1) | Calculation of unit product cost: | Absorption Costing | Variable Costing |
Direct materials | $ 30.00 | $ 30.00 | |
Direct labor | $ 14.00 | $ 14.00 | |
Variable manufacturing overhead | $ 4.00 | $ 4.00 | |
Fixed manufacturing overhead [See not below] | $ 32.00 | $ - | |
Unit product cost | $ 80.00 | $ 48.00 | |
[Note: Fixed manufacturing overhead per unit = 1280000/40000 = $32.00] | |||
2) | Income statements: | ||
a) | Absorption costing: | ||
Sales [35000*120] | $ 42,00,000 | ||
Less: Cost of goods sold: | |||
Opening inventory | $ - | ||
Add: Cost of goods manufactured (40000*80) | $ 32,00,000 | ||
Cost of goods available for sale | $ 32,00,000 | ||
Less: Closing inventory [5000*80] | $ 4,00,000 | $ 28,00,000 | |
Gross profit | $ 14,00,000 | ||
Less: Marketing and administrative expenses: | |||
Variable [35000*4] | $ 1,40,000 | ||
Fixed | $ 11,20,000 | $ 12,60,000 | |
Net operating income | $ 1,40,000 | ||
b) | Variable costing: | ||
` | $ 42,00,000 | ||
Less: Cost of goods sold: | |||
Opening inventory | $ - | ||
Add: Cost of goods manufactured (40000*48) | $ 19,20,000 | ||
Cost of goods available for sale | $ 19,20,000 | ||
Less: Closing inventory [5000*48] | $ 2,40,000 | $ 16,80,000 | |
Gross contribution margin | $ 25,20,000 | ||
Less: Variable marketing and administrative expenses [35000*4] | $ 1,40,000 | ||
Contribution margin | $ 23,80,000 | ||
Less: Fixed expenses: | |||
Manufacturing overhead expenses | $ 12,80,000 | ||
Marketing and administrative expenses | $ 11,20,000 | $ 24,00,000 | |
Net operating income | $ -20,000 | ||
3) | Reconciliation schedule: | ||
NOL under variable costing | $ -20,000 | ||
Add: Fixed manufacturing overhead deferred in inventory [5000*32] | $ 1,60,000 | ||
NOI under absorption costing | $ 1,40,000 |
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