Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed: 32,700 27,100 459 Beginning inventory Units produced Units sold Selling price per unit Selling and administrative expenses : Variable per unit Fixed per year Manufacturing costs: Direct materials cost per unit Direct labor cost per unit Variable manufacturing overhead cost per unit Fixed manufacturing overhead per year 20 $ 406,500 $ 298 $ 52 30 $425, 100 Assume that direct labor is a variable cost. Required: a. Compute the unit product cost under both the absorption costing and variable costing approaches. b. Prepare an income statement for the year using absorption costing. c. Prepare an income statement for the year using variable costing. d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Answer 1

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

=$298+$52+$30+$13

= $393 per unit

Explanation:- Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$425100/32700 units

=$13 per unit

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

=$298+$52+$30

= $380 per unit

b)-

Dorset Corporation
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	27100 units*$459 per unit		12438900
Less:- Cost of goods sold (b)
Opening inventory
Add:-Cost of goods manufactured		12851100
Direct materials	32700 units*$298 per unit	9744600
Direct labor	32700 units*$52 per unit	1700400
Variable manufacturing overhead	32700 units*$30 per unit	981000
Fixed manufacturing overhead		425100
Cost of goods available for sale		12851100
Less:- Closing inventory	5600 units*$393 per unit	2200800	10650300
Gross margin C= a-b			1788600
Less:-Variable selling & administrative exp.	27100 units*$20 per unit		542000
			1246600
Less:- Fixed costs
Selling & administrative exp.			406500
Net Income			840100

c)-

Dorset Corporation
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	27100 units*$459 per unit		12438900
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		12426000
Direct materials	32700 units*$298 per unit	9744600
Direct labor	32700 units*$52 per unit	1700400
Variable manufacturing overhead	32700 units*$30 per unit	981000
Variable cost of goods available for sale		12426000
Less:- Closing inventory	5600 units*$380 per unit	2128000	10298000
Gross contribution margin C= a-b			2140900
Less:-Variable selling & administrative exp.	27100 units*$20 per unit		542000
Contribution margin			1598900
Less:- Fixed costs
Manufacturing overhead			425100
Selling & administrative exp.			406500
Net Income			767300

d)-

Reconcilation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		767300
Less:-Fixed manufacturing overheads brought in (opening inventories)	Nil
Add:-Fixed manufacturing overheads carried farword in(closing inventories)	5600 units*$13 per unit	72800
Net income under absorption costing method		840100