Question

Linden Company manufactures and sells a single product. Cost data for the product follow: Variable costs per unit: Direct materials Direct labor Variable factory overhead Variable selling and administrative - WG Total variable costs per uni 108,000 Fixed costs per month: Fixed manufacturing overhead Fixed selling and administrative 175,000 Total fixed cost per month 283,000 The product sells for $50 per unit. Production and sales data for May and June, the first two months of operations, are as follows: Units Produced 18.000 Units Sold 14,000 May Uune *8,000 22,000 Income statements prepared by the accounting department using absorption costing. are presented below June Sales Cost of goods May 5 700,000 338 ann 5 1.100.000 52 000 nilich

Answer 1

1 Unit Product cost Variable Costing 10 Direct Material Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Unit Product cost Absorption Costing 5 10 3 6 24 S $ $ $ $ 18 Fixed Manufacturing Overhead Per unit = Total Fixed Manufacturing Overhead / Total units Produced = 108000 / 18000 = $6 per unit Income Statement under Variable Costing May $ 700,000 June 1,100,000 Given $ less Sales Variable Expense: Variable cost of goods sold Variable Selling & adm expense Total Variable Expense Contribution Margin Fixed Expense: Fixed Manufacturing Overhead Fixed Selling & administrative expense Total Fixed Cost Net Operating Income 252,000 $ 14,000 $ 266,000 $ 434,000 $ 396,000 22,000 418,000 682,000 less $ $ 108,000 175,000 283,000 151,000 $ $ $ $ 108,000 175,000 283,000 399,000 Variable COGS = Units Sold x Unit Product Cost =14000 x 18 = 252000 and 22000 x 18 = 396000 Variable selling & adm = Units Sold x variable selling cost per unit = 14000 x1 = 14000 and 22000 x 1 = 22000 In absorption costing Fixed overhead per unit is taken into consideration and in variable costing total fixed overhead is considered. So there is difference in income of both the methods. Reconciliation of variable & absorption costing May June $ 151,000 $ 399,000 Net Operating income under variable costing Add(Deduct) Fixed Manufacturing OH cost deffered in inventory Net Operating income under absorption costing $ 175,000 $ 375,000 Beginning inventory Add units produced Less Units Sold Ending Inventory May 0 18000 14000 4000 June 4000 18000 22000 O Fixed Manufacturing Oh deffered = units x fixed manufacturing oh per unit = 4000 units x $ 6 = 24000 In May absorption costing considered fixed mfg costing of only 14000 sold units while variable costing considered fixed mfg cost of all 18000 produced units. In June absorption costing considered fixed mfg costing of only 22000 sold units while variable costing considered fixed mfg cost of 18000 produced units. As it has already covered expense of 4000 units in May.