Question

2. Below is operating information of Weber Light Aircraft, a company that produces light recreational aircraft.

	Per Aircraft	Per Month
Selling price	$100,000
Direct materials	$19,000
Direct labor	$5,000
Variable manufacturing overhead	$1,000
Fixed manufacturing overhead		$70,000
Variable selling and administrative expense	$10,000
Fixed selling and administrative expense		$20,000

	January	February	March
Beginning inventory	0	1	0
Units produced	2	2	5
Units sold	1	3	5
Ending inventory	1	0	0

a. Compute the unit product cost using variable costing method.

b. Prepare an income statement for January, February and March using variable costing method.

c. Compute the unit product cost using absorption costing method.

d. Prepare an income statement for January, February and March using absorption costing method

e. Explain why both variable and absorption costing generate same income in a particular month, whereas in another month they generate different incomes.

Answer 1

Answe a. Compute the unit product cost using variable costing method. Variable Costing Unit Product Cost Direct materials. 19000 Direct Labor 5000 Variable manufacturing overhead.. 1000 Variable costing unit product cost 25000

b. Prepare an income statement for January, February and March using variable costing method.

Income statement Variable costing January February March Sales (100,000 each) 100000 300000 500000 Less: variable expanses Cost of goods sold (25,000 each) 25000 75000125000 selling and admin expanses (10,000 each) 10000 30000 50000 Total variable expenses.. 35000 105000 175000 Contribution margin 65000 195000 325000 Less: Fixed cost Fixed manufacturing overhead 70,000 70,00070,000 Fixed selling and administrative expense 20,000 20,000 20,000 Total Fixed cost 90,000 90,00090,000 Net operating income (loss) 25,000105,000 235,000

Working notes for the above answer is as under Variable Costing Cost of Goods Sold January February March Variable production cost (a) 25000 25000 25000 Units sold (b). 75000 125000 Variable cost of goods sold (a) x (b) 25000

C. Compute the unit product cost using absorption costing method. Absorption Costing Unit Product Cost January February March Direct materials. 19000 19000 19000 Direct Labor 5000 5000 000 Variable manufacturing overhead. 1000 1000 1000 Fixed manufacturing overhead ($70,0002unit produced in January $70,000 2units produced in February; $70,000 5units produced in March) 35000 35000 14000 Absorption costing unit product cost 60000 60000 39000

d. Prepare an income statement for January, February and March using absorption costing method. (5 points) Income statement Absorption costing January February March Sales (100,000 each) 100000 300000 500000 Less Cost of goods sold(S60,000 x 1 unit, S60,000 x 3 unit, 39000 x 5 unit) 60000 180000 195000 Gross margin 40000 120000 305000 Less: Selling admin expanses Variable Selling admin expanses (10,000 each Fixed selling and administrative expense Net operating income (loss) 10,00030,000 50,000 20,000 20,000 10,00070,000 235,000 20,000

e. Explain why both variable and absorption costing generate same income in a particular month, whereas in another month they generate different incomes. Reconciliation of operating income as per variable costing and absorption costing January February March 25,000 105,000 235,000 Net operating income (loss) as per variable costing Add: Fixed manufacturing expanses differed in stock (35000 x 1 unit) 3500035000 0 Net operating income (loss) as per absorption costing 10,00070,000 235,000 Net operating income was $35,000 Lower in January and higher in February as per variable costing then under absorption costing. This occurs because one aircraft produced in January is not sold until February. This aircraft has $35,000 of fixed manufacturing overhead attached to it that was incurred in February, but will not be recorded as part of cost of goods sold until February so Net operating income of January and February are different as per variable costing and as per absorption costing While in the month of march units produced and unit sold are same so net operating income will be same as per variable costing and as per absorption costing