Question

Review Problem 1: Contrasting Variable and Absorption Costing Dexter Corporation produces and sells a single product, a wooden hand loom for weaving small items such as scarves Selected cost and operating data relating to the product for two years are given below: Selling price per unit. $50 Manufacturing costs: Variable per unit produced: Direct materials. $11 Direct labor .......... Variable manufacturing overhead... Fixed manufacturing overhead per year ........ $120,000 Selling and administrative expenses: Variable per unit sold....... $4 Fixed per year. ...... $70,000 Year 1 Year 2 Units in beginning inventory .... Units produced during the year.. Units sold during the year. ... Units in ending inventory ....... 0 10,000 8,000 2,000 2,000 6,000 8,000 0 Required: 1. Assume the company uses absorption costing. a. Compute the unit product cost in each year. b. Prepare an income statement for each year.

Answer 1

la) Calculation of Unit cost Under Absorption Costing Year 1 Direct Material 11.00 Direct Labour 6.00 Variable Manufacturing Overhead 3.00 Fixed Manufacturing Over head (120000/10000), (120000 / 6000) 12.00 Unit Cost 32.00 Year 2 11.00 6.00 3.000 20.000 40.00 1b) Income Statement Under Absorption Costing Year 1 Year 2 Sales Cost of Goods Sold Gross Margin Selling and Administrative Overheads Net Operating Income or loss 400000 256000 144000 102000 42000 400000 304000 96000 102000 -6000

2a) Calculation of Unit cost Under Variable Costing Direct Material Direct Labor Variable Manufacturing Overhead Unit Cost Year 1 11.00 6.00 3.00 20.00 Year 2 11.00 6.00 3.00 20.00

Year 2 400000 160000 32000 2b) Income Statement Under Variable Costing Year 1 Sales (@50 Per unit) 400000 Variable Expense: Variable cost of goods sold (@20) 160000 Variable Selling and Administrative Expense (@4) 32000 Total Varible Expenses 192000 Contribution Magin 208000 Fixed Expenses : Fixed manufacturing Overheads 120000 Fixed Selling and Administrative Expenses 70000 Total fixed Expenses 190000 Net Operating Income or loss 18000 192000 208000 120000 70000 190000 18000

3. Reconcile the variable costing and absorption costing Net income Year 1 Year 2 Variable Costing Net Operating Income (loss) 18000 18000 Add: Fixed Manufacturing over head cost deferred in inventory under absorption 24000 Deduct : Fixed Manufacturing over head cost released from inventory under absorption costing - 24000 Absorption costing net operating income (Loss) 42000 -6000