A company manufactures a unique device that is used to boost Wi-Fi signals. The following data relates to the first month of operation:

Beginning inventory 0
Units produced 40,000
Units sold 35,000
Selling price per unit $120
Selling and administrative expenses:
   Variable per unit $4
   Fixed (total for the month) $1,120,000
Manufacturing costs:
   Direct materials cost per unit $30
   Direct labor cost per unit  $14
   Variable manufacturing overhead cost per unit  $4
   Fixed manufacturing overhead cost  $1,280,000

Management is anxious to see the profitability of newly designed unique booster.

Required:

  1. Calculate unit product cost and prepare income statement under variable costing system and absorption costing system.
  2. Prepare income statement under two costing system.
  3. Prepare a schedule to reconcile the net operating income under variable and absorption costing system.

Solution:

(1) Calculation of unit product cost:

Variable costing Absorption costing
Direct materials $30 $30
Direct labor $14 $14
Variable manufacturing overhead $4 $4
Fixed manufacturing overhead $32*
———- ———-
production cost per unit $48 $80
———- ———-

*1,280,000/40,000

(2) Income statements:

Absorption costing:

Sales (35,000 Units × $120) 4,200,000
Less cost of goods sold:
Beginning inventory 0
Add cost of goods manufactured (40,000 Units × $80) 3,200,000
———-
Cost of goods available for sale 3,200,000
Less ending inventory (5,000 Units × $80) 400,000 2,800,000
 ———- ———-
Gross profit 1,400,000
Less selling and administrative expenses
Fixed 1,120,000
Variable (35,000 Units × $4)  140,000 1,260,000
———- ———-
140,000
———-

 

Variable costing:

Sales (35,000 Units × $120) 4,200,000
Less variable cost of goods sold:
Beginning inventory 0
Add v. cost of goods manufactured (40,000 Units × $48) 1,920,000
———-
Cost of goods available for sale 1,920,000
Less ending inventory (5,000 Units × $48) 240,000 1,680,000
 ———- ———-
Gross contribution margin 2,520,000
Less variable selling and administrative expenses  140,000
———-
Contribution margin 2,380,000
Less fixed costs:
Fixed manufacturing overhead 1,280,000
Fixed selling and administrative expenses  1,120,000 2,400,000
———- ———-
 Net operating loss (20,000 )
———-

(3) Reconciliation schedule:

Net operating income (loss) under variable costing $(20,000)
Fixed manufacturing overhead cost deferred in inventory (5,000 units × $32) $160,000
———–
Net operating income under absorption costing $140,000
———–
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