Question

The following information has been extracted from Universal Inc.’s financial records for its first year of operations:

Units produced                         10,000            

Beg. Finished Goods Inventory          0

Units sold                                     7,000            

Sales Price per Unit                      $100

Variable costs per unit:                                   Fixed costs for year:

Direct Materials          $8                    Overhead                    $70,000

Direct Labor                9                    Marketing & Admin   30,000

Overhead                    3

Selling                        4 per unit sold

Required:

1. Compute the manufacturing cost of one unit using the Variable Costing method.

2. Compute the manufacturing cost of one unit using the Absorption Costing method.

3. Prepare the Income Statement under both methods.

4. Reconcile the difference in Operating Income between the 2 methods (be VERY specific and use numbers to reconcile.)

Answer 1

1)

	Unit cost under variable costing method
Direct material	8
Direct labor	9
overhead	3
Unit cost	20

2)

	Unit cost under absorption costing method
Direct material	8
Direct labor	9
variable overhead	3
Fixed overhead	7
Unit cost	27

#Unit fixed overhead cosr =Total fixed overhead /units produced

                     = 70000/10000

                    = $ 7 per unit

3)

Universal Inc.’s Variable costing income statement
Sales revenue (7000*100)		700000
Less:variable expenses
Variable cost of sales (20*7000)	140000
Variable selling expenses (4*7000)	28000
Total variable expenses		168000
contribution margin		532000
less:fixed expenses
Fixed overhead	70000
Marketing and administration expense	30000
Total fixed cost		100000
Net operating income		432000

Universal Inc.’s Absorption costing income statement
sales revenue	700000
less:cost of goods sold(27*7000)	189000
Gross margin	511000
less:operating expenses
Selling (4*7000)	28000
Marketing and administration	30000
Total operating expenses	58000
Net operating income	453000

4)

Net income under variable costing	432000
Add"Fixed overhead cost deferred in ending inventory (3000*7)	21000
Net income under absorption costing	453000