Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed: 34,100 28,100 452 $ Beginning inventory Units produced Units sold Selling price per unit Selling and administrative expenses: Variable per unit Fixed per year Manufacturing costs: Direct materials cost per unit Direct labor cost per unit Variable manufacturing overhead cost per unit Fixed manufacturing overhead per year $ 23 $393,400 $ 208 $ 58 $ 38 $716,100 Assume that direct labor is a variable cost. Required: a. Compute the unit product cost under both the absorption costing and variable costing approaches. b. Prepare an income statement for the year using absorption costing. c. Prepare an income statement for the year using variable costing. d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Answer 1

solution: a. Unit product cost under absorbtion costing Direct Materials Direct labour Variable manufacturing overhead Fixed manufacturing over head =716100/34100 Unit product cost 208.00 58.00 38.00 21.00 325.00 a.Unit product cost under variable costing Direct Materials Direct labour Variable manufacturing overhead Unit product cost 208.00 58.00 38.00 304.00 b.Income Statement Absorption Costing sales =28100*452 Less : cost of goods sold (28100*325) Gross Profit Less : selling and administrative expenses (28100*23+393400) net operating income (loss) 12,701,200 9,132,500 3,568,700 | 1,039,700 2,529,000 12,701,200 8,542,400 646,300 c.Income Statement Variable Costing sales =28100*452 Less : Variable cost of goods sold (28100*304) Less : Variable selling and administrative expenses (28100*23) contribution margin fixed expense : Fixed manufacturing overhead Fixed selling and administrative expenses net operating income 9,188,700 3,512,500 716,100 393,400 1,109,500 2,403,000 2,403,000 d) Reconciliation variable costing net operating income (Loss) Add: fixed manufacturing over head cost deferred in inventory under absorbtion costing =(34100-28100)*21 absorbtion costing net operating income (Loss) 126,000 2,529,000