Question

Stonegate Products uses the following unit costs for one of the products it manufac- tures: Direct materials $82.00 Direct labor 35.40 Manufacturing overhead (based on 5,000 units): Variable 15.60 Fixed .. 14.00 Marketing and administrative costs (based on 6,500 units): Variable 10.40 Fixed .. 7.00 This year, there were 1,500 units in beginning finished goods inventory; 5,000 units were produced; and 6,500 units were sold at $200 per unit. The beginning inventory was valued at $133 per unit using variable costing and at $147 per unit using full- absorption costing. There was no beginning or ending work in process inventory. a. Prepare an income statement for the year, using the contribution margin format. h. Would reported operating profits be more, less, or the same if full-absorption costing was used? Support your conclusions with an income statement using full-absorption costing and the traditional format.

Answer 1

Part A

Contribution Format Income Statement

Particular	Amount	Amount
Sales Revenue		13,00,000
Less : Variable Costs
Cost of Goods Sold	864,500
Marketing and Administrative Costs	67,600
Total Variable Costs		9,32,100
Contribution Margin		3,67,900
Fixed Costs
Fixed Manufacturing Overhead	70,000
Fixed Marketing and Administrative Costs	45,500
Total Fixed Costs		1,15,500
Operating Income		2,52,400

Notes

Contribution Margin = Sales - Total Variable Costs

Operating Income = Contribution Margin - Total Fixed Costs

Sales Revenue = 6,500 Units * $ 200 per Unit = $ 13,00,000

Variable Marketing and Administrative Costs = 6,500 Units * $ 10.40 per Unit = $ 67,600

Fixed Manufacturing Overhead = 5,000 Units * $ 14 Per Unit = $ 70,000

Fixed Marketing and Administrative Costs = 6,500 Units * $ 7 per Unit = $ 45,500

Variable Costs of Goods Sold = 1,500 Units * $ 133 Per Unit + 5,000 Units * $ 133 Per Unit = $ 864,500

Cost per Unit for Current Year = Direct Materials Cost per Unit + Direct Labour Cost per Unit + Variable Manufacturing Overhead per Unit

Cost per unit = 82 + 35.40 + 15.60 = $ 133

Part B

Absorption Costing Income Statement

Particular	Amount	Amount
Sales Revenue		13,00,000
Cost of Goods Sold		9,55,500
Gross Profit		3,44,500
Marketing and Administrative Costs
Variable Marketing and Administrative Costs	67,600
Fixed Marketing and Administrative Costs	45,500
Total Marketing and Administrative Costs		1,13,100
Operating Income		2,31,400

Notes

Gross Profit = Sales - Cost of Goods Sold

Operating Income = Gross Profit - Total Marketing and Administrative Costs

Sales Revenue = 6,500 Units * $ 200 per Unit = $ 13,00,000

Variable Marketing and Administrative Costs = 6,500 Units * $ 10.40 per Unit = $ 67,600

Fixed Marketing and Administrative Costs = 6,500 Units * $ 7 per Unit = $ 45,500

Costs of Goods Sold = 1,500 Units * $ 147 Per Unit + 5,000 Units * $ 147 Per Unit = $ 955,500

Cost per Unit for Current Year = Direct Materials Cost per Unit + Direct Labour Cost per Unit + Variable Manufacturing Overhead per Unit + Fixed Manufacturing Overhead per Unit

Cost per unit = 82 + 35.40 + 15.60 + 14= $ 47