Problem-2 (Variable and absorption costing unit product costs and income statements)

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

  • Beginning inventory: 0 units
  • Units produced: 40,000 units
  • Units sold: 35,000 units
  • Selling price: $120 per unit

Marketing and administrative expenses:

  • Variable marketing and administrative expenses per unit: $4
  • Fixed marketing and administrative expenses per 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 per month: $1,280,000

Management is anxious to see the success as well as 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:

problem-2-vaac-img1

*$1,280,000/40,000 units

(2) Income statements:

a. Absorption costing:

problem-2-vaac-img2

b. Variable costing:

problem-2-vaac-img3

(3) Reconciliation schedule:

problem-2-vaac-img4

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14 Comments on Problem-2 (Variable and absorption costing unit product costs and income statements)

  1. D

    Excellent examples. In the one above, under ‘Income reconciliation’ how do you arrive at the figure of $160,000 for fixed manufacturing overhead cost deferred in inventory?

    1. osai

      the unit still remain d same for closing stock. however the differences in price in absorption $80 and variable $48 =$32 so $32×5000=$160,000.
      hope u get d vibs

  2. Accounting For Management

    The number of units in ending inventory is 5,000 and the fixed manufacturing overhead per unit is $32. Therefore, the fixed manufacturing overhead cost deferred in inventory under absorption costing is $160,000 as computed below:

    5,000 units × $32* = $160,000

    *1,280,000/40,000

    The amount of $160,000 also represents the cause of difference of net operating income figure under two costing methods. Read this article for details

    Hope this helps.
    Thank you for using accountingformanagement.org

    1. Antonio Tuvici

      how does absorpton costing happen in service firm,
      here is my question
      Viti Boutique imports designer clothing manufactured by subcontractors in New Zealand. Clothing is a seasonal product. The goods must be ready for sale prior to the start of the season. Any goods left over at the end of the season usually must be sold at steep discounts. Viti Boutique prepares a dress design and selects fabrics approximately six months before a given season. It receives these goods and distributes them at the start of the season. Based on past experience, Viti Boutique estimates that 60 percent of a particular lot of dresses will be unsold at the end of the season and will be marked down to half of the initial retail price. Even with the markdown, a substantial number of dresses will remain unsold and will be returned to Viti Boutique and destroyed. Although a large number of dresses must be discounted and destroyed, Viti Boutique needs to place a minimum order of 1,000 dresses to have a sufficient selection of styles and sizes to market the design.

      Recently, Viti Boutique placed an order for 1,000 dresses of a particular design for $25,000 plus import duties of $5,000 and a $7 commission for each dress sold at retail, regardless of the price. Return mailing and disposing of each unsold dress cost $3 after the end of the markdown period.

      REQUIRED

      1. Use absorption costing to compute the cost of each dress in this lot of dresses.

  3. RGP

    Examples had excellently served me. If variable unit is not specified in the problem, can we use the amount of “selling and administrative” provided under the variable cost per unit?

  4. RGP

    Units in beginning inventory 300
    units produced 1000
    units sold 800
    units in ending inventory 500
    variable cost per unit:
    Direct Materials P 1200
    Direct Labor P 1400
    Manufacturing overhead P 500
    Selling and administrative P 200
    Fixed cost per year:
    Manufacturing overhead P 4000000
    Selling and administrative P 2000000

    Required:
    1. Compute the unit costs under absorption and variable costing methods.
    2. Compute the operating income under absorption and variable costing methods.
    3. Compute the value of ending inventory under absorption and variable costing methods.
    4. Reconcile the differences in operating income under the absorption and variable costing methods.

  5. Accounting For Management

    Hi RGP,

    Thank you for using accountingformanagement.org Your question is very simple. I think you should be able to easily solve it if you go through all the articles, exercises and problems about variable and absorption costing given in this site:

    For articles:
    http://www.accountingformanagement.org/variable-and-absorption-costing/

    For exercises:
    http://www.accountingformanagement.org/variable-and-absorption-costing-exercises/

    For problems:
    http://www.accountingformanagement.org/variable-and-absorption-costing-problems/

    Hope this helps.

  6. Chukssy Pat

    Hello RGP, this explaination on variable and absorption costing methods were perfect, and i understood the illustrations and their solution very well. The illustration given don’t have selling price, and i want to know if it is advisabe to use the per unit production cost as selling price.

  7. Accounting For Management

    Chukssy Pat is right, RGP has not give selling price and question cannot be solved without it.

  8. Saroj khadgi

    what is meant by over absorption of manufacturing cost? where should i put this in income statement under varible cost.?

  9. Rasel

    that was way too awesome..thanks a lot guys for making this simple to understand.

  10. kem

    I like accountingmanagement.org very much,Thanks

  11. kem

    I like accountingmanagement.org very much,It is
    easy understanding and remembering for me,Thanks

  12. ANTONIO

    I’m having a problem here with absorption costing..
    How do we calculate the current units produced if we have units produced in last year.

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