Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed: Beginning inventory Units produced Units sold Selling price per unit Selling and administrative expenses: Variable per unit Fixed per year Manufacturing costs: Direct materials cost per unit Direct labor cost per unit Variable manufacturing overhead cost per unit Fixed manufacturing overhead per year 32,200 26,600 422 $ $452,200 19 259 56 34 $450,800 Assume that direct labor is a variable cost. Required: a. Compute the unit product cost under both the absorption costing and variable costing approaches. b. Prepare an income statement for the year using absorption costing. c. Prepare an income statement for the year using variable costing. d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above. Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes 666,400 Net operating income (loss) under variable costing Net operating income (loss) under absorption costing Required C Required D t9 t9 t9

Answer 1

Answer-a)- Unit product cost under Absorption costing= $363 per unit.

Explanation- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$259+$56+$34+$14

= $363 per unit

Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$450800/32200 units

=$14 per unit

Unit product cost under Variable costing= $349 per unit.

Explanation-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$259+$56+$34

= $349 per unit

b)-

Dorset Corporation
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	26600 units*$422 per unit		11225200
Less:- Cost of goods sold (b)
Opening inventory
Add:-Cost of goods manufactured		11688600
Direct materials	32200 units*$259 per unit	8339800
Direct labor	32200 units*$56 per unit	1803200
Variable manufacturing overhead	32200 units*$34 per unit	1094800
Fixed manufacturing overhead		450800
Cost of goods available for sale		11688600
Less:- Closing inventory	5600 units*$363 per unit	2032800	9655800
Gross margin C= a-b			1569400
Less:-Variable selling & administrative exp.	26600 units*$19 per unit		505400
			1064000
Less:- Fixed costs
Selling & administrative exp.			452200
Net Income			611800

c)-

Dorset Corporation
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	26600 units*$422 per unit		11225200
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		11237800
Direct materials	32200 units*$259 per unit	8339800
Direct labor	32200 units*$56 per unit	1803200
Variable manufacturing overhead	32200 units*$34 per unit	1094800
Variable cost of goods available for sale		11237800
Less:- Closing inventory	5600 units*$349 per unit	1954400	9283400
Gross contribution margin C= a-b			1941800
Less:-Variable selling & administrative exp.	26600 units*$19 per unit		505400
Contribution margin			1436400
Less:- Fixed costs
Manufacturing overhead			450800
Selling & administrative exp.			452200
Net Income			533400

d)-

Reconciliation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		533400
Less:-Fixed manufacturing overheads brought in (opening inventories)	Nil
Add:-Fixed manufacturing overheads carried forward in(closing inventories)	5600 units*$14 per unit	78400
Net income under absorption costing method		611800