Question

- Unicorn Company manufactures a device that is used by internet users to boost Wi-Fi signals. The following data relates to the first month of operation:
 Beginning inventory: 0 units
 Units produced: 40,000 units
 Units sold: 35,000 units
 Selling price: OMR72 per unit Marketing and administrative expenses:
 Variable marketing and administrative expenses per unit: OMR2.4
 Fixed marketing and administrative expenses per month: OMR672,000 Manufacturing costs:
 Direct materials cost per unit: OMR18
 Direct labour cost per unit: OMR8.4
 Variable manufacturing overhead cost per unit: OMR2.4
 Fixed manufacturing overhead cost per month: OMR768,000
Management is anxious to see the success as well as profitability of newly designed unique booster.
Required to:
i. Calculate unit product cost
ii. Prepare income statement under marginal costing system and absorption costing system.

iii. Prepare a schedule to reconcile the net operating income under variable and absorption costing system and state the reasons for difference in profit under these costing systems.
iv. Compare marginal costing system and absorption costing system. Also, analyse which method is better and why.

additional information : this is important below .

needs to give an introduction about Marginal costing and Absorption costing. (Approximately 500 words)
Also, need to show the working note for the calculations, if any. Question 2-i, ii and iii (Approximately 500 words)
Comparison between the two methods (Approximately 600 words

Answer 1

Answer

Given Data Variable costs per unit: Manufacturing: Direct materials Direct labour Variable manufacturing Cost Variable selling and administrative 18.00 8.40 2.40 2.40 31.20 Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expenses 768,000 672,000 First year Opening Balance Units produced Units sold Ending Inventory 40,000 35,000 5,000 $72.00 First year Selling Price per unit Requirement iia Prepare an Income Statement using variable costing. Per Unit/ per period Units sold Sales 72.00 Variable expenses: Variable cost of goods sold 28.80 Variable selling and administrative 2.40 Total variable expenses Contribution margin (Sales-VC) 35,000 2,520,000 1,008,000 84,000 1,092,000 1,428,000 Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative Total fixed expenses: Net operating income (loss) (Cont-FC) 768,000 672,000 768,000 672,000 1,440,000 (12,000) Requirement i Prepare an Income Statement using absorption costing. a. Unit Product Cost for Year 1 First year Per Unit 18 8 2 Units produced Direct materials Direct labour Variable manufacturing Cost Fixed manufacturing overhead Total Manufacturing Cost Units produced Unit product cost Fixed Overhead per unit Requirement iib b. Absorption Costing Income Statement 40,000 720,000 336,000 96,000 768,000 1,920,000 40,000 48.00 19.20 72.00 Units sold Sales Cost of goods sold (refer below) Gross margin Selling and administrative expenses (Fixed + Variable) Net operating income (loss) First year 35,000 2,520,000 1,680,000 840,000 756,000 84,000 First year Working Notes Cost of goods sold Opening Balance Units produced Units sold Ending Inventory 40,000 35,000 5,000 Opening Balance Add: Cost of production 1,920,000 Less: Ending Inventory (240,000) Cost of goods sold 1,680,000 Requirement iii Prepare a numerical reconciliation and explanation of the difference in the income between variable costing and absorption costing. Reconciliation First year Variable costing Net Operating Income (loss) (12,000) Add: Fixed manufacturing overhead deferred in inventory under absorption costing (closing inventory - opening inventory) x fixed manufacturing overhead per unit produced. (5,000-0) < $19.20) 96,000 Absorption costing net operating income (loss) 84,000 Under marginal costing, only variable costs are charged as a cost of sale and a contribution margin is calculated which is sales less the variable cost of sales. Closing inventories of finished goods or work in progress are valued at marginal (variable) production cost. Fixed costs are treated as a period cost and are charged in full to the income statement in the accounting period in which they are incurred. Absorption costing takes both fixed costs and variable costs into account. Fixed manufacturing overhead is deferred in inventory under absorption costing but would be reported as an operating expense under variable costing. Selling and administrative expenses are treated as period costs under both variable costing and absorption costing Financial statements prepared under variable costing method do not conform to generally accepted accounting principles (GAAP). The auditors may refuse to accept them. Variable costing does not assign fixed cost to units of products. So the production costs cannot be truly matched with revenues Hence, absorption costing is better from financial reporting purpose.