PROBLEM 5-18 Variable and Absorption Costing Unit Product Costs and Income State

Question

PROBLEM 5-18 Variable and Absorption Costing Unit Product Costs and Income Statements LO 5-1, LO 5-2 Haas Company manufactures and sells one product. The following information pertains to each of the company's first three years of operations Varlable costs per unit Manufacturing: $20 $12 $4 $2 Variable selling and administrative. Fixed costs per year $960,000 $240,000 Flxed selling and administrative expenses During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company's product is $58 per unit. Required. 1. Compute the company's break-even point in units sold 2. Assume the company uses variable costing a. Compute the unit product cost for Year 1, Year 2, and Year 3 b. Prepare an income statement for Year 1, Year 2, and Year 3. 3. Assume the company uses absorption costing a. Compute the unit product cost for Year 1, Year 2, and Year 3 b. Prepare an income statement for Year 1, Year 2, and Year 3 4. Compare the net operating income figures that you computed in requirements 2 and 3 to the break-even point that you computed in requirement 1. Which net operating income figures seem counterintuitive? Why?

Explanation / Answer

Particulars Year 1 Year 2 Year 3 Particulars Amt Opening Units 0 0 25000 Selling Price 58.00 Unit Produced 60000 75000 40000 Less: Variable Costs Less: Units Sold 60000 50000 65000 Direct Material 20.00 Closing Units 0 25000 0 Direct Labor 12.00 Variable M OH 4.00 Variable S&A 2.00 1 Fixed M Cost 960000 Contribution Margin 20.00 Fixed S&A Cost 240000 Total Fixed Cost 1200000 Contribution Margin 20.00 Break Even Units 60000 (1200000/20) 2 Product Cost Under Variable Costing: Particulars Year 1 Year 2 Year 3 Direct Material 20.00 20.00 20.00 Direct Labor 12.00 12.00 12.00 Variable M OH 4.00 4.00 4.00 Total Product Cost 36.00 36.00 36.00 Income Statement Under Variable Costing: Particulars Year 1 Year 2 Year 3 Sales 34,80,000 29,00,000 37,70,000 Less: Variable Costs: Direct Material 12,00,000 10,00,000 13,00,000 Direct Labor 7,20,000 6,00,000 7,80,000 Variable M OH 240000 200000 260000 Variable S&A 120000 100000 130000 Total Variable Costs 22,80,000 19,00,000 24,70,000 Contribution Margin 12,00,000 10,00,000 13,00,000 Less: Fixed Costs: Fixed M Cost 960000 960000 960000 Fixed S&A Cost 240000 240000 240000 Total Fixed Costs 1200000 1200000 1200000 Net Operating Income 0 -2,00,000 1,00,000 3 Product Cost Under Absorption Costing: Particulars Year 1 Year 2 Year 3 Direct Material 20.00 20.00 20.00 Particulars Year 1 Year 2 Year 3 Direct Labor 12.00 12.00 12.00 Fixed M. OH 960000 960000 960000 Variable M OH 4.00 4.00 4.00 Unit Produced 60000 75000 40000 Fixed M OH 16.00 12.80 24.00 Per Unit Cost 16.00 12.80 24.00 Total Product Cost 52.00 48.80 60.00 Income Statement Under Absorption Costing: Particulars Year 1 Year 2 Year 3 Sales 34,80,000 29,00,000 37,70,000 Less: Cost of Goods Sold Opening Inventory 0 0 12,20,000 Add: Cost of Goods Manufactured 31,20,000 36,60,000 24,00,000 Cost of Goods available for Sale 31,20,000 36,60,000 36,20,000 Less: Closing Inventory 0 1220000 0 Cost of Goods Sold 31,20,000 24,40,000 36,20,000 Gross Profit 3,60,000 4,60,000 1,50,000 Less: Variable S&A Expense 120000 100000 130000 Less: Fixed S&A Expense 240000 240000 240000 Net Operating Income 0 1,20,000 -2,20,000 Net Income Under Variable Costing 0 -2,00,000 1,00,000 Net Income Under Absorption Costing 0 1,20,000 -2,20,000 Break Even Units 60000 60000 60000 Units Sold 60000 50000 65000 Net Income Under Variable Costing Units sold are equal to BEP Units sold are Less than BEP Units sold are More than BEP Net Income Under Absorption Costing Units sold are equal to BEP Units sold are Less than BEP Units sold are More than BEP

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