Question

Hipster Company manufactures a single product. The following are the data concerning its most recent month of operations: Selling Price RM 104.00 Variable Costs per unit: Direct Materials Direct Labor Variable Manufacturing Overhead Variable Selling and Administrative 26.00 37.00 5.00 10.00 Fixed Costs: Fixed Manufacturing Overhead Fixed Selling and Administrative 16,500.00 45,000.00 Production Volume Sales Volume Ending finished-goods inventory Units 3,300 3,000 300 There is no beginning finished-goods inventory. Required:

Answer 1

a)	Unit product cost:
i)	Variable costing:
					$
	Direct material				26
	Direct labor				37
	Variable manufacturing overhead				5
	Total				68
ii)	Absorption costing:
					$
	Direct material				26
	Direct labor				37
	Variable manufacturing overhead				5
	Fixed manufacturing overhead			(16500/3300)	5
	Total				73.00
b)
i)		Variable costing income statement
					$	$
	Sales			(3000*104)		312000
	Less: Variable cost of goods sold			(3000*68)		204000
	Gross contribution margin					108000
	Less: Variable selling and administrative			(3000*10)		30000
	Contribution margin					78000
	Less:Fixed costs
	Fixed manufacturing overhead				16500
	Fixed selling and administrative				45000	61500
	Net operating income					16500
ii)		Absorption costing income statement
					$	$
	Sales			(3000*104)		312000
	Less: Cost of goods sold			(3000*73)		219000
	Contribution margin					93000
	Less:Selling and administrative expenses
	Variable			(3000*10)	30000
	Fixed selling				45000	75000
	Net operating income					18000
c)	Reconciliation:
					$
	Net operating income as per variable costing				16500
	Add: Fixed MOH included in ending inventory			(300*5)	1500
	Net operating income as per absorption costing				18000
d)	Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues.
	Under variable costing , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change.