Question

High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant's operation: 10,000 8,000 $75 Beginning inventory ......... Units produced .... Units sold .... Selling price per unit..... Selling and administrative expenses: Variable per unit .... Fixed (per month) ..... Manufacturing costs: Direct materials cost per unit ....... Direct labor cost per unit ........... Variable manufacturing overhead cost per unit .......... Fixed manufacturing overhead cost (per month).............. $200,000 $20 $8 $100,000 Management is anxious to assess the profitability of the new camp cot during the month of May. Required: 1. Assume that the company uses absorption costing. a. Determine the unit product cost. b. Prepare an income statement for May. 2. Assume that the company uses variable costing. a. Determine the unit product cost. b. Prepare a contribution format income statement for May. 3. Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating income.

Answer 1

1-A Assume Company Using Absorption Costing Calculation of Unit cost Under Absorption Costing 20 Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head(100000/10000) Unit Product Cost Absorption Costing Unit Product Cost 40 1-B Income Statement Under Absorption Costing Sales (8000*75) Cost of Goods Sold (8000*40) Gross Margin Total Selling and Administrative Overheads (Fixed +Variable ) . (200000+(8000*6) Net Operating Income 6080001 320000 288000 248000 40000

2-A Assuming the Firm Using the Variable Cositng Variable Costing Calculation of Unit cost Under Variable Costing Direct Material Direct Labour Variable Manufacturing Overhead Unit Product Cost Variable Costing Unit Product Cost 30 30 608000 240000 48000 2-B Variable Costing income Statement Sales (8000*75) LESS: Variable Expense Variable Cost of Goods Sold (8000*30) Variable Selling and Administrative Expense(8000*6) Total Varible Expenses Total Contribution Margin Less:Fixed Expenses Fixed manufacturing Overheads Fixed Selling and Administrative Expenses Total fixed Expenses Net operating income (loss) 288000 320000 100000 200000 300000 20000

Difference in invenotyr and the impact on net income 20000 20000 Variable Costing Net Operating Income ADD: fixed Manufacturing Overheads Deferred in inventory | under Absorption Costing Absorption Costing Net Operating Income (loss) 40000 Calcualtion Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = ( Difference in units * fixed manufacturing overheads per unit) = Fixed Manufacturing overheads per unit Fixed Manufacturing Overheads Deferred in inventory under Absorption Costing : 10000 8000 2000 20,000 101 20,000