Question

Great Outdoze Company manufactures sleeping bags, which sell for $65.90 each. The variable costs of production are as follows: Direct material Direct labor Variable manufacturing overhead $18.80 9.40 8.00 Budgeted fixed overhead in 20x1 was $169,400 and budgeted production was 22,000 sleeping bags. The year's actual production was 22,000 units, of which 19,900 were sold. Variable selling and administrative costs were $1.80 per unit sold; fixed selling and administrative costs were $23,000. Required: 1. Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing. 2-a. Prepare an operating income statement for the year using absorption costing. 2-b. Prepare an operating income statement for the year using variable costing. 3. Reconcile reported operating income under the two methods using the shortcut method.

Answer 1

a.	Under Absorption Costing
	Unit product cost:
	Direct Material	$                18.80
	Direct Labour	$                  9.40
	Variable Manufaturing overhead	$                  8.00
	Total Variable Cost	$                36.20
	Fixed Manufacturing overhead ($169400/22000)	$                  7.70
(i)	Unit product cost	$                43.90
	Under Variable Costing
	Unit product cost:
	Direct Material	$                18.80
	Direct Labour	$                  9.40
	Varialble Manufaturing overhead	$                  8.00
(ii)	Unit product cost	$                36.20
b.	Absorbtion Costing Income Statement
	Sales(19900 X $65.90)	$       13,11,410
Less:	Cost of Goods Sold (19900 X $43.90)	$          8,73,610
	Gross Margin	$          4,37,800
Less:	Selling and Administrative expenses
	Variable Selling and Administrative expenses (19900 X $1.80)	$             35,820
	Fixed Selling and Administrative expenses	$             23,000
	Net Operating Income	$          3,78,980
c.	Variable Costing Income Statement
	Sales(19900 X $65.90)	$       13,11,410
Less:	Variable Cost of goods sold (19900 X $36.20)	$          7,20,380
Less:	Variable Selling and Administrative expenses (19900 X $1.80)	$             35,820
	Contribution margin	$          5,55,210
Less:	Fixed Expenses:
	Fixed Manufacturing overhead	$          1,69,400
	Fixed Selling and Administrative expenses	$             23,000
	Net operating Income	$          3,62,810
d.	2100 units X $7.70 = $16170
	Net operating income under variable costing	$          3,62,810
Add:	Fixed Manufacturing overhead cost deferred in inventory under absorbtion costing (2,100 X $7.70)	$             16,170
	Net operating income under absorbtion costing	$          3,78,980

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