Variable and absorption costing unit product costs and income statements SOLVED

A company manufactures a unique device that is used to boost Wi-Fi signals. The following data relates to the first month of operation:

Beginning inventory	0
Units produced	40,000
Units sold	35,000
Selling price per unit	$120
Selling and administrative expenses:
Variable per unit	$4
Fixed (total for the month)	$1,120,000
Manufacturing costs:
Direct materials cost per unit	$30
Direct labor cost per unit	$14
Variable manufacturing overhead cost per unit	$4
Fixed manufacturing overhead cost	$1,280,000

Management is anxious to see the profitability of newly designed unique booster.
Required:

1. Calculate unit product cost and prepare income statement under variable costing system and absorption costing system.
2. Prepare income statement under two costing system.
3. Prepare a schedule to reconcile the net operating income under variable and absorption costing system.

Solution:

(1) Calculation of unit product cost:

	Variable costing	Absorption costing
Direct materials	$30	$30
Direct labor	$14	$14
Variable manufacturing overhead	$4	$4
Fixed manufacturing overhead	—	$32*
	———-	———-
production cost per unit	$48	$80
	———-	———-

*1,280,000/40,000

(2) Income statements:

Absorption costing:

Sales (35,000 Units × $120)		4,200,000
Less cost of goods sold:
Beginning inventory	0
Add cost of goods manufactured (40,000 Units × $80)	3,200,000
	———-
Cost of goods available for sale	3,200,000
Less ending inventory (5,000 Units × $80)	400,000	2,800,000
	———-	———-
Gross profit		1,400,000
Less selling and administrative expenses
Fixed	1,120,000
Variable (35,000 Units × $4)	140,000	1,260,000
	———-	———-
		140,000
		———-

---

Variable costing:

Sales (35,000 Units × $120)		4,200,000
Less variable cost of goods sold:
Beginning inventory	0
Add v. cost of goods manufactured (40,000 Units × $48)	1,920,000
	———-
Cost of goods available for sale	1,920,000
Less ending inventory (5,000 Units × $48)	240,000	1,680,000
	———-	———-
Gross contribution margin		2,520,000
Less variable selling and administrative expenses		140,000
		———-
Contribution margin		2,380,000
Less fixed costs:
Fixed manufacturing overhead	1,280,000
Fixed selling and administrative expenses	1,120,000	2,400,000
	———-	———-
Net operating loss		(20,000 )
		———-

(3) Reconciliation schedule:

Net operating income (loss) under variable costing	$(20,000)
Fixed manufacturing overhead cost deferred in inventory (5,000 units × $32)	$160,000
	———–
Net operating income under absorption costing	$140,000
	———–

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