Sunshine Valley Meat Company produces one of the best sausage products in Pennsy

Question

Sunshine Valley Meat Company produces one of the best sausage products in Pennsylvania. The company's controller compiled the following information by analyzing the accounting records:
1. Meat costs the company $3.25 per pound of sausage produced.
2. Compensation of production employees is $2.25 per pound of sausage produced.
3. Supervisory salaries total $23,000 per month.
4. The company incurs utility costs for the plant of $9,000 per month

5. There is an administrative cost of $0.35 per pound of sausage produced.
6. Insurance and property taxes of the plant average $6,400 per month.

ANSWERT THE FOLLOWING

A. Classify each cost as variable or fixed. Also state if each expenses is a manufacturing cost (product cost) or period cost.

B. Write a formula to express the behavior of the firm's production costs. (Use the form Y = a + bX, where X denotes the quantity of sausage produced.)

Assume that you make and sell 800 units of sausage products in the first year. Use your cost formula to calculate your first year’s total cost.    

If you sell each product at $65 each (still assuming 800 units sold). how much would net profit be in the first year?  

What is your product cost per unit under variable costing if 800 units of sausage products were sold?

What is your product cost per unit under absorption costing if 800 units of sausage products were planned and sold?

Is there a difference between net income in variable costing when compared to net income in absorption costing. Why or why not?

Explanation / Answer

A. Variable cost is a cost which varies with the change in activity level. The variable cost per unit remains same. Fixed cost is a cost which remains same at different activity level and it does not vary with the change in activity level. Manufacturing cost or product cost is a cost incurred directly or indirectly for manufacture the product like direct cost for product manufacturing like direct material, direct labor, factory overhead, consumable production supplies. Period cost is a cost incurred for selling and administrative and general activities. These cost does not add to the inventory cost. Meat cost is a variable cost and product cost.(this cost changes with the change in activity level) Compensation of production employee is also a variable cost and product cost too. This cost increases with the increase in production and vice versa. Supervisors salary is a fixed cost because it does not changes with the change in activity level. Supervisors salary is a product cost. Utility cost for the plant is also a fixed cos and manufacturing overhead cost. (The cost incurred for running the plant is also included as manufacturing overhead). Administrative cost is a variable cost and it is a period cost. The administrative cost is incurred for general operations of the company. Insurance and property tax of the plant is a fixed cost and is a manufacturing cost included in product cost. B. Variable cost Fixed cost Meat cost $                  3.25 $                           -   Compensation of production $                  2.25 $                           -   Supervisors salary $                       -   $                 23,000 Utility cost $                       -   $                    9,000 Administrative cost $                  0.35 $                           -   Insurance and property tax $                       -   $                    6,400 Total $                  5.85 $                 38,400 Y=$38,400+$5.85X X denotes the quantity of sausage products. If the first year the company sell 800 units of sausage products then the cost would be as under: Cost = $38,400+($5.85*800)           '=$38,400+$4,680           '=$43,080 If each product sell 800 units at $65 each then the net profit for the year is as under: Sales (800*$65) $             52,000 Less: Variable cost($5.85*800) $             (4,680) Fixed cost $           (38,400) Net income $                8,920 The product cost per unit under variable costing is as under: Cost per unit Meat cost $                  3.25 Compensation of production $                  2.25 Product cost per unit $                  5.50 The product cost per unit under variable costing is $5.50. The product cost per unit under absorption costing is as under: Cost per unit Meat cost $                  3.25 Compensation of production $                  2.25 Manufacturing overhead absorbed $48 Product cost per unit $                53.50 The product cost per unit under variable costing is $5.50. Fixed manufacturing overhead Supervisory salary $             23,000 Utility cost $                9,000 Insurance and property tax $                6,400 Total manufacturing overhead $             38,400 ÷ 800 units 800 units Absorption cost per unit $                48.00 The net income under variable costing and absorption costing would be same when the production and units sold are same. under absorption costing the manufactruing overhead is absorbed per unit basis therefore if there is difference between production and sales units then the net income under absorption costing and net income under variable costing varies. Under variable costing only variable manufacturing overhead are treated as product cost. under variable costing the fixed manufactuirng expenses are treated as period cost where as under absorption costing the fixed manufactuirng overhead are absorbed for product cost calculation.

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