Question

Start Me Up Inc. manufactures a caffeinated energy drink that sells for $4.20 each. The results for its first year of operations appear in the table below:

Projections
Number of drinks produced		53,500
Number of drinks sold		47,100
Direct materials per drink	$	0.67
Direct labor per drink	$	0.37
Variable manufacturing overhead per drink	$	0.27
Total fixed manufacturing overhead	$	37,985
Total fixed selling and administrative costs	$	56,000

Required:

1. Compute the operating income for the first year under full costing.

2. Compute the operating income for the first year under variable costing.

(For all requirements, do not round intermediate calculations.)

Answer 1

Ans. 1	In full costing method, the unit product cost is the sum of all manufacturing costs per drink
	whether it is fixed or variable.
	Unit product cost under full Costing:
	Direct materials	$0.67
	Direct labor	$0.37
	Variable Overhead per drink	$0.27
	Fixed overhead per drink   ($37985 / 53,500)	$0.71
	Product Cost per drink	$2.02
	*Fixed overhead per drink = Fixed overhead / Units produced
	Start Me Up Inc.
	Full Costing Income Statement
	PARTICULARS		Amount
	Sales   (47,100 * $4.20)		$197,820
	Less: Cost of goods sold
	Opening inventory	$0
	Add: Cost of goods manufactured (53,500*$2.02)	$108,070
	Cost of goods available for sale	$108,070
	Less: Ending inventory [(53,500 - 47,100) * $2.02]	-$12,928
	Cost of goods sold (total)		$95,142
	Gross margin		$102,678
	Selling & Administrative expenses:
	Fixed	$56,000
	Variable	$0
	Total Selling and administrative expenses		$56,000
	Net operating income		$46,678
	*Ending inventory   = (Units produced - Units sold) * Production cost per drink
Ans. 2	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per drink
	Unit product cost under Variable Costing:
	Direct materials	$0.67
	Direct labor	$0.37
	Variable Overhead per drink	$0.27
	Total production cost per drink	$1.31
	Start Me Up Inc.
	Variable Costing Income Statement
	PARTICULARS		Amount
	Sales   (47,100 * $4.20)		$197,820
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (53,500 * $1.31)	$70,085
	Variable cost of goods available for sale	$70,085
	Less: Ending inventory [(53,500 - 47,100) * $1.31]	-$8,384
	Variable cost of goods sold		$61,701
	Gross Contribution Margin		$136,119
	Less: Variable Selling and Administrative Expenses		$0
	Contribution Margin		$136,119
	Less: Fixed expenses:
	Fixed manufacturing overhead	$37,985
	Fixed selling and administrative expenses	$56,000	$93,985
	Net operating income		$42,134
	*Variable cost of goods manufactured = Units produced * Variable unit product cost