Question

Maher Corporation, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price	$	187
Units in beginning inventory		0
Units produced		3,660
Units sold		3,100
Units in ending inventory		560
Variable costs per unit:
Direct materials	$	50
Direct labor	$	55
Variable manufacturing overhead	$	17
Variable selling and administrative expense	$	19
Fixed costs:
Fixed manufacturing overhead	$	124,440
Fixed selling and administrative	$	9,300

Required:

a. What is the unit product cost for the month under variable costing?

b. What is the unit product cost for the month under absorption costing?

c. Prepare a contribution format income statement for the month using variable costing.

d. Prepare an income statement for the month using absorption costing.

e. Reconcile the variable costing and absorption costing net operating incomes for the month.

Answer 1

Answer: a)

Unit product cost under variable costing method is the sum of direct material cost per unit, direct labor cost per unit and variable manufacturing overhead cost per unit. Therefore,

Direct Materials	$          50
Direct labor	$          55
Variable manufacturing overhead	$          17
Unit product cost	$        122

Hence, unit product cost for the month under variable costing is $122 per unit.

Answer: b)

Unit product cost under absorption costing method is the sum of direct material cost per unit, direct labor cost per unit and variable manufacturing overhead cost per unit and fixed manufacturing overhead cost per unit. Therefore,

Direct Materials	$          50
Direct labor	$          55
Variable manufacturing overhead	$          17
Fixed Manufacturing overhead	$          34
Unit product cost	$        156

Working Note :

Fixed manufacturing overhead cost per unit = Fixed manufacturing overhead cost / Units produced

= $124440/3660 units = $34 per unit

Hence, unit product cost for the month under absorption costing is $156 per unit.

Answer: c)

The contribution format income statement for the month using variable costing is as follows:

Variable costing (Contribution Margin) income statement
Sales (3100 units sold @$187 sales price/unit) - (a)		$        579,700
Less: Variable cost of goods sold
Beginning inventory	$                   -
Add: Variable cost of goods manufactured (3660 units produced @$122 per unit product cost)	$        446,520
Goods available for sale	$        446,520
Less: Ending inventory (560 units @$122 per unit product cost)	$          68,320
Variable cost of goods sold - (b)		$        378,200
Gross contribution margin (a-b)		$        201,500
Less: Variable selling & administrative expenses (3100 units sold @$19 per unit cost)		$          58,900
Contribution margin		$        142,600
Less: Period Costs:
Fixed manufacturing overhead	$        124,440
Fixed selling and administrative expenses	$            9,300
Total period costs		$        133,740
Net operating income/(loss)		$            8,860

Therefore, as per the table above, the net operating income under variable costing is $8860.

Answer: d)

The income statement for the month using absorption costing is as follows:

Absorption costing income statement
Sales (3100 units sold @$187 sales price/unit) - (a)		$        579,700
Less: Cost of goods sold
Beginning inventory	$                   -
Add: Cost of goods manufactured (3660 units produced @$156 per unit product cost)	$        570,960
Goods available for sale	$        570,960
Less: Ending inventory (560 units @$156 per unit product cost)	$          87,360
Cost of goods sold - (b)		$        483,600
Gross margin (a-b)		$          96,100
Less: Selling & administrative expenses
Fixed selling and administrative expenses	$            9,300
Variable selling & administrative expenses (3100 units sold @$19 per unit cost)	$          58,900
Total selling and administrative expenses		$          68,200
Net operating income/(loss)		$          27,900

Therefore, as per the table above, the net operating income under absorption costing is $27900.

Answer: e)

Reconciliation of net operating incomes:

Reconciliation of net operating income:
Net operating income (loss) under variable costing	$            8,860
Add: Fixed manufacturing overhead deferred in inventory (560 units @$34 fixed manufacturing overhead cost per unit)	$          19,040
Net operating income under absorption costing	$          27,900

Since ending inventory will be sold in next year therefore the fixed manufacturing overhead cost for such ending inventory will be deferred for the next year and hence it will be added to the variable costing income figure.