Question

Great Outdoze Company manufactures sleeping bags, which sell for $67.00 each. The variable costs of production are as follows:

Direct material	$	18.50
Direct labor		9.50
Variable manufacturing overhead		7.20

Budgeted fixed overhead in 20x1 was $169,400 and budgeted production was 22,000 sleeping bags. The year’s actual production was 22,000 units, of which 19,700 were sold. Variable selling and administrative costs were $2.10 per unit sold; fixed selling and administrative costs were $29,000.

Required:
1. Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing.
2-a. Prepare an operating income statement for the year using absorption costing.
2-b. Prepare an operating income statement for the year using variable costing.
3. Reconcile reported operating income under the two methods using the shortcut method.

Answer 1

1 (A)	Unit Product Cost	42.90
	Direct Material	18.50
	Direct Labour	9.50
	Manufacturing OH (Variable)	7.20
	Fixed Manufacturing OH (Per Unit)	7.70
	(Fixed Manufacturing OH / Units Produced)
	Total Product Cost	42.90
1 (b)	Unit Product Cost	35.20
	Direct Material	18.50
	Direct Labour	9.50
	Manufacturing OH (Variable)	7.20
	Total Product Cost	35.20
2-a	Great Outdoze Company
	Absorption Costing Income Statement
	Sales	1,319,900
	Less: Cost of Goods Sold	845,130
	Gross profit Margin	474,770
	Less: Selling and Administrative Expense	127,500
	Net Income	347,270
2(B)	Great Outdoze Company
	Variable Costing Income Statement
	Sales		1,319,900
	Less: Variable Cost
	Direct Material	364450
	Direct Labour	187150
	Manufacturing OH (Variable)	141840
	Less:Selling and Administrative Expense(Variable)	98500
	Total Variable Cost		791940
	Contribution Margin		527,960
	Less: Fixed Expenses
	Fixed Manufacturing OH	169400
	Selling and Administrative Expense(Fixed)	29000	198400
	Net Income		329,560
3)	Reconciliation statement:
	Income as per Variable costing	329,560
	Add: Fixed overhead deffered in ending inventory	17,710
	Income as per absorption costing	347,270