Question

Audiophonics Limited manufactures and sells high-quality and durable ear buds for use with personal electronics that are custom moulded to each customer’s ear. Cost data for the product follow: Variable costs per unit: Direct materials $ 10 Direct labour 18 Variable factory overhead 10 Variable selling and administrative 5 Total variable costs per unit $ 43 Fixed costs per month: Fixed manufacturing overhead $ 169,400 Fixed selling and administrative 154,000 Total fixed cost per month $ 323,400 The product sells for $66 per unit. Production and sales data for May and June, the first two months of operations, are as follows: Units Produced Units Sold May 15,400 13,200 June 15,400 17,600 Income statements prepared by the Accounting Department using absorption costing are presented below: May June Sales $ 871,200 $ 1,161,600 Cost of goods sold: Beginning inventory 0 107,800 Add cost of goods manufactured 754,600 754,600 Goods available for sale 754,600 862,400 Less ending inventory 107,800 0 Cost of goods sold 646,800 862,400 Gross margin 224,400 299,200 Selling and administrative expenses 220,000 242,000 Operating income $ 4,400 \ $ 57,200 Required: 1. Determine the unit product cost under each of the following methods. 2. Prepare variable costing income statements for May and June using the contribution approach. (Do not leave any empty spaces; input a 0 wherever it is required.) 3. Reconcile the variable costing and absorption costing operating income figures. (Loss amounts should be indicated with a minus sign.)

Answer 1

1.

	Absorption Costing	Variable Costing
Direct materials	10	10
Direct labor	18	18
Variable factory overhead	10	10
Fixed manufacturing overhead	11	-
($169400/15400)
Unit product cost $	49	38

2.

Variable Costing Income Statement
	May	June
Sales	871200	1161600
Variable expenses:
Variable cost of goods sold:
Beginning inventory	0	83600
Add: Variable production costs	585200	585200
Goods available for sale	585200	668800
Less: Ending inventory	83600	0
Cost of goods sold	501600	668800
Variable selling and administrative expense	66000	88000
Total variable expenses	567600	756800
Contribution margin	303600	404800
Fixed expenses:
Fixed manufacturing overhead	169400	169400
Fixed selling and administrative expense	154000	154000
Total fixed expenses	323400	323400
Operating income (loss)	-19800	81400

3.

	May	June
Variable costing operating income (loss)	-19800	81400
Add: Fixed manufacturing overheads deferred in inventory under absorption costing [(15400 - 13200) x $11]	24200	0
Less: Fixed manufacturing overheads released from inventory under absorption costing	0	24200
Absorption costing operating income (loss)	4400	57200