Question

Bonn Corporation produces and sells a unique type of TV recording device. The company has just opened a new plant to manufacture the device. The following cost and revenue data have been provided for the first month of the plant’s operation.

Beginning inventory                                                                           0

Units produced                                                                       60,000

Units sold                                                                                50,000

Selling price per unit                                                                      $80

Selling and administrative expenses:

Variable per unit                                                                              $4

Fixed                                                                                      $700,000

Manufacturing costs:

Direct materials cost per unit                                                         $20

Direct labor cost per unit                                                                 $8

Variable manufacturing overhead cost per unit                               $4

Fixed manufacturing overhead cost                                      $800,000

Required:

Determine the unit product cost using absorption costing and variable costing.

Prepare an income statement for the month using variable costing.

Prepare an income statement for the month using absorption costing.

Explain why or why not the operating income is the same if income statements for absorption costing or variable costing are prepared.

Answer 1

a) calculation of unit product cost :

particulars	variable costing	absorption costing
direct material cost	20	20
direct labor	8	8
variable manufacturing overheads	4	4
selling and administative expenses	4	4
fixed selling expenses (working note 1)	---`	11.67
fixed manufacturing expenses	---	13.33
total cost per unit	$ 36	$ 61

working note 1 :

fixed selling expenses = fixed cost / units produced

= 700000 / 60000

= 11.67

working note 2 :

fixed manufacturing expenses = fixed manufacturing overheads / units produced

= 800000 / 60000

= 13.33

b) income statement for the month using variable costing :

particulars	variable costing
sales (50000 units * 80 cost)	4000000
less : variable cost (50000 * 36 per unit)	(1800000)
gross profit	2200000
less fixed costs :
selling expenses	(700000)
manufacturing expenses	(800000)
net profit	700000

c) income statement for the month using absorption costing :

particulars	absorption costing
sales (50000 units * 80 per unit)	4000000
less : variable cost (50000 * 61per unit)	(3050000)
net profit	950000

d) variable costing :

• under this system only variable cost of production is assertined.
• the contribution is calculated unit cost
• it will be raise or fall the costs based on the production when increases the production costs are raise other wise it falls
• the fixed expenses does not have any relevence to calculate the contribution.

absorption costing :

• under this system, variable costs and fixed costs are considered the total manufactured units
• the fixed costs are also added to the product on the unit basis but not the time basis
• the treatment of fixed costs which in different under both methods