Question

Fresh Air Products manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below:

Beginning inventory		0	units
Units produced		10,000
Units sold		9,000
Manufacturing costs
Fixed overhead		$89,100
Variable overhead		$3	per unit
Direct labour		$9	per unit
Direct material		$25	per unit
Selling and administrative costs
Fixed		$190,000
Variable		$3	per unit sold

The portable cooking unit sells for $110. Management is interested in the opening month’s results and has asked for an income statement.

Assume the company uses normal costing and uses the budgeted volume of 13,500 units to allocate the fixed overhead rate rather than the actual production volume of 10,000 units. The company expenses production volume variance to cost of goods sold in the accounting period in which it occurs.

(a) Calculate the manufacturing cost per unit. (Round manufacturing cost to 2 decimal places, e.g. 15.25.)

(b) Prepare a normal-costing income statement for the first month of operation.

Answer 1

1. Manufacturing cost per unit

Cost of Goods Manufactured
	Units	Rate / Unit	Amount	Remarks
WIP Inventory, Beginning Balance	0		$0
Add : Current Year Manufacturing Cost
Direct Material	10000	$25.00	$250,000	(Rate per unit * Units Produced)
Direct Labour	10000	$9.00	$90,000	(Rate per unit * Units Produced)
Manufacturing Overheads - Variable	10000	$3.00	$30,000	(Rate per unit * Units Produced)
Manufacturing Overheads - Fixed	10000	$6.60	$66,000	(Rate per unit is based on budgeted volume of 13500) Rate per unit * Units Produced)
Total Current Period Manufacturing Cost	10000	$43.60	$436,000
Total Cost of Work in Progress	10000	$43.60	$436,000
Less : WIP Ending Balance	0		$0
Cost of Goods Manufactured	10000	$43.60	$436,000

2. Normal Costing Income Statement

	Units	Rate per Unit	Amount
Sales	9000	$110.00	$990,000.00
Less : Cost of Goods Sold
Beginning Inventory	0
Add: Cost of Goods Manufactured	10000	$43.60	$436,000.00
Less : Ending Inventory	1000	$43.60	$43,600.00
COGS	9000	$43.60	$392,400.00
Add : Under Applied overheads due to production volume variance	3500	$6.60	$23,100.00
COGS Adjusted	9000	$46.17	$415,500.00
Gross Margin	9000	$63.83	$574,500.00
Less : Selling and Admin Expenses
Fixed	9000	$21.11	$190,000.00
Variable	9000	$3.00	$27,000.00
			$217,000.00
Operating IncomeBefore Tax	9000	$39.72	$357,500.00