Question

High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant's operation: 0 49,000 44,000 75 Beginning inventory Units produced Units sold Selling price per unit Selling and administrative expenses : Variable per unit Fixed (per month) Manufacturing costs: Direct materials cost per unit Direct labor cost per unit Variable manufacturing overhead cost per unit Fixed manufacturing overhead cost (per month) 563,000 15 2 $ 784,000 Management is anxious to assess the profitability of the new camp cot during the month of May. Required: 1. Assume that the company uses absorption costing. a. Determine the unit product cost. b. Prepare an income statement for May. 2. Assume that the company uses variable costing. a. Determine the unit product cost. b. Prepare a contribution format income statement for May.

Answer 1

Answer

1.

a)

Absorption costing
Production costs	Per unit	Total
Direct material	15	$            735,000
Direct labor	8	$            392,000
Variable manufacturing overhead	2	$              98,000
Fixed manufacturing overhead		$            784,000
Total		$        2,009,000
No of units produced		49000
Cost per unit		$                      41

Product cost per unit = $41

b)

Income statement (Absorption costing)
Particulars	Amount
Sales (75*44000)	$ 3,300,000
Production costs
Direct material	$      735,000
Direct labor	$      392,000
Variable manufacturing overhead	$        98,000
Fixed manufacturing overhead	$      784,000
Cost of Production	$ 2,009,000
(Less) Closing stock of finished stock	$      205,000
Cost of Goods Sold	$ 1,804,000
Add:Selling and administrative expenses
a)variable	$      176,000
b)Fixed	$      563,000
Total cost	$ 2,543,000
PROFIT (SALES -TOTAL COST)	$      757,000

2.

a)

Variable costing
Production costs	Per unit	Total
Direct material	15	$            735,000
Direct labor	8	$            392,000
Variable manufacturing overhead	2	$              98,000
Total		$        1,225,000
No of units produced		49000
Cost per unit		$                      25

Unit product cost under variable costing =$ 25

b)

Income statement (Variable costing)
Particulars	Amount
Sales (75*44000)	$ 3,300,000
Variable manufacturing costs
Direct material	$      735,000
Direct labor	$      392,000
Variable manufacturing overhead	$        98,000
Cost of Production	$ 1,225,000
(Less) Closing stock of finished stock	$      125,000
Cost of Goods Sold	$ 1,100,000
Add:Selling and administrative expenses
a)variable	$      176,000
Total variable cost	$ 1,276,000
CONTRIBUTION (SALE -Total variable cost)	$ 2,024,000
(Less) Fixed cost
a)Manufacturing overhead	$      784,000
b)Selling and administrative	$      563,000
PROFIT (Contribution - fixed cost)	$      677,000