Question

Quimper, Inc., began business last year making decorated pottery platters. The unit costs on a normal costing basis are as follows:

Manufacturing costs (per unit):
Direct materials (1.5lbs. @ $2)	$3.00
Direct labor (2hrs. @$9)	18.00
Variable overhead (2 hrs. @$2.50)	5.00
Fixed overhead (2 hrs. @ $3.25)	6.50
Total	$32.50

Nonmanufacturing costs (Selling & Administration):

            Variable                                             15% of sales

            Fixed                                                   $230,000

During the year, the company had the following activity:

Units produced                                            30,000

Units sold                                                        27,400

Unit selling price                                           $50

Direct labor hours worked                         60,000

Actual fixed overhead was $10,000 greater than budgeted fixed overhead. Actual variable overhead was $5,000 greater than budgeted variable overhead. The company used an expected actual activity level of 60,000 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods sold.

REQUIRED

1. Compute the unit cost using

            a. Absorption costing                                                                     (1.5 marks)

            b. Variable costing                                                                          (1.5 marks)

2. Prepare an absorption-costing income statement                          (9 marks)

3. Prepare a variable-costing income statement                                 (9 marks)

4. Reconcile the difference between the two income statements (use the short-cut method).                                                                                                           (4 marks)

Answer 1

1 a) & b) Product Cost Direct Material Direct Labor Variable manufacturing overhead Fixed manufacturing overhead Total Product Cost per Unit Absorption Costing $3.00 $18.00 $5.00 $6.50 $32.50 Variable Costing $3.00 $18.00 $5.00 $26.00 Working notes: Budgeted Fixed overheads Expected level of direct labor hours Fixed overhead rate Budgeted fixed overheads Budget variance Actual fixed overheads 60,000 $3.25 $195,000 $5,000 Unfavourable $200,000 Applied fixed overheads to manufacturing Direct labor hours worked Pre-determined overheads rate Applied fixed overheads to manufacturing 60,000 $3.25 $195,000 $1,370,000 Quimper, Inc Income Statement-Absorption Costing Sales Less :Cost of Goods Sold Beginning Inventory - Finished Goods $0 Cost of goods manufactured Direct Material $90,000 Direct Labor $540,000 Variable Manufacturing overhead $150,000 Fixed Manufacturing overhead $195,000 Cost of Goods available for Sale $975,000 Less: Closing stock (2,600*$32.50) $84,500 Unadjusted Cost of goods sold $890,500 Unfavourable budget variance - fixed overheads $5,000 Gross profit Less: Operating expenses Variable Selling and administrative expenses $205,500 Fixed Selling and administrative expenses $230,000 Net Operating Income $895,500 $474,500 $435,500 $39,000 3 $1,370,000 Quimper, Inc Income Statement- Variable Costing Sales Less : Variable Cost of Goods Sold Beginning Inventory - Finished Goods $0 Variable Cost of goods manufactured Direct Material $90,000 Direct Labor $540,000 Variable Manufacturing overhead $150,000 Variable Cost of Goods available for Sale $780,000 Less: Closing stock (2,600* $26) $67,600 Variable cost of goods sold Variable selling and administrative expenses Contribution Margin Less: Fixed Cost Fixed Manufacturing overhead $200,000 Fixed Selling and administrative expenses $230,000 Net Operating Income $712,400 $205,500 $452,100 $430,000 $22,100 4 Reconciliation of Operating Income Absorption Costing and Variable Costing Operating Income as per Absorption Costing $39,000 Less: Fixed overhead included in closing stock -$16,900(2,600* $6.50) Operating Income as per Variable costing $22,100 Short cut method is multiply closing stock units by fixed overheads rate for closing stock value difference