Question

Maher Corporation, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price	$	198
Units in beginning inventory		0
Units produced		3,230
Units sold		3,060
Units in ending inventory		170
Variable costs per unit:
Direct materials	$	55
Direct labor	$	55
Variable manufacturing overhead	$	14
Variable selling and administrative expense	$	13
Fixed costs:
Fixed manufacturing overhead	$	109,820
Fixed selling and administrative	$	12,240

Required:

a. What is the unit product cost for the month under variable costing?

b. What is the unit product cost for the month under absorption costing?

c. Prepare a contribution format income statement for the month using variable costing.

d. Prepare an income statement for the month using absorption costing.

e. Reconcile the variable costing and absorption costing net operating incomes for the month.

Answer 1

a)

Computation of Unit Product Cost
	Variable Costing
Direct Meterial	$                   55.00
Direct Labour	$                   55.00
Variable Manufactoring Overhead	$                   14.00
Unit Product Cost	$                 124.00

b)

Computation of Unit Product Cost
	Absorption Costing
Direct Meterial	$                            55.00
Direct Labour	$                            55.00
Variable Manufactoring Overhead	$                            14.00
Fixed Manufactoring Overhead ($109,820/3,230)	$                            34.00
Unit Product Cost	$                          158.00

c)

Income Statement
Variable Costing
Sales (3,060*$198)		$ 605,880
Less: Variable Expenses:
Variable manufacturing Cost (3,060*($55+$55+$14+$13)	$ 379,440
Variable selling and administrative expense (3,060*$13)	$    39,780
Total Variable Expenses		$ 419,220
Contribution Margin		$ 186,660
Fixed Expenses:
Fixed manufacturing overhead	$ 109,820
Fixed selling and administrative	$    12,240
Total Fixed Expenses		$ 122,060
Net Operating Income (loss)		$    64,600

d)

Income Statement
Absorption Costing
Sales (3,060*$198)		$ 605,880
Less: Cost of Goods Sold (3,060*$158)		$ 483,480
Gross Margin		$ 122,400
Less: Selling and administrative expense
Variable (3,060*$13)	$ 39,780
Fixed	$ 12,240
Total selling and administrative expense		$    52,020
Net income (loss)		$    70,380

e)

Reconciliation of Variable costing and Absorption costing Net operating income
Variable costing net operating income	$                 64,600
Add(deduct) fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing	170*$34 = $5,780
Absorption costing net operating income	$                 70,380