Question

Exercise 6-1 Computing unit and inventory costs under absorption costing LO P1

Trio Company reports the following information for the current year, which is its first year of operations.

Direct materials	$	10	per unit
Direct labor	$	17	per unit
Overhead costs for the year
Variable overhead	$	60,000	per year
Fixed overhead	$	120,000	per year
Units produced this year		20,000	units
Units sold this year		14,000	units
Ending finished goods inventory in units		6,000	units

Exercise 6-4 Variable costing income statement LO P2

Kenzi Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,075 kayaks and sold 825. at a price of $1,075 each. At this first year-end, the company reported the following income statement information using absorption costing.
  

Sales (825 × $1,075)	$	886,875
Cost of goods sold (825 × $425)		350,625
Gross margin		536,250
Selling and administrative expenses		220,000
Net income	$	316,250

Additional Information

Product cost per kayak totals $425, which consists of $325 in variable production cost and $100 in fixed production cost—the latter amount is based on $107,500 of fixed production costs allocated to the 1,075 kayaks produced.

The $220,000 in selling and administrative expense consists of $75,000 that is variable and $145,000 that is fixed.

Required

1. Prepare an income statement for the current year under variable costing.

Answer 1

Exercise 6-1 - Answer:

1. Cost per unit using absorption costing

Direct materials per unit = $10

Direct labor per unit = $17

Variable overhead per unit ($60,000 / 20,000 units) = $3

Fixed overhead ($120,000 / 20,000 units) = $6

Therefore, Total product cost per unit = $36

2. Cost of ending finished goods inventory using absorption costing

Closing finished goods units * cost per unit

= 6,000 units * $36

= $216,000

Note: Cost per unit of finished goods using absorption costing is calculated by adding the direct materials cost per unit, direct labor cost per unit, variable overhead cost per unit, and fixed overhead cost per unit. Variable overhead cost per unit is calculated by dividing the variable overhead cost per year with the number of units produced during the year. Fixed overhead cost per unit is calculated by dividing the fixed overhead cost per year with the number of units produced during the year.

Exercise 6-4 - Answer:

1. Income Statement under variable costing

Total Sales (825 units * $1,075) = $886,875

Less: Total variable production cost (825 units * $325) = $268,125

Less: Total variable selling and administrative expense = $75,000

Therefore, total contribution = $543,750

Less: Total Fixed Production cost = $107,500

Less: Total fixed selling and administrative expense = $145,000

Therefore, net income = $291,250