Question

Comox Company sells garden chairs for $65 each. The current production level is 25,000 chairs, and

   only 20,000 units are sold in the current year. Assume the production volume variance is written off to

   other expenses at the end of the period. (10)

   Unit manufacturing costs are:

      Direct materials                                           $12.00

      Direct manufacturing labour                          $18.00

      Variable manufacturing costs                       $9.00

      Total fixed manufacturing costs                    $180,000

      Marketing expenses $6.00 per unit, plus        $60,000 per year

Required:

a.   Prepare an income statement using absorption costing.

b. Prepare an income statement using variable costing.

Answer 1

Unit product cost under absorption costing

= Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed manufacturing overhead

= 12 + 18 + 9 + (180,000/25,000)

= 46.20

Sales (20,000*65)	1,300,000
Cost of Goods Sold (20,000*46.20)	924,000
Gross profit	376,000
Selling and administrative expenses (6*20,000)+60,000	180,000
Net operating income	196,000

.

Sales (20,000*65)	1,300,000
Variable cost (12+18+9+6)*20,000	900,000
Contribution margin	400,000
Fixed cost (180,000+60,000)	240,000
Net operating income	160,000