Question

Darwin Company manufactures only one product that it sells for $200 per unit. The company uses plantwide overhead cost allocation based on the number of units produced. It provided the following estimates at the beginning of the year:

Number of units produced		50,000
Total fixed manufacturing overhead costs	$	1,000,000
Variable manufacturing overhead per unit produced	$	12

During the year, the company had no beginning inventories of any kind and no ending raw materials or work in process inventories. All raw materials were used in production as direct materials. An unexpected business downturn caused annual sales to drop to 38,000 units. In response to the decline in sales, Darwin decreased its annual production to 40,000 units. The company’s actual costs for the year were as follows:

Variable costs per unit:
Manufacturing:
Direct materials	$	78
Direct labor	$	60
Variable manufacturing overhead	$	12
Variable selling and administrative	$	15
Fixed costs per year:
Fixed manufacturing overhead	$	1,000,000
Fixed selling and administrative expenses	$	350,000

Required:

1. Assuming the company uses normal costing (as described in Chapters 2 and 3):
a. Compute the plantwide predetermined overhead rate.
b. Compute the unit product cost for each unit produced during the year.
c. Prepare a schedule of cost of goods manufactured and a schedule of cost of goods sold. Assume that any underapplied or overapplied overhead is closed entirely to cost of goods sold.
d. Compute absorption costing net operating income for the year.

Prepare a schedule of cost of goods manufactured and a schedule of cost of goods sold. Assume that any underapplied or overapplied overhead is closed entirely to cost of goods sold.

Compute the plantwide predetermined overhead rate

	Plantwide predetermined overhead rate per unit

Compute the unit product cost for each unit produced during the year.

	Unit product cost

	Darwin Company Cost of Goods Manufactured Direct materials: ? ? Total raw materials available 0 ? Raw materials used in production $0 ? ? Total manufacturing costs 0 ? ? 0 ? Cost of goods manufactured $0 ? Cost of Goods Sold ? ? Cost of goods available for sale 0 ? Unadjusted cost of goods sold 0 ? Adjusted cost of goods sold $0

Compute absorption costing net operating income for the year.

	Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income

Answer 1

Req 1-a:
Plantwide OH rate (per unit)
Fixed OH rate (1000,000/50,000):			20
Variable OH rate			12.00
OH rate per unit			32.00
Req 1-b:
Unit product cost:
Material			78
Labour			60
Variable Manufacturing OH			12
Fixed Manufafcturing Oh			20
Unit product cost:			170
Req 1-c:
Cost of Goods manufactured:
Direct Material
Beginning Inventory of Material			0
Add: Purchases			3120000
Total raw material available			3120000
Less: Ending material			0
Raw material consumed				3120000
Direct Labour				2400000
Manufacturing OH				1280000
Total Mnaufacturing Cost				6,800,000
Add: Beginning WIP				0
Total cost of Goods manufacturing				6800000
Less: Ending WIP				0
Cost of Goods manufactured:				6800000
Cost of Goods sold:
Beginning Finished Goods				0
Add: Cost of Goods manufactured				6800000
Cost of Goods available for sale				6800000
Less: Ending inventory (2000 units @ 170)				340000
Cost of Goods sold:				6460000
Add; Under-applied OH				200,000
(1000,000 -40000 units @20)
Adjusted Cost of Goods sold				6,660,000
Absorption costing:
Unit product cost:
Material			78
Labour			60
Variable Manufacturing OH			12
Fixed Manufafcturing Oh			25	(1000,000/40000)
Unit product cost:			175
Net Income as per Aabsorption costing:
Sales			7600000
Less: Cost fo Goods sold			6460000
Gross margin			1140000
Less: Selling and admin expense			920000
Net Income as per Aabsorption costing:			220000