Chapter 5 Problem 6 6. Direct and absorption costing The information that follow
ID: 2369584 • Letter: C
Question
Chapter 5 Problem 6
6. Direct and absorption costing
The information that follows pertains to Consumer Products for the year ended December 31, 20X6.
Inventory, 1/1/X6 24,000 units
Units manufactured 80,000
Units sold 82,000
Inventory, 12/31/X6 ? units
Manufacturing costs:
Direct materials $3 per unit
Direct labor $5 per unit
Variable factory overhead $9 per unit
Fixed factory overhead $280,000
Selling & administrative expenses:
Variable $2 per unit
Fixed $136,000
The unit selling price is $26. Assume that costs have been stable in recent years.
Instructions:
a. Compute the number of units in the ending inventory.
b. Calculate the cost of a unit assuming use of:
1. Direct costing.
2. Absorption costing.
c. Prepare an income statement for the year ended December 31, 20X6, by using direct costing.
d. Prepare an income statement for the year ended December 31, 20X6, by using absorption costing.
Explanation / Answer
a. Compute the number of units in the ending inventory.
Inv, 12/31/X6 = (Inv, 1/1/X6 + Units manufactured) - Units sold.
Number of units in ending inventory = 24,000 + 80,000 %u2013 82,000
= 22,000
b. Calculate the cost of a unit assuming use of:
1. Direct costing.
Direct costing = (Dir. mat. + Dir. lab. + V.F.O.)
3 + 5 + 9 = $17.
2. Absorption costing.
Absorption costing = Direct cost + (F.F.O / Units manuf.)
Absorption costing = 3 + 5 + 9 + (280,000/80,000)
= 3 +5 +9 +3.50
= $20.50
c. Prepare an income statement for the year ended December 31, 20X6, by using direct costing.
Computations:
Sales = 82,000 x 26 = 2,132,000
COGS = 82,000 x 17 = 1,394,000
Variable selling & admin = 2 x 82,000 = 164,000
Total variable cost = 1,394,000 + 164,000 = 1,558,000
Total fixed cost = 280,000 + 136,000 = 416,000
Consumer Products
Income Statement - Direct Costing
For the Year Ended December 31, 19X6
Sales $2,132,000
Variable costs:
Cost of goods sold 1,394,000
Selling & administrative 164,000 1,558,000
Contribution Margin 574,000
Fixed Costs:
Factory overhead 280,000
Selling & administrative 136,000 416,000
Net Income $158,000
d. Prepare an income statement for the year ended December 31, 20X6, by using absorption costing.
Computations:
Sales = 82000 x 26 = 2,132,000
COGS = 82,000 x $20.50 = 1,681,000
Variable selling expense = 82,000 x $2 = 164,000
Total selling & admin expenses = 164,000 + 136,000 = 300,000
Consumer Products
Income Statement - Absorption Costing
For the Year Ended December 31, 19X6
Sales $2,132,000
Cost of goods sold 1,681,000
Gross Profit 451,000
Selling & administrative expenses:
Variable 164,000
Fixed 136,000 300,000
Net Income $151,000
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