Question

Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 42,000 units and sold 34,000 units at a price of $110 per unit.
  

Manufacturing costs
Direct materials per unit	$	42
Direct labor per unit	$	16
Variable overhead per unit	$	5
Fixed overhead for the year	$	378,000
Selling and administrative costs
Variable selling and administrative cost per unit	$	11
Fixed selling and administrative cost per year	$	110,000

1a. Assume the company uses absorption costing. Determine its product cost per unit.

Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 42,000 units and sold 34,000 units at a price of $110 per unit.
  

Manufacturing costs
Direct materials per unit	$	42
Direct labor per unit	$	16
Variable overhead per unit	$	5
Fixed overhead for the year	$	378,000
Selling and administrative costs
Variable selling and administrative cost per unit	$	11
Fixed selling and administrative cost per year	$	110,000

1b. Assume the company uses absorption costing. Prepare its income statement for the year under absorption costing.

Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 42,000 units and sold 34,000 units at a price of $110 per unit.
  

Manufacturing costs
Direct materials per unit	$	42
Direct labor per unit	$	16
Variable overhead per unit	$	5
Fixed overhead for the year	$	378,000
Selling and administrative costs
Variable selling and administrative cost per unit	$	11
Fixed selling and administrative cost per year	$	110,000

2a. Assume the company uses variable costing. Determine its product cost per unit.

Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 42,000 units and sold 34,000 units at a price of $110 per unit.
  

Manufacturing costs
Direct materials per unit	$	42
Direct labor per unit	$	16
Variable overhead per unit	$	5
Fixed overhead for the year	$	378,000
Selling and administrative costs
Variable selling and administrative cost per unit	$	11
Fixed selling and administrative cost per year	$	110,000

2b. Assume the company uses variable costing. Prepare its income statement for the year under variable costing.

Answer 1

Solution

Cool Sky

1a. Absorption costing –

Product cost per unit:

Direct materials         $42

Direct labor                $16

Variable overhead      $5

Fixed overhead           $9 (378,000/42,000 = $9)

Product cost per unit $72

1b. Income Statement for the year –

Income Statement under Absorption Costing Method
Sales	(34,000 x $110)		$3,740,000
Cost of goods sold:
cost of goods produced	42,000 x $72	$3,024,000
Less: ending inventory	8,000 x $72	$576,000
Cost of goods sold			$2,448,000
Gross Margin			$1,292,000
Selling and administrative expenses
Variable	34,000 x $11	$374,000
Fixed		$110,000	$484,000
Net Operating Income			$808,000

Note: Ending inventory units = 42,000 – 34,000 = 8,000 units

2. Variable Costing

2a. Unit Product Cost –

Direct materials         $42

Direct labor                $16

Variable overhead      $5

Unit Product Cost       $63

2b. Income statement under variable costing method:

Income Statement under Variable Costing Method
Sales	34,000 x $110	$3,740,000
Cost of goods sold	34,000 x $63	$2,142,000
Gross Margin		$1,598,000
Less: variable selling expenses	34,000 x $11	$374,000
Contribution Margin		$1,224,000
Less: fixed costs:
Manufacturing overhead	$378,000
Selling overhead	$110,000	$488,000
Net operating income		$736,000