Company has no beginning and ending inventories, and reports the following infor

Question

Company has no beginning and ending inventories, and reports the following information about

its only product:

Direct materials used $29,000 Direct labor $17,000 Variable indirect production $13,000 Fixed indirect production $18,000 Variable selling and administrative expenses $22,000 Fixed selling and administrative expenses $11,000 Units produced and sold 10,000 Selling price per unit $25 Required:

A) Prepare an income statement using the contribution approach.

B) Prepare an income statement using the absorption approach.

Explanation / Answer

A) Contibution approach calculates margin as Revenues - Variable expenses

Selling price per unit = $25. No. of units = 10,000

Direct materials per unit = 29,000/10,000 = 2.9. Direct labour per unit = 17,000/10,000 = 1.7 Variable indirect production cost per unit = 13,000/10,000 = 1.3 Variable SG&A per unit = 22,000/10,000 = 2.2

Income statement will be

Thus margin will be $16.9 per unit or 16.9*10,000 = $169,000

B)Under absorption costing, all the costs are absorbed. Thus the expense of $18,000 (fixed indirect production) and $11,000 (fixed SG&A) expense excluded in the method above will now be deducted from revenues.

Thus margin will be $169,000 (margin as calculated earlier) - 18,000 - 11,000 = $140,000

Particulars Amount (per unit) in $ Revenue 25 Less: direct materials cost 2.9 Less: direct labour cost 1.7 Less: Variable indirect production 1.3 Less: Variable SG&A 2.2

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