Question

Problem 6-20 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income (LO6-1, LO6-2, LO6-3) 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: 35,000 30,000 82 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 coat (per month) $ 562,000 15 ces $ 595,000 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. Complete this question by entering your answers in the table below. Reg 1A Reg 1B Reg 2A Reg 28 Determine the unit product cost. Assume that the company uses absorption costing Unit product cost 10

Answer 1

Solution:

1. Absorption Costing:

a. Unit product cost = DM cost per unit + DL per unit + var. Mfg. cost + Fixed mfg cost per unit

= $15 + 7 + 4 + $595,000/35,000

= $43

b. Income statement for May under absorption costing:

2,460,000 Absorption costing income statement Sales revenue ($82x30,000) $ Cost of Goods sold: Direct materials cost ($15*30,000) 450,000 Direct labor cost ($7*30,000) 210,000 Variable mfg. OH ($4*30,000) 120,000 Fixed mfg. OH ($17*30,000) 510,000 Total Cost of Goods sold Gross profit Operating expenses: Var. Selling and administrative exp 120,000 Fixed selling & administrative exp 562,000 Total operating expenses Operating Income or profit (1,290,000) 1,170,000 (682,000) 488,000

2. Under variable costing:

a. Unit product cost = DM cost per unit + DL per unit + var. Mfg. cost

   = $15 + $7 + $4 = $26

b. Income statement for May under variable costing (contribution format):

$ 2,460,000 Variable costing income statement Sales revenue ($82x30,000) Variable costs: Direct materials cost ($15*30,000) 450,000 Direct labor cost ($7*30,000) 210,000 Variable mfg. OH ($4*30,000) 120,000 Variable selling & administrative exp. ($4*30,000) 120,000 Total variable costs Contribution margin Fixed Expense: Fixed manufacturing OH 595,000 Fixed selling & administrative exp 562,000 Total fixed expenses Operating Income or profit (900,000) 1,560,000 (1,157,000) 403,000 $