A company manufactures a unique unique device that is is used to boost Wi-Fi Wi-Fi signals. The following following data relates to the first month of operation: Beginning inventory Units produced Units sold Selling price per unit Selling and ad ministrative expenses: Variable per unit Fied !total "or t#e ont#% Manufacturing costs: &irect aterials cost per unit &irect labor cost per unit Variable anu"acturing over#ead cost per unit Fied anu"acturing over#ead cost
0 40,000 35,000 $ 12 0 $4 $1,120,000 $ 30 $ 14 $4 $1,2'0,000
Management is anious to see the profitability of newly designed unique booster. Required:
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"alc "alcul ulat ate e uni unitt pro produ duct ct cost cost and and pre prepa pare re inco income me stat statem emen entt und under er vari variab able le cost costin ing g sys syste tem m and and absorption costing system. #. $repare income statement under two costing system. %. $rep $repar are e a sch sched edul ule e to to rec recon onci cile le the the net net oper operat atin ing g inc incom ome e und under er vari variab able le and and abs absor orpt ptio ion n cos costi ting ng system.
Solution: (1) Calculation of unit product cost: &irect aterials &irect labor Variable anu"acturing over#ead Fied anu"acturing over#ead production cost per unit
Variable co costing $30 $14 $4 ( ***+ $4' ***+
Absorption co costing $ 30 $ 14 $4 $ 32 ) ***+ $'0 ***+
&!'#()')))*+)')))
(2) Income statements: Absorption costing: Sales !35,000 Units $120% Less cost of goods sold: Beginning inventory -dd cost o" goods anu"actured !40,000 Units $'0% .ost o" goods available "or sale /ess ending inventory !5,000 Units $'0% ross pro"it /ess selling and adinistrative epenses Fied Variable !35,000 Units $4%
4,200,000 0 3,200,000 ***+ 3,200,000 400,000 ** ***+
1,120,000 140,000 ***+
2,'00,000 *** + 1,400,000
1,20,000 ***+ 140,000 ***+
Variable costing: Sales !35,000 Units $120% Less variable cost of goods sold:
4,200,000
Beginning inventory -dd v cost o" goods anu"actured !40,000 Units $4'%
0 1,20,000 ***+ 1,20,000 240,000 ***+
.ost o" goods available "or sale /ess ending inventory !5,000 Units $4'% ross contribution argin /ess variable selling and adinistrative epenses .ontribution argin Less fixed costs: Fied anu"acturing over#ead Fied selling and adinistrative epenses
1,2'0,000 1,120,000 ***+
et operating loss
1,'0,000 ***+ 2,520,000 140,000 ***+ 2,3'0,000
2,400,000 ***+ !20,000 % ***+
(3) Reconciliation schedule: et operating incoe !loss% under variable costi ng Fied anu"acturing over#ead cost de"erred in inventory !5,000 units $32% et operating incoe under absorption costin g
,uper ie Manufacturing "ompany presents the following data for #)!!: pening inventory Sales 6roduction .losing inventory &irect aterials &irect labor Variable anu"acturing over#ead epenses Variable selling and adinistrative epenses Fied anu"acturing over#ead epenses Fied selling and adinistrative epenses
0 Units ',000 Units 10,000 Units 2,000 Units $240 $2'0 $100 $40 $1200,000 $'00,000
Required: "ompute the unit product cost of one bie under:
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Absorption costing system. /ariable costing system.
Solution: Computation of unit product cost:
$!20,000% $10,000 ***( $140,000 ***(
Absorption costing Variable costing Direct materials
$240
$240
Direct labor
$280
$280
Variable manufacturing overhead
$100
$100
Fixed manufacturing overhead
$120*
–
!
!
$40
$%20
!
!
"nit #roduct cost
*1&200&000 ' 10&000 ( $120
0otice that the fied manufacturing overhead cost has not been included while computing the cost of one bie under variable costing system. Note: ,elling and administrative epenses 1both variable and fied2 are not relevant for the computation
of unit product cost.
The following is the absorption costing income statement of a manufacturing company: Sales !40,000 units 7 $850% /ess cost o" goods sold9 pening inventory -dd cost o" goods anu"actured !50,000 42% -vailable "or use /ess closing inventory
$2,800,000 0 2,100,000 ***+ 2,100,000 420,000 ***+
1,'0,000 ***+ ross argin 1,020,000 /ess selling and adinistrative epenses '40,000 ***+ et operating incoe 1'0,000 ***+ Fied selling and adinistrative epenses are $00,000 Variable selling and adinistrative epenses are $ per unit sold :#e unit product cost under absorption costing is coputed as "ollo;s9 &irect aterials $20 &irect labor ' Variable anu"acturing over#ead 4 Fied anu"acturing over#ead !$500,000<50,000% 10 **+ :otal cost per unit $42 **+
Required:
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$repare a contribution margin income statement using variable costing system.
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3econcile any difference between net operating income figure under variable costing income statement and net operating income figure under absorption costing income statement.
Solution (1) Income Statement: Sales !40,000 units 7 $850% /ess variable cost o" goods sold9 pening inventory -dd v cost o" goods anu"actured !50,000 units $32% -vailable "or sale /ess closing inventory !10,000 units $32%
2,800,000 0 1,00,000 ***+ 1,00,000 320,000 ***+
ross contribution argin /ess variable selling and adinistrative epenses .ontribution argin /ess "ied epenses9 =anu"acturing Selling and adin
500,000 00,000 ***+
et operating incoe
1,2'0,000 ***+ 1,420,000 240,000 ***+ 1,1'0000
1,100,000 ***+ '0,000 ***+
(2) Reconciliation of net operating income: et operating incoe under variable costin g Fied anu"acturing over#ead de"erred in inventory !10,000 units $10% et operating incoe under absorption costin g
'0,000 100,000 **( 100,000 **(
Solution: Computation of unit product cost: &irect aterials &irect labor Variable anu"acturing over#ead Fied anu"acturing over#ead Unit product cost
Absorption costing $240 $2'0 $100 $120) ***+ $840 ***+
Variable costing $240 $2'0 $100 ( ***+ $20 ***+
)1,200,000 < 10,000 > $120
0otice that the fied manufacturing overhead cost has not been included while computing the cost of one bie under variable costing system. Note: ,elling and administrative epenses 1both variable and fied2 are not relevant for the computation of unit product cost.
A company manufactures a unique device that is used to boost Wi-Fi signals. The following data relates to the first month of operation: Beginning inventory Units produced Units sold Selling price per unit Selling and ad ministrative expenses: Variable per unit Fied !total "or t#e ont#% Manufacturing costs: &irect aterials cost per unit &irect labor cost per unit Variable anu"acturing over#ead cost per unit Fied anu"acturing over#ead cost
0 40,000 35,000 $120 $4 $1,120,000 $30 $14 $4 $1,2'0,000
Management is anious to see the profitability of newly designed unique booster. Required:
!.
"alculate unit product cost and prepare income statement under variable costing system and absorption costing system. #. $repare income statement under two costing system. %. $repare a schedule to reconcile the net operating income under variable and absorption costing system.
Solution: (1) Calculation of unit product cost: &irect aterials &irect labor Variable anu"acturing over#ead Fied anu"acturing over#ead production cost per unit
Variable costing $30 $14 $4 ( ***+ $4' ***+
Absorption costing $30 $14 $4 $32) ***+ $'0 ***+
&!'#()')))*+)')))
(2) Income statements: Absorption costing: Sales !35,000 Units $120% Less cost of goods sold: Beginning inventory -dd cost o" goods anu"actured !40,000 Units $'0% .ost o" goods available "or sale /ess ending inventory !5,000 Units $'0% ross pro"it /ess selling and adinistrative epenses Fied Variable !35,000 Units $4%
4,200,000 0 3,200,000 ***+ 3,200,000 400,000 ***+
1,120,000 140,000 ***+
2,'00,000 ***+ 1,400,000
1,20,000 ***+ 140,000 ***+
Variable costing: Sales !35,000 Units $120% Less variable cost of goods sold: Beginning inventory -dd v cost o" goods anu"actured !40,000 Units $4'%
4,200,000 0 1,20,000 ***+ 1,20,000 240,000 ***+
.ost o" goods available "or sale /ess ending inventory !5,000 Units $4'%
1,'0,000 ***+ 2,520,000 140,000 ***+ 2,3'0,000
ross contribution argin /ess variable selling and adinistrative epenses .ontribution argin Less fixed costs: Fied anu"acturing over#ead Fied selling and adinistrative epenses
1,2'0,000 1,120,000 ***+
2,400,000 ***+ !20,000 % ***+
et operating loss
(3) Reconciliation schedule: et operating incoe !loss% under variable costi ng Fied anu"acturing over#ead cost de"erred in inventory !5,000 units $32%
$!20,000% $10,000 ***( $140,000 ***(
et operating incoe under absorption costin g
A4A company manufactures and sells a product for 5#)*6g. The data for the last year is given below: Sales Finis#ed goods inventory at t#e beginning o" t#e period Finis#ed goods inventory at t#e closing o" t#e period Manufacturing costs: Variable cost Fied anu"acturing over#ead cost Marketing and administrative expenses: Variable epenses Fied epenses
85,000 ?g 12,000 ?g 18,000 ?g $' per ?g $320,000 per year $2 per ?g o" sale $300,000 per year
Required:
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7ncome statement using absorption and variable costing methods. 8planation of the cause of difference in operating income under two concepts.
Solution (1) Income statements: (a) Absorption costing: Sales Less cost of goods sold: Beginning inventory !12000?g $12% .ost o" goods anu"actured !'0,000) ?g $12))% .ost o" goods available "or sale .losing inventory !18,000?g 12 % ross pro"it
1,500,000 144,000 0,000 *** 1,104,000 204,000 ***
00,000 *** 00,000
Less marketing and administrative expenses: Variable epenses !85,000?g $2% Fied epenses
et operating incoe )Production for last year: Sales .losing inventory :otal inventory available "or sale pening inventory 6roduction "or t#e period
150,000 300,000 ***
450,000 *** 150,000 *** ))Manufacturing cost per unit 85,000?g Variable 18,000?g Fied !320,000 < '0,000% ***+ 2,000?g 12,000?g ***+ '0,000?g ***+
$' $4 ** $12 **
(b)Variable costing: Sales Less variable cost of goods sold: Beginning inventory !12000?g $'% Variable cost o" goods anu"actured !'0,000 ?g $'% Variable cost o" goods available "or sale .losing inventory !18,000?g ' %
1,500,000 ,000 40,000 *** 83,000 13,000 ***
ross contribution argin Variable ar@eting and adin epenses !85,000?g $2%
Less period costs: =ar@eting and adinistrative =anu"acturing
300,000 320,000 ***
et operating incoe
00,000 *** 00,000 150,000 *** 850,000
20,000 *** 130,000 ***
(2) Explanation of the difference in net operating income: The net operating income under absorption costing is 5#)'))) more than the net operating income under variable costing. When production is more than sales 1as in this eercise2' the fied manufacturing overhead is deferred in inventory that causes a higher net operating income under absorption costing than under variable costing. The reconciliation of net operating income is as follows: perating incoe under absorption costing perating incoe under variable costing &i""erence in net operating incoe .#ange in inventory !18,000?g ( 12,000?g% Fied cost de"erred in inventory !5,000?g $400%
150,000 130,000 *** 20,000 *** 5,000?g *** 20,000 ***
or et operating incoe under variable costin g -dd "ied anu"acturing over#ead cost de"erred in inventory !5,000?g $400%
130,000 20,000 *** $150,000 ***
