Question

Starfire Company, which has only one product, has provided the following data concerning its most recent month of operations:
                                                                                                                                                        
Selling price RM90
Units in beginning inventory 500
Units produced 12,000
Units sold 11,800

Variable costs per unit:
Direct materials RM25
Direct labor RM12
Variable manufacturing overhead RM8
Variable selling and administrative RM5

Fixed costs:
Fixed manufacturing overhead RM60,000
Fixed selling and administrative RM152,000

The company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and total fixed costs have been constant from month to month.

Required:

a) Calculate the cost of one unit of product under absorption costing.                    

b) Calculate the cost of one unit of product under variable costing.                        

c) Calculate Starfire’s next year operating income under absorption costing.         

d) Calculate Starfire’s next year operating income under variable costing.             

Answer 1

a) Cost of one unit of product under absorption costing:

Under absorption costing, the product cost includes, all the manufacturing costs associated with production. It includes, the per unit cost of direct materials, direct labour and fixed and variable manufacturing overheads.

Cost of one unit of product = Direct Materials + Direct Labor + Fixed manufacturing overhead + Variable manufacturing overhead

Direct Materials = RM25 per unit

Direct Labor = RM12 per unit

Fixed manufacturing overhead per unit = Fixed manufacturing overhead ÷ Units produced = RM60,000 ÷ 12,000 = RM5 per unit

Variable manufacturing overhead = RM8 per unit

Cost of one unit of product = RM25 + RM12 + RM5 + RM8 = RM50

Therefore, the cost of one unit of product under absorption costing is RM50.

b) Cost of one unit of product under variable costing:

Under variable costing only variable manufacturing costs are considered as product cost. It includes, the per unit cost of direct materials, direct labor and variable manufacturing overhead

Cost of one unit of product = Direct Materials + Direct Labor + Variable manufacturing overhead

Direct Materials = RM25 per unit

Direct Labor = RM12 per unit

Variable manufacturing overhead = RM8 per unit

Cost of one unit of product = RM25 + RM12 + RM8 = RM45

Therefore, the cost of one unit of product under variable costing is RM45.

c) Starfire’s next year operating income under absorption Costing:

Sales = Units sold × Selling price per unit = 11,800 × RM90 = RM1,062,000

Cost of beginning inventory = Units in beginning inventory × Product cost = 500 × RM50 = RM25,000

Cost of goods manufactured = Units produced × Product cost = 12,000 × RM50 = RM600,000

Units in ending inventory = Units in beginning inventory + Units produced - Units sold = 500 + 12,000 - 11,800 = 700 units

Cost of Ending inventory = Units in ending inventory × Product cost = 700 × RM50 = RM35,000

Variable selling and administrative expenses = Units sold × Variable selling and administrative expenses per unit = 11,800 × RM5 = RM59,000

d) Starfire’s next year operating income under variable Costing:

Sales = Units sold × Selling price per unit = 11,800 × RM90 = RM1,062,000

Cost of beginning inventory = Units in beginning inventory × Product cost = 500 × RM45 = RM22,500

Cost of goods manufactured = Units produced × Product cost = 12,000 × RM45 = RM540,000

Units in ending inventory = Units in beginning inventory + Units produced - Units sold = 500 + 12,000 - 11,800 = 700 units

Cost of Ending inventory = Units in ending inventory × Product cost = 700 × RM45 = RM31,500

Variable selling and administrative expenses = Units sold × Variable selling and administrative expenses per unit = 11,800 × RM5 = RM59,000

Fixed Expenses = Fixed manufacturing overhead + Fixed selling and administrative expenses = RM60,000 + RM152,000 = RM212,000