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		39,000
Units sold		34,000
Selling price per unit	$	82
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	557,000
Manufacturing costs:
Direct materials cost per unit	$	15
Direct labor cost per unit	$	6
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	741,000

Management is anxious to assess the profitability of the new camp cot during the month of 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

2. Assumption: Variable Costing

Determination of Unit product cost:

A. Sales (34000*82) 27,88,000

B. Cost of goods sold

1.Variable cost

Sales and distribution expenses(34000*3) (1,02,000)

MAnufacturing Direct Material Cost (34000*15) (5,10,000)

MAnufacturing Direct Labour Cost(34000*6) (2,04,000)

Manufacturing Variable overhead cost (34000*3) (1,02,000)

2.Fixed Cost   

Selling & Admin cost (5,57,000)

Manufacturing overhead (7,41,000)

3. profit 5,72,000

Number of units sold 34,000

Cost Per unit (572000/34000) 16.82

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2.(b) Income Statement for the month of may

Direct MAterials cost 5,10,000

Direct Labour cost 2,04,000

Varaible overhead 1,02,000

Prime cost 8,16,000

Selling overhead

Variable 1,02,000

Fixed 5,57,000 6,59,000

Works cost 14,75,000

Fixed overhead 7,41,000

Total cost of goods sold 22,16,000

Sales 27,88,000

Net profit 5,72,000

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1. Absorptional Costing

Calcuatioin of produt cost per unit

Direcet matrial cost 15

Direct Labour 6

Variable overhead 3

Fixed Maufacturing overhead(741,000/39000) 19

Selling & Admin variable cost 3

Selling Fixed cost(5,57,000/39000) 14.28

Total cost 60.28

Sale value per unit 82

Net profit per unit 21.71

1.(B) Income statement

Material cost 1,17,000

Direct Labour Cost 2,34,000

Variable manufacturing cost 1,17,000

Prime cost 468000

Fixed Overhead 7,41,000

12,09,000

Less: Cost of closing stock(WN-1) 1,55,000

Selling overhead:

Variable: 36000*3 1,02,000

Fixed overhead 5,57,000

Total cost 17,13,000

Sales(34000*82) 27,88,000

Net profit 10,75,000

WN-1 calculation of closing stock

cost of 39000 products 12,09,.000

Cos of 34,000 products 12,09,000*34000/39000 10,54,000

Value of closing stock 1,55,000