Question

Problem 6. Italia Espresso Machina Inc. produces a single product. Data concerning the company's operations last year appear below Units in beginning inventory Units produced Units sold 2,000 1,900 Selling price per unit $100 Variable costs per unit Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative $30 $10 $5 $2 Fixed costs in total Fixed manufacturing overhead Fixed selling and administrative 40,000 $60,000 Required a. Compute the unit product cost under both absorption and variable costing b. Prepare an income statement for the year using absorption costing c. Prepare a contribution format income statement for the year using variable costing d. Prepare a report reconciling the difference in net operating income between absorption and variable costing for the year

Answer 1

Answers

• All working forms part of the answer
• Requirement ‘a’

Working		Absorption Costing	Variable Costing
	Variable cost per unit:
	Direct material	$                   30.00	$                 30.00
	Direct Labor	$                   10.00	$                 10.00
	Variable manufacturing overhead	$                     5.00	$                    5.00
A	Total Variable manufacturing cost per unit	$                   45.00	$                 45.00
B	Fixed manufacturing overhead	$          40,000.00
C	Units produced	2,000
D = B/C	Fixed manufacturing cost per unit	$                   20.00
E = A + D	Unit Product Cost	$                   65.00	$                 45.00

• Requirement ‘b’

--Absorption costing income statement

A = 1900 units x $ 100	Sales Revenue		$             190,000
	Cost of Goods Sold:
B	Beginning Inventory	$                          -
C = 2000 units x $ 65	Cost of production	$              130,000
D = 100 units x $ 65	Ending Inventory	$                (6,500)
E = 1900 units x $ 65	Cost of Goods Sold		$             123,500
F = A - E	Gross Profit		$               66,500
	Operating Expenses:
G = 1900 units x $ 2	Variable selling & administrative expenses	$                   3,800
H	Fixed Selling & administrative expense	$                60,000
I = G+H	Total Operating Expenses		$               63,800
J = F - I	Net Operating Income		$                 2,700

• Requirement ‘c’

--variable Costing Income Statement

A = 1900 units x $ 100	Sales Revenue		$           190,000
	Variable costs:
B = 1900 units x $30	Direct material	$         57,000
C = 1900 units x $10	Direct Labor	$         19,000
D = 1900 units x $5	variable manufacturing cost	$            9,500
E = 1900 units x $2	Variable selling & admin cost	$            3,800
F = B+C+D+E	Total Variable cost		$              89,300
G = A - F	Contribution margin		$           100,700
	Fixed costs:
H	Fixed manufacturing cost	$         40,000
I	Fixed selling & administrative	$         60,000
J = H + I	Total Fixed cost		$           100,000
K = G - J	Net Operating Income		$                    700

• Requirement ‘d’

--Under Absorption costing, Fixed manufacturing overhead of $ 20 per unit [see requirement 1] is deferred to next period in Ending Inventory.

Reconciliation:

A	Net Operating Income as per Absorption costing	$                   2,700
B = 100 units x $ 20	Less: Amount of Fixed manufacturing overhead deferred in Ending Inventory	$                   2,000
C = A - B	Net Operating Income as per variable Costing	$                      700