Question

Q.3.Italian Espresso Company. produces a single product. Data concerning the company's operations last year appear below: Units in beginning inventory 0 Units produced 2,000 Units sold. 1,900 Selling price per unit $100 Variable costs per unit: Direct materials.... $30 Direct labor $10 Variable manufacturing overhead $5 Variable selling and administrative.. $2 Fixed costs in total: Fixed manufacturing overhead $40,000 Fixed selling and administrative $60,000 Required: a. Compute the unit product cost under both absorption and variable costing. b. Prepare an income statement for the year using absorption costing. c. Prepare an income statement for the year using variable costing. d. Prepare a report reconciling the difference in net operating income between absorption and variable costing for the year. (2+3+3+2=10)

Answer 1

Ans. A	In Absorption costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	Unit product cost under Absorption Costing:
	Direct materials	$30.00
	Direct labor	$10.00
	Variable Overhead per unit	$5.00
	Fixed overhead per unit   ($40,000 / 2,000)	$20.00
	Unit Product Cost	$65.00
	*Fixed overhead per unit = Fixed overhead / Units produced
	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Direct materials	$30.00
	Direct labor	$10.00
	Variable Overhead per unit	$5.00
	Unit Product Cost	$45.00

Ans. B Amount $190,000 ITALIAN EXPRESSO COMPANY Absorption Costing Income Statement PARTICULARS Sales (1,900 * $100) Less: Cost of goods sold Opening inventory $0 Add: Cost of goods manufactured (2,000 * $65 $130,000 Cost of goods available for sale $130,000 Less: Ending inventory [(2,000 - 1,900) * $65] $6,500 Cost of goods sold (total) Gross margin Selling & Administrative expenses: Fixed $60,000 Variable (1,900 * $2) $3,800 Total Selling and administrative expenses Net operating income $123,500 $66,500 $63,800 $2,700 *Ending inventory = (Units produced - Units sold) * Production cost per unit Ans. C Amount $190,000 ITALIAN EXPRESSO COMPANY Variable Costing Income Statement PARTICULARS Sales (1,900 * $100) Less: Variable cost of goods sold: Opening inventory $0 Add: Variable cost of goods manufactured (2,1 $90,000 Variable cost of goods available for sale $90,000 Less: Ending inventory [(2,000 - 1,900) * $45] -$4,500 Variable cost of goods sold Gross Contribution Margin Less: Variable Selling and Administrative Expenses (1,900 * $2) Contribution Margin Less: Fixed expenses: Fixed manufacturing overhead $40,000 Fixed selling and administrative expenses $60,000 Net operating income $85,500 $104,500 $3,800 $100,700 $100,000 $700 *Variable cost of goods manufactured = Units produced * Variable unit product cost

Ans. D	ITALIAN EXPRESSO COMPANY
	Reconciling Difference in Operating Income
	Between Absorption and Variable Costing
	Variable costing net operating income	$700
	Add : Fixed manufacturing overhead deferred in inventory under absorption costing	$2,000
	Absorption costing net operating income	$2,700
	*Fixed manufacturing overhead deferred in inventory = (Units produced - Units sold) * Fixed overhead per unit
	(2,000 - 1,900) * $20
	100 * $20
	$2,000