PROBLEM 6-12 Variable and Absorption Costing Unit Product Costs and Income State

Question

PROBLEM 6-12 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income

High Country, Inc., produces and sells many recreational products. The company has just opened a new
plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant's operation:

Beginning inventory: 0
Units Produced: 10,000
Units Sold: 8,000
Selling Price Per Unit 75

Selling and administrative expenses:
Variable per unit 6
Fixed(total) 200,000
Manufacturing costs:
Direct material cost per unit 20
Direct labor cost per unit 8
Variable manufacturing overhead cost per unit 2
Fixed manufacturing overhead cost (total) 100,000
Management is anxious to see how profitable the new camp cot will be and has asked that statement be prepared for May.
Required:
1. Assume that the company uses absorption costing.
a. Determine the unit product cost.
b. Prepare an income statement for May.
2. Assume that the company uses variable costing.
a. Determine the unit product cost.
b. Prepare a contribution format income statement for May.
3. Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating income.

Explanation / Answer

Total units produced 10000 Direct material cost per unit 20 Direct labor cost per unit 8 Manufacturing overheads -variable per unit 2 Manufacturing over heads-fixed per unit 10 Selling & administration-variable 6 Sellig& administation-fixed 20 Cost of production per unit 66 Income Statement for the month of May Sales 8000units×75 600000 Less:Cost of goods sold 66×8000 528000 Net income 72000 2, a Direct material cost per unit 20 Direct labor cost per unit 8 Manufacturing overheads-variable 2 Selling & administration-varialble 6 Cost of production per unit 36 b Sales 8000 units ×75 600000 Less: Cost of goods sold 36×8000 288000 contribution 312000 Less: fixed costs 300000 Net income 12000 Fixed costs Manufacturing fixed cost 100000 Selling & administration overheads-fixed 200000 300000 3 Number of units produced 10000 Less: Number of unis sold 8000 Closing stock in units 2000 Valuation of closing stock under absorbtion Cost of production per unit 66 Closing stock = cost per unit×No of units 66×2000 132000 Valuation of closing stock under variable costing method cost per unit under variable costing 36 Number closing stock units 2000 Closing stock = cost per unit×No of units 36×2000 72000 While working out cost of production per unit under absobtion costing we consider both fixed and variable overheadsalso but in variable costing we consider only the variable overheads. So there will be a difference in closing stock under both the methods. So there is a difference of 60000 in closing stock under these two methods. Closing stock under absorbtion costing 132000 Closing stock under variable costing 72000 Difference 60000

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