Question

High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation:

   

Beginning inventory		0
Units produced		43,000
Units sold		38,000
Selling price per unit		$79
Selling and administrative expenses:
Variable per unit		$3
Fixed per month	$	565,000
Manufacturing costs:
Direct materials cost per unit		$17
Direct labor cost per unit		$9
Variable manufacturing overhead cost per unit		$3
Fixed manufacturing overhead cost per month	$	731,000

  

Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May.

  

Required:

1.	Assume that the company uses absorption costing.

  

a.	Determine the unit product cost.

         

b.	Prepare an income statement for May.

         

2.	Assume that the company uses variable costing.

  

a.	Determine the unit product cost.

         

b.	Prepare a contribution format income statement for May.

Answer 1

1) Under Absorption costing :

a)	Calculation of unit product cost
	particulars				amount ($)'
	Direct materials cost per unit				17
	Direct labour				9
	Variable cost				3
	Fixed OH cost(731000/43000)				17
					46

b)

Calculation of income statement
Particulars				amount ($)
sales (38000*79)				3002000
(-) cost of goods sold
Direct material (43000*17)	731000
Direct labour (43000*9)	387000
Variable Manf OH (43000*3)	129000
Fixed Manf OH	731000			1978000
				1024000
(-) closing stock (43000-38000)				230000
(1978000/43000*5000)
CONTRIBUTION				794000
(-) Variable selling expenses (38000*3)				114000
				680000
(-) fixed selling expenses				565000
Profit for month of May				115000

2 ) Under Variable costing:

Calculation of unit product cost under Variable costing :
particulars				amount ($)'
Direct materials cost per unit				17
Direct labour				9
Variable cost				3
				29

b)Under variable costing :

Calculation of income statement
Particulars				amount ($)
sales (38000*79)				3002000
(-) cost of goods sold
Direct material (43000*17)	731000
Direct labour (43000*9)	387000
Variable Manf OH (43000*3)	129000
				1247000
				1755000
(-) closing stock (43000-38000)				204069.8
(1755000/43000*5000)
CONTRIBUTION				1550930
(-) Variable selling expenses (38000*3)				114000
				1436930
(-) fixed selling and manf OH(565000+731000)				1296000
Profit for month of May				140930.2