Chapter 6 Homework Problem B My Company produced 26,00o units during February. D

Question

Chapter 6 Homework Problem B My Company produced 26,00o units during February. Direct materials are $3.75 per unit and direct labor is $4.50 per unit. Variable overhead is applied at $5 per unit and fixed overhead is s65.o00 per month. Sales commissions are $o.75 per unit sold. Sales salaries for the month are $50,000 and fixed administrative expenses are $100,000. Required: a. Calculate production cost per unit under variable and absorption costing. b. Prepare an income statement under variable costing and under absorption costing for February assuming all 26,000 units produced were sold for $25 each. During March, My Company produced 26,o00 units and sold 20,0o0 units. Prepare an income statement under variable and under absorption costing for March assuming each unit sold for $25 each. c. Is the February net income different under each method? Why or why not? What about March, is the net income different? Why or why not? d.

Explanation / Answer

1(a)Production cost under variable costing Particular Amount Amount Direct materials costs $3.75 direct labor $4.50 Variable overhead $5.00 Sales commissions $0.75 Production cost per unit $14.00 1(b)Production cost under absorption costing Particular Amount Amount Production cost per unit under variable costing excluding sales commission 13.25 Total variable portion of production cost (26,000 units x $ 13.25) $344,500 Add: fixed overhead $65,000 Total cost of production $409,500 Production cost per unit (409500/26000) $15.75 2(a)Income statement under variable costing for the month February Particular Amount Amount Sales Revenue (26,000 units x $ 25) $650,000 Less: Variable cost (26,000 units x $ 14) $364,000 Contribution margin $286,000 Less: Fixed costs Fixed manufacturing overhead $65,000 Sales salaries $50,000 fixed administrative expenses $100,000 Total fixed costs $215,000 Net income ($ 286,000 -$ 215,000) $71,000 2(b)Income statement under absorption costing for the month February Particular Amount Amount Sales Revenue (26,000 units x $ 25) $650,000 Less: Cost of goods sold Total cost of production $409,500 Add: Beginning inventory - Less: Ending inventory ( - Cost of goods sold $409,500 Gross income $240,500 Operating expenses Sales commission (26,000 x $ 0.75) $19,500 Sales salaries $50,000 fixed administrative expenses $100,000 Total expenses $169,500 Net income $71,000 3(a)Income statement under variable costing for the month March Particular Amount Amount Sales Revenue (20,000 units x $ 25) $500,000 Less: Variable cost (20,000 units x $ 14) $280,000 Contribution margin $220,000 Less: Fixed costs Fixed manufacturing overhead $65,000 Sales salaries $50,000 fixed administrative expenses $100,000 Total fixed costs $215,000 Net income ($ 220,000 -$ 215,000) $5,000 3(b) Income statement under absorption costing for the month March Particular Amount Amount Sales Revenue (20,000 units x $ 25) $500,000 Less: Cost of goods sold Total cost of production $409,500 Add: Beginning inventory - Less: Ending inventory (6000 units x $ 15.75) $94,500 Cost of goods sold $315,000 Gross income $185,000 Less: Operating expenses Sales commission (20,000 x $ 0.75) $15,000 Sales salaries $50,000 fixed administrative expenses $100,000 Total expenses $165,000 Net income $20,000 4. There is no difference in net income for the month February since quantity of units produce and sold are same level. However,during month of May income under variable costing is lower than the net income under absorption costing since quantity of units sold is less than the units produced.

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