Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:

Beginning inventory		0
Units produced		28,800
Units sold		25,100
Selling price per unit	$	410
Selling and administrative expenses:
Variable per unit	$	20
Fixed per year	$	527,100
Manufacturing costs:
Direct materials cost per unit	$	241
Direct labor cost per unit	$	56
Variable manufacturing overhead cost per unit	$	34
Fixed manufacturing overhead per year	$	604,800

Assume that direct labor is a variable cost.

Required:

a. Compute the unit product cost under both the absorption costing and variable costing approaches.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.

d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Answer 1

a) Unit product cost

	Absorption	Variable
direct material	241	241
direct labor	56	56
Variable manufacturing overhead	34	34
Fixed manufacturing overhead	604800/28800 = 21
Unit product cost	352	331

b) Absorption costing income statement

Sales (25100*410)	10291000
cost of goods sold (25100*352)	8835200
Gross profit	1455800
Selling and administrative expense (25100*20+527100)	1029100
Net operating income	426700

c) Variable costing income statement

Sales		10291000
Variable cost of goods sold (25100*331)		8308100
Manufacturing margin		1982900
Variable selling and administrative (25100*20)		502000
contribution margin		1480900
Fixed cost
Fixed manufacturing overhead	604800
Fixed selling and administrative expense	527100
Total fixed cost		1131900
Net operating income		349000

Reconciliation

Variable costing net operating income	349000
Add: Fixed manufacturing overhead deferred in ending inventory (21*3700)	77700
Absorption costing net operating income	426700