Question

Produced and sold units:

Year 1 Year 2

Units produced 45,000 45,000

Units sold 40,000 50,000

Basic data (applicable for the two years):

Selling price $25

Direct materials per unit produced $4

Direct labor per unit produced $7

Variable manufacturing overhead per unit produced $1

Fixed manufacturing overhead per year $270,000

Variable selling and administrative expenses per unit sold $2

Fixed selling and administrative expenses per year $130,000

Using the absorption costing method and variable coast method to get profit

Answer 1

1)

Computation of Ending inventory
	Year 1	Year 2
Beginning inventory (in units)	0	5,000
Units produced during the year	45,000	45,000
Units sold during the year	40,000	50,000
Ending inventory (in units)	5,000	0
Computation of Absorption Costing Unit Product Cost
	Year 1	Year 2
Direct materials	$4	$4
Direct labor	$7	$7
Variable manufacturing overhead	$1	$1
Fixed manufacturing overhead	$6	$6
Absorption costing unit product cost	$18	$18
Absorption Costing Income Statement
	Year 1	Year 2
Sales	$1,000,000	$1,250,000
Cost of goods sold	$720,000	$900,000
Gross margin	$280,000	$350,000
Selling and administrative expenses	$210,000	$230,000
Net operating income	$70,000	$120,000

　

2)

Computation of Variable Costing Unit Product Cost
	Year 1	Year 2
Direct materials	$4	$4
Direct labor	$7	$7
Variable manufacturing overhead	$1	$1
Variable costing unit product cost	$12	$12
Variable Costing Income Statement
	Year 1		Year 2
Sales		$1,000,000		$1,250,000
Variable expenses:
Variable cost of goods sold	$480,000		$600,000
Variable selling and administrative expenses	$80,000	$560,000	$100,000	$700,000
Contribution margin		$440,000		$550,000
Fixed expenses:
Fixed manufacturing overhead	$270,000		$270,000
Fixed selling and administrative expenses	$130,000	$400,000	$130,000	$400,000
Net operating income		$40,000		$150,000	$190,000
	Year 1	Year 2
Fixed manufacturing OH in ending inventory	$30,000	$0
Fixed manufacturing OH in beginning inventory	$0	$30,000
Fixed manufacturing OH deferred in (released from) inventories	$30,000	($30,000)
	Year 1	Year 2
Variable costing net operating income	$40,000	$150,000
Plus: Fixed manufacturing OH costs deferred in inventory (5,000 * $6 per unit)	$30,000
Minus: Fixed manufacturing OH costs released from inventory (5,000 units* $6 per unit)		($30,000)
Absorption costing net operating income / loss	$70,000	$120,000