Question

$ Sales (@ $64 per unit) Cost of goods sold (@ $41 per unit) Gross margin Selling and administrative expenses* Net operating income Year i 960,000 615,000 345,000 299,000 146,000 Year 2 $ 1,600,000 1,025,000 575,000 329,000 $ 246,000 $ *$3 per unit variable; $254,000 fixed each year. The company's $41 unit product cost is computed as follows: $ 6 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($380,000 + 20,000 units) Absorption costing unit product cost Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings. Production and cost data for the first two years of operatons are: Units produced Units sold Year 1 20,000 15,000 Year 2 20,000 25,000 Required: 1. Using variable costing, what is the unit product cost for both years? 2. What is the variable costing net operating income in Year 1 and in Year 2? 3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Answer 1

Answer-1:

Direct material Direct labor Variable manufacturing overhead Unit product cost under variable costing Year 1 6.00 11.00 5.00 22.00 Year 2 6.00 11.00 5.00 22.00

Answer-2:

Year 1 960,000 375,000 585,000 Sales (15,000 $64) Variable cost (15,000 $25) Contribution margin Less: Fixed costs: Manufacturing overehead Selling and administrative expense Total fixed cost Net operating loss 380,000 254,000 634,000 (49,000) Year 2 1,600,000 625,000 975,000 Sales (25,000 $64) Variable cost (25,000 $25) Contribution margin Less: Fixed costs: Manufacturing overehead Selling and administrative expense Total fixed cost Net operating income 380,000 254,000 634,000 341,000

Answer-3:

Reconciliation Income under variable costing Add: Fixed overhead absorbed/(realesed) (5,000 Income under absorption costing Year 1 (49,000)| 95,000 46,000 Year 2 341,000 (95.000) 246,000 $19)|