The Dorset Corporation produces and sells a single product. The following data r

Question

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed Beginning inventory Units produced Units sold Selling price per unit Selling and administrative expenses: 34,000 28,700 $ 409 Variable per unit Fixed per year 18 $602,700 Manufacturing costs: $252 Direct materials cost per unit Direct labor cost per unit Variable manufacturing overhead cost per unit Fixed manufacturing overhead per year 32 $646,000 Assume that direct labor is a variable cost. Required: a. Compute the unit product cost under both the absorption costing and variable costing approaches b. Prepare an income statement for the year using absorption costing c. Prepare an income statement for the year using variable costing d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above

Explanation / Answer

Opening Inventory Units Produced                  34,000 Units sold                  28,700 Closing Inventory                     5,300 Selling Price p.u $409 Selling and administrative expenses Variable per unit $18 Fixed $602700 Manufacturing costs: Direct materials cost per unit: $252 Direct labor cost per unit: $55 Variable manufacturing overhead cost per unit: $32 Fixed manufacturing overhead cost per year: $646000 A Calculation of unit product cost: Absorption Costing Variable Costing Direct Material                        252                        252 Direct Labour                           55                           55 Variable Manufacturing Overhead                           32                           32 Fixed Manufacturing Overhead                           19 -- (646000/34000) Unit Product Cost                        358                        339 B Income Statement using Absorption Costing Sales ($409*28700 units)         1,17,38,300 Less: Cost of goods Sold Opening Inventory                            -   Add: Cost of goods manufactured (34000 units*$358)         1,21,72,000 Cost of Goods available for sale         1,21,72,000 Less: Closing Inventory (5300 units*$358)           -18,97,400         1,02,74,600 Gross Profit            14,63,700 Less: Selling and administrative expenses Variable Selling Exp ($18*28700 units)               5,16,600 Fixed Selling Exp               6,02,700            11,19,300 Net Operating Income               3,44,400 C Income Statement using Variable Costing Sales ($409*28700 units)         1,17,38,300 Less: Cost of goods Sold Opening Inventory                            -   Add: Cost of goods manufactured (34000 units*$339)         1,15,26,000 Cost of Goods available for sale         1,15,26,000 Less: Closing Inventory (5300 units*$339)           -17,96,700            97,29,300 Gross Contribution Margin            20,09,000 Less: Variable Selling and administrative expenses ($18*28700 units)               5,16,600 Contribution Margin            14,92,400 Less: Fixed Expense Fixed Manufacturing Overheads               6,46,000 Fixed Selling and administrative expenses               6,02,700            12,48,700 Net Operating Income               2,43,700 D Reconciliation Schedule Net Operating Income under Variable Costing               2,43,700 Add: Fixed Manufacturing Overhead Deferred in inventory               1,00,700 ($19*5300 units) Net Operating Income under Absorption Costing               3,44,400

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