Income Statement using Variable Costing.

4) Prepare a Traditional format income statement using Absorption Costing.

5) Explain why the operating incomes were not the same under the different cost flow assumptions? And reconcile the difference in operating income.

Answer 1

Answer

1.

Unit (Variable Costing)
Direct Material			25
Direct Labor			20
Variable Manufacturing Overhead			5
Per unit Cost			50
2. Unit Cost(Absorption Costing) $ Direct Material 25 Direct Labor 20 Variable Manufacturing Overhead 5 Fixed Manufacturing per unit 30.0 ($360,000 / 12,000 Units) Per unit Cost 80.0 3.
Income Statement (Variable Costing)
	Detail	Net
Sales (@ 150 per unit)		1,500,000
Less: Cost of Goods Sold
Opening Inventory	-
Add: Cost of goods Manufactured	600,000 (12,000 Units * 50)
Less: Closing Inventory	(100,000) (2,000 Units * 50)	500,000
Gross Contribution Margin		1,000,000
Less: Variable Selling and Adm. Expenses		100,000 (10,000 Units * $10)
Contribution Margin		900,000
Less: Fixed Cost
Fixed Manufacturing Cost	360,000
Fixed Selling and Adm. Expenses	200,000	560,000
Net Operating Income		340,000

4.

Sales (@ 150 per unit)	1,500,000
Cost of Goods Sold	(800,000)
(Opening Stock + Produced – Closing Stock) {0 + (12,000 Units * $80) – (2,000 Units * $80)}
Gross Margin	700,000
Selling Expenses (Variable Selling expenses + Fixed Selling Expenses) {(10,000 Units * $10) + 200,000)}	(300,000)
Net Operating Income	400,000

5.

The difference is because we don’t include the Per unit Manufacturing Overhead cost while calculating profit under Variable costing.

i.e. $30 per unit Manufacturing cost is not included in 2,000 Closing Stock while following Variable cost method.

Profit as per Variable costing	340,000
Add: Fixed Mfg. overhead deferred in Inventory (2,000 * $30)	60,000
Profit according to Absorption Costing	400,000

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