Question

Exercise 19-9  Income statement under absorption costing and variable costing  P1  P2

Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 44,000 units and sold 36,000 units at a price of $140 per unit.

Manufacturing costs
Direct materials per unit	$60
Direct labor per unit	$22
Variable overhead per unit	$8
Fixed overhead for the year	$528,000
Selling and administrative costs
Variable selling and administrative cost per unit	$11
Fixed selling and administrative cost per year	$105,000

1. Assume the company uses absorption costing.
   1. Determine its product cost per unit.

Check (1a) Absorption cost per unit, $102

1. 2. Prepare its income statement for the year under absorption costing.
2. Assume the company uses variable costing.
   1. Determine its product cost per unit.

(2a) Variable cost per unit, $90

2. Prepare its income statement for the year under variable costing.

Answer 1

Ans. 1 a	In Absorption costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	Per unit product cost using:	Absorption Costing
	Direct materials	$60.00
	Direct labor	$22.00
	Variable Overhead per unit	$8.00
	Fixed overhead per unit   ($528,000 / 44,000)	$12.00
	Product Cost per unit	$102.00
	*Fixed overhead per unit = Fixed overhead / Units produced
Ans. 1 b	COOL SKY
	Absorption Costing Income Statement
	Sales   (36,000 * $140)		$5,040,000
	Less: Cost of goods sold
	Opening inventory	$0
	Add: Cost of goods manufactured (44,000*$102)	$4,488,000
	Cost of goods available for sale	$4,488,000
	Less: Ending inventory [(44,000 - 36,000) * $102]	-$816,000
	Cost of goods sold (total)		$3,672,000
	Gross margin		$1,368,000
	Selling & Administrative expenses:
	Fixed	$105,000
	Variable     (36,000 * $11)	$396,000
	Total Selling and administrative expenses		$501,000
	Net operating income		$867,000
	*Cost of goods manufactured = Units produced * Absorption unit product cost
	*Ending inventory   = (Units produced - Units sold) * Per unit product cost
Ans. 2 A	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Per unit product cost using:	Variable Costing
	Direct materials	$60.00
	Direct labor	$22.00
	Variable Overhead per unit	$8.00
	Total production cost per unit	$90.00
Ans. 2 b	COOL SKY
	Variable Costing Income Statement
	Sales   (36,000 * $140)		$5,040,000
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (44,000 * $90)	$3,960,000
	Variable cost of goods available for sale	$3,960,000
	Less: Ending inventory [(44,000 - 36,000) * $90]	-$720,000
	Variable cost of goods sold		$3,240,000
	Gross Contribution Margin		$1,800,000
	Less: Variable Selling and Administrative Expenses (36,000 * $11)		$396,000
	Contribution Margin		$1,404,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$528,000
	Fixed selling and administrative expenses	$105,000	$633,000
	Net operating income		$771,000
	*Variable cost of goods manufactured = Units produced * Variable unit product cost
	*Variable selling and administrative expenses = Units sold * Variable selling and administrative expenses per unit sold