Question

Dance Creations manufactures authentic Hawaiian hula skirts that are purchased for traditional Hawaiian celebrations, costume parties, and other functions. During its first year of business, the company incurred the following costs: Variable Cost per Hula Skirt Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses $ 10.25 4.05 1.20 0.50 Fixed Cost per Month Fixed manufacturing overhead Fixed selling and administrative expenses $19, 140 5, 600 Dance Creations charges $33 for each skirt that it sells. During the first month of operation, it made 1,740 skirts and sold 1,620. Required: 1. Assuming Dance Creations uses variable costing, calculate the variable manufacturing cost per unit for last month. 2. Complete a variable costing income statement for the last month. 3. Assuming Dance Creations uses full absorption costing, calculate the full manufacturing cost per unit for the last month. 4. Complete a full absorption costing income statement. 6. Suppose next month Dance Creations expects to produce 1,740 hula skirts and sell 1,840. Without recreating the new income statements, calculate the difference in profit between variable costing and full absorption costing. Which would be higher?

Answer 1

1.Variable manufacturing cost per unit = Direct material + Direct labor + Variable manufacturing overhead
=10.25+4.05+1.20
15.5	per unit
2.Variable costing income statement
Sales revenue	53,460
Variable manufacturing cost	25,110
Variable selling and admin expenses	810
Total variable cost	25,920
Contribution Margin	27,540
Fixed manufacturing overhead	19,140
Fixed selling and admin expenses	5,600
Total fixed costs	24,740
Net Operating Income	2,800
3.Full manufacturing cost per unit = Material + labor + overhead
=10.25+4.05+1.20+19140/1740
26.5	per unit
4.Absorption costing income statement
Sales revenue	53,460
Less: Cost of goods sold	42,930
Gross Margin	10,530
Selling and Admin expenses	6,410
Net operating income	4,120
6.Variable costing will be higher by (19140/1740)*(1840-1740)
=$1100