Question

Coverall Inc. produces and sells a unique type of case for a standard-size tablet computer that is guaranteed waterproof but still allows for regular functionality of the tablet. The company has just opened a new plant to manufacture these cases, and the following cost and revenue data have been provided for the first month of the plant’s operation in the form of a worksheet:

Beginning inventory		0
Units produced		28,000
Units sold		19,000
Selling price per unit	$	92
Selling and administrative expenses:
Variable per unit	$	8
Fixed (total)	$	513,000
Manufacturing costs:
Direct materials cost per unit	$	24
Direct labour cost per unit	$	14
Variable manufacturing overhead cost per unit	$	4
Fixed manufacturing overhead cost (total)	$	756,000

Since the new case is unique in design, management is anxious to see how profitable it will be and has asked that an income statement be prepared for the month.

Required:

1. Assume that the company uses absorption costing.

a. Determine the unit product cost.

b. Prepare an income statement for the month. (Do not leave any empty spaces; input a 0 wherever it is required.)

2. Assume that the company uses variable costing.

a. Determine the unit product cost.

b. Prepare a contribution format income statement for the month. (Do not leave any empty spaces; input a 0 wherever it is required.)

Answer 1

Absorption Costing	Amount
Direct Materials	24
Direct labor	14
Variable Manufacturing Cost per unit	4
Fixed Manufacturing Overhead cost per unit	27
Unit Product cost	69

Absorption Costing Income Statement		Amount
Sales		1748000
Beginning Invenotry	0
Add: Cost of goods manufactured	1932000
Goods available for sale	1932000
Less: Ending Inventory	621000
Cost of goods sold		1311000
Gross Profit		437000
Selling and administrative cost	665000
Net operating income		-228000

Variable costing Income Statement		Amount
Sales		1748000
Less: Variable Expenses
Beginning Invenotry	0
Add: Cost of goods manufactured	1176000
Goods available for sale	1176000
Less: Ending Inventory	378000	798000
Variable cost of goods sold		950000
Variable selling and administrative cost	152000
Contribution Margin		798000
Less: Fixed Expenses
Manufacturing Overhead	756000
Selling and administrative	513000	1269000
Net operating income		-471000

Reconcilation		Amount
Net operating income (Variable costing)		-471000
Add: Fixed Manufacturing OH Deffered		243000
in Closing Inventories
Net operating income (absorption costing)		-228000