Question

Goran Grill Company makes a single product - a handmade                                                             specialty barbeque grill that sells for $600. Data for last year’s                                                          operations follow:

                                   

                                    Units in beginning inventory                           0

                                    Units produced                                     50,000

                                    Units sold                                                40,000

                                   

                       

                                    Variable costs per unit:

                                    Direct materials                                   $      150

                                    Direct labor                                                 120

                                    Variable manufacturing overhead              100

                                    Variable selling and administrative              30

                                    Total variable cost per unit                 $      400

                                    Fixed costs:

                                    Fixed manufacturing overhead        $1,500,000

                                    Fixed selling and administrative         600,000

                                    Total fixed costs                              $2,100,000

                                    Required:

1. Compute the unit product cost for one barbeque grill for absorption costing and variable costing.
2. Prepare an income statement for the year using the absorption costing approach.
3. Prepare an income statement for the year using the variable costing approach.
4. Explain the difference in operating income for the absorption and variable costing approaches.

Answer 1

Answer:-a)-Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$150+$120+$100+$30 = $400 per barbeque grill

Explanation:- Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$1500000/50000 units =$30 per barbeque grill

Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$150+$120+$100 = $370 per barbeque grill

b)-

GORAN GRILL COMPANY
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	40000 units*$600 per unit		24000000
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufactured		18500000
Direct materials	50000 units*$150 per unit	7500000
Direct labor	50000 units*$120 per unit	6000000
Variable manufacturing overhead	50000 units*$100 per unit	5000000
Fixed manufacturing overhead		1500000
Variable cost of goods available for sale		20000000
Less:- Closing inventory	10000 units*$400 per unit	4000000	16000000
Gross contribution margin C= a-b			8000000
Less:-Variable selling & administrative exp.	40000 units*$30 per unit		1200000
Contribution margin			6800000
Less:- Fixed costs
Selling & administrative exp.			600000
Net Income			6200000

c)-

GORAN GRILL COMPANY
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	40000 units*$600 per unit		24000000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		18500000
Direct materials	50000 units*$150 per unit	7500000
Direct labor	50000 units*$120 per unit	6000000
Variable manufacturing overhead	50000 units*$100 per unit	5000000
Variable cost of goods available for sale		18500000
Less:- Closing inventory	10000 units*$370 per unit	3700000	14800000
Gross contribution margin C= a-b			9200000
Less:-Variable selling & administrative exp.	40000 units*$30 per unit		1200000
Contribution margin			8000000
Less:- Fixed costs
Manufacturing overhead			1500000
Selling & administrative exp.			600000
Net Income			5900000

d)-

Reconcilation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		5900000
Less:-Fixed manufacturing overheads brought in (opening inventories)	Nil
Add:-Fixed manufacturing overheads carried forword in(closing inventories)	10000 units*$30 per unit	300000
Net income under absorption costing method		6200000