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Exercise 6-9 Income statement under absorption costing and variable costing LO P1, P2

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Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 44,000 units and sold 36,000 units at a price of $120 per unit.
  

Manufacturing costs
Direct materials per unit	$	48
Direct labor per unit	$	18
Variable overhead per unit	$	6
Fixed overhead for the year	$	440,000
Selling and administrative costs
Variable selling and administrative cost per unit	$	10
Fixed selling and administrative cost per year	$	115,000

Exercise 6-9 Part 1a

1a. Assume the company uses absorption costing. Determine its product cost per unit.
1b. Assume the company uses absorption costing. Prepare its income statement for the year under absorption costing.

2a. Assume the company uses variable costing. Determine its product cost per unit.

2b. Assume the company uses variable costing. Prepare its income statement for the year under variable costing.

Answer 1

• All working forms part of the answer
• Under absorption costing , fixed production overhead become cost of the product.
• Under variable costing only variable production expense become cost of the product.
• Requirement 1 (a) and 2 (a)

	Product Unit Cost
	Cost under Absorption Costing	Cost under Variable costing
Direct material	48	48
Direct labor	18	18
Variable Overhead	6	6
Fixed overhead	[$440000/44000 units] 10	0
Total Unit product cost	$82	$72

• Requirement 1 (b) Absorption costing

A	Sales [36000 x $120]		$4,320,000
	Less: Cost of Goods Sold
	Beginning Inventory	0
	Add: Production cost [44000 x $82]	3608000
	Less: Cost of ending inventory [8000 x $82]	656000
B	Cost of Goods Sold		2952000
C=A-B	Gross Profits		1368000
	Selling & administrative expenses:
	variable [36000 x $10]	360000
D	Fixed	115000	475000
E=C-D	Net income		$893,000

• Requirement 2 (b)

A	Sales [36000 x $120]		$4,320,000
	Less: variable production cost [36000 x $72]		2592000
	Less: Variable selling & admin cost [36000 x $10]		360000
B	Contribution margin		1368000
	Less: Fixed Cost
	Fixed overhead	440000
C	Fixed Selling & Admin	115000	555000
B - C	Net Income		$813,000