Question

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117.Lee Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $95 Units in beginning inventory Units produced Units sold Units in ending inventory 100 6,200 5,900 400 Variable costs per unit: Direct materials Direct labour Variable manufacturing overhead Variable selling and administrative Fixed costs: Fixed manufacturing overhead Fixed selling and administrative $62,000 35,400 The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Required: a) What is the unit product cost for the month under variable costing? b) What is the unit product cost for the month under absorption costing? c) Prepare an income statement for the month using the contribution format and the variable costing method. d) Prepare an income statement for the month using the absorption costing method. e) Reconcile the variable costing and absorption costing operating incomes for the month.

Answer 1

Answer-a)- Unit product cost under Absorption costing= $81 per unit.

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

=$42+$28+$1+$10

= $81 per unit

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

=$62000/6200 units

=$10 per unit

b)- Unit product cost under Variable costing= $71 per unit.

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

=$42+$28+$1

= $71 per unit

c)-

LEE OMPANY
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	5900 units*$95 per unit		560500
Less:- Cost of goods sold (b)
Opening inventory	100 units*$81 per unit	8100
Add:- Cost of goods manufactured		440200
Direct materials	6200 units*$42 per unit	260400
Direct labor	6200 units*$28 per unit	173600
Variable manufacturing overhead	6200 units*$1 per unit	6200
Fixed Manufacturing overhead		35400
Cost of goods available for sale		483700
Less:- Closing inventory	400 units*$81 per unit	32400	451300
Gross margin C= a-b			109200
Less:-Variable selling & administrative exp.	5900 units*$5 per unit		29500
Less:- Fixed costs
Selling & administrative exp.			62000
Net Income			17700

d)-

LEE COMPANY
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	5900 units*$95 per unit		560500
Less:- Variable cost of goods sold (b)
Opening inventory	100 units*$71 per unit	7100
Add:- Variable cost of goods manufactured		440200
Direct materials	6200 units*$42 per unit	260400
Direct labor	6200 units*$28 per unit	173600
Variable manufacturing overhead	6200 units*$1 per unit	6200
Variable cost of goods available for sale		447300
Less:- Closing inventory	400 units*$71 per unit	28400	418900
Gross contribution margin C= a-b			141600
Less:-Variable selling & administrative exp.	5900 units*$5 per unit		29500
Contribution margin			112100
Less:- Fixed costs
Manufacturing overhead			62000
Selling & administrative exp.			35400
Net Income			14700

e)-

Reconciliation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		14700
Less:-Fixed manufacturing overheads brought in (opening inventories)	100 units*$10 per unit	1000
Add:-Fixed manufacturing overheads carried forward in(closing inventories)	400 units*$10 per unit	4000
Net income under absorption costing method		17700