Question

Chuck Wagon Grills, Inc., makes a single product—a handmade specialty barbecue grill that it sells for $210. Data for last year’s operations follow:

Units in beginning inventory		0
Units produced		20,000
Units sold		19,000
Units in ending inventory		1,000
Variable costs per unit:
Direct materials	$	50
Direct labor		80
Variable manufacturing overhead		20
Variable selling and administrative		10
Total variable cost per unit	$	160
Fixed costs:
Fixed manufacturing overhead	$	700,000
Fixed selling and administrative		285,000
Total fixed costs	$	985,000

Required:

1. Assume that the company uses absorption costing. Compute the unit product cost for one barbecue grill.

2. Assume that the company uses absorption costing. Prepare an income statement for last year.

Answer 1

Absorption costing is the traditional costing method where we compute gross profit and variable costing is the contribution margin approach where we compute contribution margin. The reason of difference between the net income reported by two methods is due to the treatement of fixed overhead. In absorption costing Fixed Overhead is allocated according to the number of units produced and sold i.e it is considered in the unit product cost whereas in variable costing it is taken in whole i.e the whole amount. Chuck Wagon grills part 1 DM DL Var. mfg. OH Fixed Mfg. OH ( 700000 / 20000 ) Product cost per unit 50 80 20 185 Selling and adm. Are period costs and not product costs 2 - Income statement Sales ( 19000 * 210 ) Less:-COGS ( 19000 * 185 ) Gross profit Variable S and adm. Exp. (19000 * 10) Fixed S and A expenses Net Income/ (loss) 3990000 3515000 475000 190000 285000 0 Since the format was not available, the question has been solved using this format.