Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:
Beginning inventory 0
Units produced 9,000
Units sold 7,000
Selling price per unit $ 47
Selling and administrative expenses:
Variable per unit $ 4
Fixed per year $ 58,000
Manufacturing costs:
Direct materials cost per unit $ 10
Direct labor cost per unit $ 6
Variable manufacturing overhead cost per unit $ 5
Fixed manufacturing overhead per year $ 90,000
Assume that direct labor is a variable cost.
Required:
a. Prepare an income statement for the year using absorption costing
b. Prepare an income statement for the year using variable costing
c. Reconcile the absorption costing and variable costing net operating income figures

Answer 1

a.

Income statement absorption costing
Particulars	Amount	Amount
Sales (7000 units x $47)	$329,000
Less: Cost of goods sold ( 7000 units x  $31)	(217,000)
Gross profit		$112,000
Less: operating expenses
Selling and administrative expenses:
Fixed	(58,000)
Variable (7000 * 4)	(28,000)
Total expenses		(86,000)
Net operating income		$26,000

b.

Income statement  variable costing
Particulars	Amount	Amount
Sales (7000 x $47)		$329,000
Less: Cost of goods sold (7000 x $21)	(147,000)
Variable selling expenses (7000 *$4)	(28,000)
Total variable cost		(175,000)
Contribution margin		154,000
Less : Fixed costs:
Fixed overhead	(90,000)
Selling expenses fixed	(58,000)
Total fixed expenses		(148,000)
Net Income		$6,000

c. Fixed manufacturing overhead per unit = Fixed manufacturing overhead  / total units produced

= $90000 / 9000

= $10 per unit

Particulars	Amount
Net operating income (absorption costing)	$26,000
Less: Fixed manufacturing overhead on inventory (2000 units x $10 per unit	(20,000)
Net operating income (variable costing)	$6,000

Direct material cost per unit.            $10

Direct labor cost per unit.                  $6

Variable overhead per unit.                $5

Fixed overhead (90,000/9,000).         $10

Total absorption cost per unit.                        $31

 

Direct material cost per unit.            $10

Direct labor cost per unit.                  $6

Variable overhead per unit.                $5

Total cost per unit (variable costing) $21