Question

In the first year of business, Sky Corp. produced and sold 10,000 units for $100 per unit, and incurred the following costs.

	direct material	300,000
	direct labor	160,000
	Variable MOH	120,000
	Fixed MOH	100,000
	Variable Selling	175,000
	Fixed Selling	65,000

Calculate Sky’s NOI and cost of inventory under full absorption and variable costing if in the coming year the selling price remains constant, it produces 10,000 units, but only sells 9,000 units.

(a) The unit cost of ending inventory on an absorption cost balance sheet: _____________

(b) The operating income using absorption costing: _____________
(c) The operating income using variable costing: _____________

Show how to calculate selling and Admin expenses

Answer 1

• Requirements
• [a]
  Unit cost of ending inventory = Unit Product Cost

	Direct Material	$300,000
	Direct Labor	$160,000
	Variable MOH	$120,000
	Fixed MOH	$100,000
A	Total cost of production	$680,000
B	Total units produced	10000
C = A/B	Product cost per unit	$68

Answer = $ 68 per unit

• [b]

Operating Income using Absorption costing = $ 48,000

Sales	[9000 units x $ 100]	$900,000
Cost of Goods Sold	[9000 units x $ 68]	$612,000
Gross Profits		$288,000
Fixed selling	65000
Variable selling	175000	$240,000
Operating Income		$48,000

• [c]

Operating Income under Variable costing = $ 38,000

Sales	[9000 units x $ 100]	$900,000
Variable expenses	[($300000+160000+120000) x 9000 units / 10000 units] + $ 175000	$697,000
Contribution margin		$203,000
Fixed expenses	[$100000 + 65000]	$165,000
Operating Income		$38,000

• Selling & Admin expenses are for units sold, hence under both absortion and variable costing,
  the selling & admin expenses = $ 175000 variable + $ 65000 fixed = $ 240000