Question

Problem 2 (Ch.6): Face Corporation, which has only one product has provided the following data concerning most recent month of operations: $ 55 500 3.100 3,300 300 Selling price Units in beginning inventory Units produced Units sold Units in ending inventory Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expense Fixed costs: Fixed manufacturing overhead Fixed selling and administrative expense $ 19 S26 S $ 12,400 $ 3,300 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 a contribution format income statement for the month using variable costing. d. Prepare an income statement for the month using absorption costing, e. Reconcile the variable costing and absorption costing net operating incomes for the month.

Answer 1

Answer-a)-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$19+$26+$1

= $46 per unit

b)- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + Fixed manufacturing overhead

=$19+$26+$1+$4 = $50 per unit

Where- Unit fixed manufacturing overhead= Fixed manufacturing overhead/No. of units produced

=$12400/3100 units

=$4 per unit

c)-

Pace Corporation
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	3300 units*$55 per unit		181500
Less:- Variable cost of goods sold (b)
Opening inventory	500 units*$46 per unit	23000
Add:- Variable cost of goods manufactured		142600
Direct materials	3100 units*$19 per unit	58900
Direct labor	3100 units*$26 per unit	80600
Variable manufacturing overhead	3100 units*$1 per unit	3100
Variable cost of goods available for sale		165600
Less:- Closing inventory	300 units*$46 per unit	13800	151800
Gross contribution margin C= a-b			29700
Less:-Variable selling & administrative exp.	3300 units*$4 per unit		13200
Contribution margin			16500
Less:- Fixed costs
Manufacturing overhead			12400
Selling & administrative exp.			3300
Net Income			800

d)-

Pace Corporation
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	3300 units*$55 per unit		181500
Less:- Cost of goods sold (b)
Opening inventory	500 units*$50 per unit	25000
Add:- Cost of goods manufactured		155000
Direct materials	3100 units*$19 per unit	58900
Direct labor	3100 units*$26 per unit	80600
Variable manufacturing overhead	3100 units*$1 per unit	3100
Fixed manufacturing overhead		12400
Cost of goods available for sale		180000
Less:- Closing inventory	300 units*$50 per unit	15000	165000
Gross margin C= a-b			16500
Less:-Variable selling & administrative exp.	3300 units*$4 per unit		13200
Less:- Fixed costs
Selling & administrative exp.			3300
Net Income			0

e)-

Reconciliation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		800
Less:-Fixed manufacturing overheads brought in (opening inventories)	500 units*$4 per unit	2000
Add:-Fixed manufacturing overheads carried forward in(closing inventories)	300 units*$4 per unit	1200
Net income under absorption costing method		0