Question

Stark and Company would like to evaluate one of the product lines that they sell to the defense department. Every month the Stark and Company produce an identical number of units, although the sales in units differ from month to month.

Selling price	$105
Units in beginning inventory	110
Units produced	6,400
Units sold	6,100
Units in ending inventory	600
Variable costs per unit:
Direct materials	$62
Direct labour	$48
Variable manufacturing overhead	$3
Variable selling and administrative	$7
Fixed costs:
Fixed manufacturing overhead	$64,000
Fixed selling and administrative	$35,600

Required:

1)     Under variable costing, identify the unit product cost for the month.

2)     What is the unit product cost for the month under absorption costing?

3)     Prepare an income statement for the month using the contribution format and the variable costing method.

4)     Prepare an income statement for the month using the absorption costing method.

Answer 1

The Absorption Costing Unit Product Cost
	Amount
Direct Material	$62.00
Direct labour	$48.00
Variable Manufacturing overheads	$3.00
Fixed Manufacturing overheads (64000/6400)	$10.00
Unit Product cost	$123.00

Compuation of Unit Product cost- Variable Costing
	Amount $
Direct Material	$62.00
Direct labour	$48.00
Variable Manufacturing overheads	$3.00
Variable Product cost	$113.00

The Absorption Costing Income Statement
	Amount $
No. of Unit Sold	6100
Sales	$640,500.00
Less: Cost of Goods sold @$123	$750,300.00
Gross Margin	-$109,800.00
Less: Selling and distribution expense
Variable Expense @$7	$42,700.00
Fixed Expense	$35,600.00
Net operating income	-$188,100.00

The Variable Costing Income Statement
	Amount $
No. of Unit Sold	6100
Sales	$640,500.00
Less: Variable cost
variable cost of goods sold	$689,300.00
Variable selling expense	$42,700.00
Contribution margin	-$91,500.00
Fixed expense:
Fixed Manufacturing overheads	$64,000.00
Fixed selling expense	$35,600.00
Net operating Income	-$191,100.00