Question

Problem 6-20 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income [LO6-1, LO6-2, LO6-3]

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		40,000
Units sold		35,000
Selling price per unit	$	76
Selling and administrative expenses:
Variable per unit	$	4
Fixed (per month)	$	561,000
Manufacturing costs:
Direct materials cost per unit	$	16
Direct labor cost per unit	$	8
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	600,000

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

Ans.1(a)	Detemination of Unit Product Cost (Under Absorption Costing):
	Particulars			Amt.($)
	Direct Material			16
	Direct Labor			8
	Variable Manuf. Overhead			3
	Fixed Manuf. Overhead ($600,000 / 40,000)			15
	Cost per unit			$                42
Ans.1(b)	High Couuntry, Inc.
	Income Statement for May
	Particulars				Amt.($)	Amt.($)
	Sales (35,000 x $76)					$   2,660,000
	Cost of Goods sold:
	Beginning Inventory
	Production cost (40,000 units x $42)				$   1,680,000
	Cost of Goods available for sale				1,680,000
	Ending Inventory (5,000 units x $42)				210,000	1,470,000
	Gross Profit					1,190,000
	Less: Selling and administrative expenses:
	Variable (35,000 units x $4)				140,000
	Fixed				561,000	701,000
	Net Operating Income					$       489,000
Ans.2(a)	Detemination of Unit Product Cost (Under Variable Costing):
	Particulars			Amt.($)
	Direct Material			16
	Direct Labor			8
	Variable Manuf. Overhead			3
	Cost per unit			$                27
Ans.2(b)	High Couuntry, Inc.
	Contribution Margin Income Statement for May
	Particulars				Amt.($)	Amt.($)
	Sales (35,000 x $76)					$   2,660,000
	Variable Cost of Goods sold:
	Beginning Inventory
	Production cost (40,000 units x $27)				$   1,080,000
	Cost of Goods available for sale				1,080,000
	Ending Inventory (5,000 units x $27)				135,000	945,000
	Gross conttribution margin					1,715,000
	Variable Selling and administrative expenses(35,000 units x $4)					140,000
	Contribution Margin					1,575,000
	Less: Fixed cost
	Manufacturing Overhead				600,000
	Selling and administrative				561,000	1,161,000
	Net Operating Income					$       554,000