Zurgot Inc. has just organized a new division to manufacture and sell specially
ID: 2481464 • Letter: Z
Question
Zurgot Inc. has just organized a new division to manufacture and sell specially designed computer tables, using select hardwoods. The division’s monthly costs are shown in the schedule below:
Manufacturing Costs
Variable Costs per unit
Direct Materials
$152
Variable manufacturing overhead
$10
Fixed manufacturing overhead costs
$340,000
Selling and Administrative costs
Variable
%15 of sales
Fixed
$160,000
Zurgot regards all of its workers as full-time employees and the company has a long-standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labour costs in its fixed manufacturing overhead. The tables sell for $400 each.
During the first month of operations, the following activity was recorded.
Units Produced 4,000
Units Sold 3,200
Reconcile the absorption costing and variable costing operating income as per above.
Manufacturing Costs
Variable Costs per unit
Direct Materials
$152
Variable manufacturing overhead
$10
Fixed manufacturing overhead costs
$340,000
Selling and Administrative costs
Variable
%15 of sales
Fixed
$160,000
Explanation / Answer
Solution:
Reconciliation the absorption costing and variable costing operating income
Profit as per Variable Costing (refer note 1)
$69,600
Add: Fixed Overhead Cost added in Ending Inventory under Absorption Costing (800*340,000/4000)
$68,000
Operating Profit as per Absorption Costing (note 2)
$137,600
Note 1:
Income Statement
Variable Costing
Sales (3200*400)
$1,280,000
Total Variable Production Cost (4,000 x (152+10))
$648,000
Less: Ending Inventory ($648,000 *800 / 4000 )
($129,600)
Cost of Goods Sold
$518,400
Add: Variable Selling Expenses (15% of Sales)
$192,000
Total Variable Cost
$710,400
Contribution Margin (Sales - Total Variable Cost)
$569,600
Fixed Costs:
Fixed Manufacturing Overheads
$340,000
Fixed Selling and administrative costs
$160,000
Total Fixed Cost
$500,000
Operating Profit (Contribution Margin - Total fixed Costs)
$69,600
Note 2:
Income Statement
Absorption Costing
Sales (3200*400)
$1,280,000
Total Variable Cost (4,000 x (152+10))
$648,000
Fixed Manufacturing Overheads
$340,000
Total Production Cost
$988,000
Less: Ending Inventory ($988,000*800 / 4000)
($197,600)
Cost of Goods Sold
$790,400
Gross Profit (Sales - COGS)
$489,600
Selling and administrative costs:
Variable (15% of Sales)
$192,000
Fixed
$160,000
Total Selling and administrative costs
$352,000
Operating Profit (Gross Profit - Selling Costs)
$137,600
Ending Inventory = Unit Produced – Units Sold = 4000 – 3200 = 800
Reconciliation the absorption costing and variable costing operating income
Profit as per Variable Costing (refer note 1)
$69,600
Add: Fixed Overhead Cost added in Ending Inventory under Absorption Costing (800*340,000/4000)
$68,000
Operating Profit as per Absorption Costing (note 2)
$137,600
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