Question

DC-Marvel would like to evaluate one of the product lines that they sell to defense department. Every month the company produces an identical number of units, although the sales in units differ from month to month.

	Product B
Selling price	$109
Units in beginning inventory	360
Units produced	6,900
Units sold	7,200
Variable costs per unit:
Direct materials	$29
Direct labour	$31
Variable manufacturing overhead	$2
Variable selling and administrative	$7
Fixed costs:
Fixed manufacturing overhead	$53,500
Fixed selling and administrative	$145,000

Required:

Compute the Contribution Margin.

Compute the Operating Income under Variable Costing.

Prepare a reconciliation from your Operating Income under Variable Costing to Operating Income under Absorption Costing. Show the differences between each method.

Answer 1

WORKING NOTES : 1
	beginning Inventory	360	Units
	Unit Produced =	6,900	Units
	Unit Sold =	7,200	Units
	Closing Stock	60	Units
	Selling Price Per unit	$                       109.00	Per Units
	Sales Value	$                    7,84,800
	Fixed Overhead recovery Rate =
	Fixed Manufacturing expenses	$                       53,500
	Divide by	"/" By
	Number of units Produced	$                          6,900
	Fixed Overhead recovery Rate =	$                            7.75	Per Units
WORKING NOTES : 2
	CALCUALTION OF cost of production units by using absorption and variable Costing
	Particulars	Absorption Costing Amount	Variable Costing Amount
	Direct Material Per unit	$                          29.00	$              29.00
	Direct Labour Per Unit	$                          31.00	$              31.00
	Vairable Manufacturing Overhead	$                            2.00	$                 2.00
	Fixed Manufacturing Overhead	$                            7.75	$                     -
	Cost of Production per unit	$                          69.75	$              62.00
SOLUTION = 1 & 2
	VARIABLE COSTING INCOME STATEMENTS	Variable Costing
	Particulars	Amount
	Sales	$                    7,84,800
	Cost of Goods Sold
	Beginning inventory (360 X $ 62)	$                       22,320
	Cost of Goods Manufactured (6900 Units X $ 62)	$                    4,27,800
	Less: Ending Inventory (60 Units X 62)	$                          3,720
	Cost of Goods Sold	$                    4,46,400
	Variable Selling Expenses (7200 X $ 7)	$                       50,400
	Contribution Margin	$                    2,88,000
	Selling Expenses:
	Less: Fixed Manufacturing overhead	$                       53,500
	Less : Fixed Selling Expenses	$                    1,45,000
	Net Income	$                       89,500
SOLUTION = 3	Units
	Income as per Variable Costing	89,500
	Less: Fixed Overhead in Beginning inventory (360 Units X $ 7.75)	2,791
	Add: Fixed Overhead in Ending inventory (60 Units X $ 7.75)	465
	Income as per Absorption Costing	87,174