Question

reconcile the difference in profit in both methods.

1. Piscopo Company produces mint chocolate candies. The chocolates sell for $12 per box During its first year of operations, the company produced 10,000 boxes of chocolates and sold 9,000 boxes of the candies. The company's cost information includes the following: Direct materials Direct labor Fixed manufacturing overhead Fixed selling and administrative expenses Variable manufacturing overhead Variable selling and administrative expenses $ 2.00 per unit $ 3.00 per unit $20,000 $ 5,000 $1.00 pr unit $ 3.00 per unit Part (a) Compute the unit product cost under absorption costing. Part (b) Compute the unit product cost under variable costing. Part (c) Prepare an income statement using absorption costing. Part (d) Prepare an income statement using variable costing. Part (e) Explain the difference of $2,000 in the net operating income determined under the absorption and variable costing methods.

Answer 1

Part. a. Unit product cost under Absorption Costing =

Direct Material Cost per unit $ 2.00

direct labour per unit $ 3.00

variable overhead per unit $ 1.00

Fixed manucturing overhead $ 2.00    

Total Cost per Unit $ 8.00

Part b. Unit Product Cost per unit under Variable costing

Direct Material Cost per unit $ 2.00

direct labour per unit $ 3.00

variable overhead per unit $ 1.00

Total Cost per Unit $ 6.00

Part.c. Income Statement under Absorption Costing

Sales (9000*$ 12) $ 108,000

Less: Cost of Goods Sold ( 9000* $ 8)   $ 72,000

Gross Profit $ 36,000

Less: Selling & Administrative Expenses (9,000*3) +5000    $ 32,000

   Net Operating Income    $ 4,000

Part.d. Income Statement under Variable  Costing

Sales ($ 12*9000) $ 108,000

Less : Variable Costs

(9,000* $ 9.00) $ 81,000

   Conttribution Margin       $ 27,000

Less:Fixed Costs

($ 20,000+$ 5,000)    $ 25,000

Net operating Income $ 2,000

Part e.

Difference of $ 2,000 in the net operating income determined under the absorption and variable costing methods is due to the Fixed manufacturing overhead which is deferred in the inventory

  

Net operating Income under variable costing	$ 2,000
Add: Fixed Manufacturing overhead deferred in Inventory (1000* $ 2.00)	$2,000
Net operating income under absorption costing	$ 4,000