Question

White Water Rafting Company manufactures kayaks, which sell for $565 each. The variable costs of production (per unit) are as follows:

Direct Material                          $ 200

Direct labor                                   110

Variable manufacturing overhead 80

Budgeted fixed overhead in 20x1 was $400,000 and budgeted production was 50,000 kayaks. The year’s actual production was 50,000 units, of which 47,000 were sold. Variable selling and administrative costs were $5 per unit sold; fixed selling and administrative costs were $75,000.

Required:

1. Calculate the product cost per kayak under (a) absorption costing and (b) variable costing.

2. Prepare operating income statements for the year using (a) absorption costing and (b) variable costing.

3. Reconcile reported operating income under the two methods using the shortcut method.

Answer 1

Solution 1:

Computation of Unit Product cost
Per unit Product Cost Using:	Absorption Costing	Variable Costing
Direct material	$200.00	$200.00
Direct Labor	$110.00	$110.00
Variable Factory overhead	$80.00	$80.00
Fixed manufacturing overhead ($400,000 /50,000)	$8.00	$0.00
Cost Per unit	$398.00	$390.00

Solution 2:

White Water Rafting company
Income Statement - Absorption Costing
Particulars	Amount
Sales (47000*$565)	$2,65,55,000
Less: Cost of goods sold (47000*$398)	$1,87,06,000
Gross Profit	$78,49,000
Less: selling and administrative expenses:
Variable Selling and administrative expenses ($5*47000)	$2,35,000
Fixed Selling & Administrative Expenses	$75,000
Net Operating Income (Loss)	$75,39,000

Income Statement - Variable Costing
Particulars	Amount
Sales (47000*$565)	$2,65,55,000
Variable Expense:
Variable cost of goods sold (47000*$390)	$1,83,30,000
Variable Selling and administrative expenses ($5*47000)	$2,35,000
Total Variable Expense	$1,85,65,000
Contribution Margin	$79,90,000
Fixed Expenses:
Fixed manufacturing overhead	$4,00,000
Fixed Selling & Administrative Expenses	$75,000
Total Fixed expense	$4,75,000
Net Operating Income (Loss)	$75,15,000

Solution 3:

Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	Amount
Variable Costing Income (Loss)	$75,15,000
Add : Fixed manufacturing overhead deferred in ending inventory ($8*3000)	$24,000
Less: Fixed manufacturing overhead released in beginning inventory	$0
Absorption Costing Income (Loss)	$75,39,000