Question

P Co.

Smores Co. produces and sells many camping products. The company has just opened a new plant to produce a cushy sleeping bag 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:

Beginning inventory	0
Units produced	47,000
Units sold	42,000
Selling price per unit	$81
Selling and administrative expenses:
Variable per unit	$2
Fixed (total)	$561,000
Manufacturing costs:
Direct materials cost per unit	$17
Direct labor cost per unit	$8
Variable manufacturing overhead cost per unit	$4
Fixed manufacturing overhead cost (total)	$846,000

Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May.

Assume that the company uses absorption costing.

1) What is the unit product cost?

2) Prepare an income statement for May.

Assume that the company uses variable costing.

3) What is the unit product cost?

4) Prepare an income statement for May.

Answer 1

1) Under Absorption Costing
a) Unit prodcut cost under absorption costing
Unit Product cost	= Total Variable cost + Fixed Manufacturing OH
Fixed Cost per unit	= Total Fixed cost/Number of units produced
Total Fixed Cost	= Fixed manufacturin OH
	= 846,000
Unit Produced	= 47000
Fixed Cost per unit	= 846,000/47,000
	= 18
Unit product cost
Direct Material	= 17
Direct Labour	= 8
Variable Manufacuring OH	= 4
Fixed Manufacturing OH	= 18
Produsct cost per unit	= 47

Income Statement under Absorptoin Costing
Description	Amount	Amount
Sales		34,02,000
Less: Manufacturing cost
Variable Cost
Direct Material Cost	7,99,000
Direct Labour Cost	3,76,000
Variable Manufacturing overhead	1,88,000
Fixed factory (Manufacturing) overhead	8,46,000
Cost of goods manufactured	22,09,000
Add: Opening Stock	-
Cost of goods available for sale	22,09,000
Less: Closing Stock (5000 X 47)	2,35,000	19,74,000
Gross profit		14,28,000
Less: Fixed Selling & Admin Expense	5,61,000
Less: Variable Selling & Admin Expense	84,000	6,45,000
Operating Income		7,83,000

2) Under Variable Costing
a) Unit prodcut cost under Variable costing
Unit Product cost	= Total Variable cost/Unit produced
Unit Produced	= 47000
Unit product cost
Direct Material	= 17
Direct Labour	= 8
Variable Manufacuring OH	= 4
Produsct cost per unit	= 29

Income Statement under Variable Costing
Description	Amount	Amount
Sales		34,02,000
Less: Variable cost of Goods Sold
Opening Inventory	-
Variable Cost of Goods Manufactured	13,63,000
Variable cost of Goods available for sale	13,63,000
Less Closing Inventory	1,45,000	12,18,000
Gross Contribution Margin		21,84,000
Less: Variable Selling & Admin Expense		84,000
Net Contribution Margin		21,00,000
Less Fixed Expenses
Fixed Manufacturing OH	8,46,000
Fixed Selling & Admin Expense	5,61,000	14,07,000
Operating Income		6,93,000