Question

Dance Creations manufactures authentic Hawaiian hula skirts that are purchased for traditional Hawaiian celebrations, costume parties, and other functions. During its first year of business, the company incurred the following costs: Variable Cost per Hula Skirt Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses $ 10.15 3.95 1.10 0.40 Fixed Cost per Month Fixed manufacturing overhead Fixed selling and administrative expenses $18,785 5,500 Dance Creations charges $33 for each skirt that it sells. During the first month of operation, it made 1,700 skirts and sold 1,580. Required: 1. Assuming Dance Creations uses variable costing, calculate the variable manufacturing cost per unit for last month. 2. Complete a variable costing income statement for the last month. 3. Assuming Dance Creations uses full absorption costing, calculate the full manufacturing cost per unit for the last month. 4. Complete a full absorption costing income statement. 6. Suppose next month Dance Creations expects to produce 1,700 hula skirts and sell 1,800. Without recreating the new income statements, calculate the difference in profit between variable costing and full absorption costing. Which would be higher?

Answer 1

1.Variable manufacturing cost per unit = Direct material + Direct labor + variable manufacturing overhead
=10.15+3.95+1.10
15.2	per unit
2.Variable csoting income statement
Sales Revenue	52,140
Less: Variable cost per unit	24,648
Contribution Margin	27,492
Less: Fixed costs	24,285
Net Operating Income	3,207
3.Full manufacturing cost per unit = Direct material + Direct labor + variable manufacturing overhead + Fixed manufacturing overhead per unit
=10.15+3.95+1.10+18785/1700
26.25	per unit
4.Absorption costing Income Statement
Sales Revenue	52,140
Less: Cost of Goods sold	41,475
Gross Margin	10,665
Less: Selling expenses	6,132
Net Operating Income	4,533
6.Variable costing would be higher by 100*(18785/1700) = $1,105

1 1. Variable manufacturing cost per unit = Dired 2 =10.15+3.95+1.10 3 =10.15+3.95+1.1 per unit 4. 5 2.Variable csoting income statement 6 Sales Revenue =1580*33 7 Less: Variable cost per unit =1580*(15.2+0.4) | 8 Contribution Margin =B6-B7 9 Less: Fixed costs =18785+5500 10 Net Operating Income =B8-B9 11 12 3.Full manufacturing cost per unit = Direct ma 13 =10.15+3.95+1.10+18785/1700 14 =10.15+3.95+1.1+18785/1700 per unit 15 16 4.Absorption costing Income Statement 17 Sales Revenue =1580*33 18 Less: Cost of Goods sold =1580*26.25 19 Gross Margin =B17-B18 20 Less: Selling expenses =0.4*1580+5500 21 Net Operating Income =B19-B20 22 23 6.Variable costing would be higher by 100*(18