Question

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

Selling price	$	167
Units in beginning inventory		0
Units produced		3,410
Units sold		3,180
Units in ending inventory		230
Variable costs per unit:
Direct materials	$	48
Direct labor	$	55
Variable manufacturing overhead	$	13
Variable selling and administrative expense	$	12
Fixed costs:
Fixed manufacturing overhead	$	102,300
Fixed selling and administrative	$	12,720

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	$ 48.00
Direct Labour	$                   55.00
Variable Manufactoring Overhead	$                   13.00
Unit Product Cost	$                 116.00

b)

Computation of Unit Product Cost
	Absorption Costing
Direct Meterial	$ 48.00
Direct Labour	$ 55.00
Variable Manufactoring Overhead	$ 13.00
Fixed Manufactoring Overhead ($102,300/3,410)	$ 30.00
Unit Product Cost	$ 146.00

c)

Income Statement
Variable Costing
Sales (3,180 * 167)		$531,060
Less: Variable Expenses:
Variable manufacturing Cost [3,180 * (48+55+13)]	$368,880
Variable selling and administrative expense (3,180 * 12)	$38,160
Total Variable Expenses		$407,040
Contribution Margin		$124,020
Fixed Expenses:
Fixed manufacturing overhead	$102,300
Fixed selling and administrative	$12,720
Total Fixed Expenses		$115,020
Net Operating Income (loss)		$ 9,000

d)

Income Statement
Absorption Costing
Sales (3,180 * 167)		$531,060
Less: Cost of Goods Sold (3,180 * 146)		$464,280
Gross Margin		$ 66,780
Less: Selling and administrative expense
Variable (3,180 * 12)	$38,160
Fixed	$12,720
Total selling and administrative expense		$ 50,880
Net income (loss)		$ 15,900

e)

Reconciliation of Variable costing and Absorption costing Net operating income
Variable costing net operating income	$9,000
Add:- fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing (230 * 30)	6,900
Absorption costing net operating income	$15,900