The following information relates to Porter manufacturing for fiscal 2014, the c
ID: 2492157 • Letter: T
Question
The following information relates to Porter manufacturing for fiscal 2014, the company's first year of operation.
Selling Price Per unit $150
Direct material per unit $75
Direct labor per unit $30
Variable manufacturing overhead per unit $5
Variable selling cost per dollar of sales $0.05
Annual fixed manufacturing overhead $2,750,000
Annual fixed selling expense $1,500,000
Annual fixed administrative expense $900,000
Units produced 250,000
Units sold 230,000
Required: A) Prepare an income statement using full costing.
B) Prepare an income statement using variable costing.
C) Calculate the amount of fixed manufacturing overhead that will be included in ending inventory under full costing and reconcile it to the difference between incomes computed under variable and full costing.
Please show work.
Explanation / Answer
A.
Fixed manufacturing overhead
$ 2,750,000.00
Units produced
$ 250,000.00
Fixed manufacturing overhead per unit
$ 11.00
Variable manufacturing costs per unit ($75 + $30 + $5)
$ 110.00
Full cost per unit
$ 121.00
Income statement using Full Costing
Sales ($150 x 230,000 units)
$ 34,500,000.00
Less cost of goods sold ($121*230,000 units)
$ 27,830,000.00
Gross margin
$ 6,670,000.00
Less selling expense {($0.5 * 250,000 units) + $1,500,000}
$ 1,625,000.00
Less administrative expense
$ 900,000.00
Net income
$ 4,145,000.00
Ending inventory ($121 x 20,000)
$ 2,420,000.00
B.
Income statement using Variable Costing
Sales ($150 x 230,000 units)
$ 34,500,000.00
Less variable cost of goods sold ($110.00 x 230,000)
$ 25,300,000.00
Less variable selling expense ($0.50*250,000)
$ 125,000.00
Contribution margin
$ 9,075,000.00
Less fixed costs:
Manufacturing
$ 2,750,000.00
Selling expense
$ 1,500,000.00
Administrative expense
$ 900,000.00
Net income
$ 3,925,000.00
Ending inventory ($110 x 20,000)
$ 2,200,000.00
C.
Amount of fixed manufacturing overhead included in ending inventory using Full costing = $11 * 20,000 units = $220,000.
This amount is fully expenses using variable costing. This accounts for the difference in income under full versus variable costing.
Fixed manufacturing overhead
$ 2,750,000.00
Units produced
$ 250,000.00
Fixed manufacturing overhead per unit
$ 11.00
Variable manufacturing costs per unit ($75 + $30 + $5)
$ 110.00
Full cost per unit
$ 121.00
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