Question

Empey Manufacturing produces towels to be sold as souvenirs at sporting events

throughout the world. Assume that units produced equalled units sold in 2020. The company's

variable-costing income statement and other data are as follows:

EMPEY MANUFACTURING

Income Statement

Year Ended December 31, 2020

Variable Costing

Sales (260,700 units) $521,400

Variable cost of goods sold $255,486

Variable selling expenses 31,284

Variable administrative expenses 36,498 323,268

Contribution margin 198,132

Fixed manufacturing overhead 96,459

Fixed selling expenses 38,500

Fixed administrative expenses 42,625 177,584

Net income $ 20,548

Unit selling price $2.00

Variable costs per unit

Direct material 0.26

Direct labour 0.34

Variable overhead 0.38

Variable selling expenses 0.12

Variable administrative expenses 0.14

Instructions

a.

Calculate the manufacturing cost per towel under variable costing.

b.

Calculate the manufacturing cost per towel under absorption costing.

c.

Prepare an absorption-costing income statement for Empey Manufacturing.

d.

Explain why there is or is not a difference in the net income amounts in the two income

statements.

e.

Explain why Empey Manufacturing might want to prepare both an absorption-costing income

statement and a variable-costing income statement.

Answer 1

a. Manufacturing Cost using variable costing

Variable Costing
Direct Material	$           0.26
Direct Labor	$           0.34
Variable Overhead	$           0.38
Manufacturing Cost per unit	$           0.98

b. Manufacturing Cost using absorption costing

Absorption Costing
Variable Cost of Goods Sold	$    255,486.00
Fixed Manufacturing Overhead	$      96,459.00
Total Product Costs	$    351,945.00
No of units	260700
Cost per unit	$                 1.35

Absorption Costing Income Statement
Sales	$    521,400.00
Cost of Goods Sold	$    351,945.00
Gross Margin	$    169,455.00
Selling Expenses	$      69,784.00
Administrative Expenses	$      79,123.00
Net Income	$      20,548.00

There is no difference in income statement under both methods because both methods consider all costs to compute net income, the only difference is of presentation

Answer 2

Sales (256,900 units)				$539,490
Variable cost of goods sold		$256,900
Variable selling expenses		25,690
Variable administrative expenses		35,966		318,556
Contribution margin				220,934
Fixed manufacturing overhead		89,915
Fixed selling expenses		39,000
Fixed administrative expenses		42,000		170,915
Net income				$50,019

Unit selling price			$2.10
Variable costs per unit
	Direct material		0.25
	Direct labour		0.40
	Variable overhead		0.35
	Variable selling expenses		0.10
	Variable administrative expenses		0.14