Question

Zurgot Inc. has just organized a new division to manufacture and sell specially designed computer tables, using select hardwoods. The division’s monthly costs are shown in the schedule below:

Manufacturing costs:
Variable costs per unit:
Direct materials	$	192
Variable manufacturing overhead	$	17
Fixed manufacturing overhead costs (total)	$	561,105
Selling and administrative costs:
Variable		15	% of sales
Fixed (total)	$	272,970

Zurgot regards all of its workers as full-time employees, and the company has a long-standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labour costs in its fixed manufacturing overhead. The tables sell for $490 each.

During the first month of operations, the following activity was recorded:

Units produced		5,055
Units sold		4,130

Required:

1. Compute the unit product cost under each of the following costing method.

2. Prepare an income statement for the month using absorption costing. (Do not leave any empty spaces; input a 0 wherever it is required.)

3. Prepare a contribution format income statement for the month using variable costing. (Do not leave any empty spaces; input a 0 wherever it is required.)

4. Not available in Connect.

5. Reconcile the absorption costing and variable costing operating income figures in (2) and (3) above.

Answer 1

1. Computation of Product Cost
	Absorption	Variable
Total Product Cost:
Direct Material	192	192
Variable Manuf. O/H	17	17
Fixed Manuf O/h	111
	(561105/5055)
	320	209
Requirement 2
Income statement (Absorption Costing)
Sales		2023700
Less: Cost of goods sold		1321600
Opening
Add: Units Manuf.	1617600
Less: Closing Inventory (15000*29)	296000
Gross Margin		702100
Less: Variable Selling & Admin		303555
Less: Fixed Selling & Admin		272970
Operating Income		125575
Requirement 3
Income statement (Variable Costing)
Sales		2023700
Less: Variable Product cost		863170
Product Cost
Add: Units Manuf.	1056495
Less: Closing	193325
Less: Variable Selling & Admin		303555
Contribution Margin		856975
Less: Fixed Manuf. O/H		561105
Less: Fixed Selling & Admin		272970
Operating Income		22900
Absorption costing operating income is higher than Variable costing.
This is because units produced are higher than units sold.
Fixed Manuf. O/H costs are deferred in ending inventory.
Reconciliation of Net Operating Income
Operating Income under Variable Costing		22900
Add: Fixed Manuf. Cost deferred in Absorption Costing Closing Inventory	102675
Operating Income under Absorption Costing		125575