Question & Answer: Overton Company produced 80,000 units last year. The company sold 79,000 units and there was no beginning inventory. The c…..

Overton Company produced 80,000 units last year. The company sold 79,000 units and there was no beginning inventory. The company chose practical activity at 80,000 units to compute its predetermined rate. Manufacturing costs are as follows:

Direct materials $596,000

Direct Labor $104,000

Variable Overhead $88,000

Fixed Overhead $228,000

Assume the sales price per unit is $18. Assume variable selling expenses are $1 per unit sold. Assume fixed selling and administrative expenses total $120,000.

REQUIRED: Prepare an Absorption-Costing Income Statement down to Operating Income (just like your Textbook does). Then prepare a Variable-Costing Income Statement in proper format down to Operating Income (just like your Textbook does). Note this exercise involves a situation where more units were made than sold.

Expert Answer


		unit product cost		unit product
		under		cost under
		Absorption costing		variable costing
Direct materials	(596000/80000)	7.45		7.45
Direct labor	(104000/80000)	1.3		1.3
variable overhead	(88,000/80,000)	1.1		1.1
fixed MOH	(228,000/80,000)	2.85
total		12.7		9.85


Absorption costing
income statement
Sales (79,000*18)			1422000
less cost of goods sold (79000*12.7)			1003300
gross profit			418700


Variable costing
income statement
sales (79000*18)			1422000
less variable cost of goods sold (79000*9.85)			778150
contribution margin			643850
Fixed expenses
fixed manufacturing overhead			228,000
Net income			415,850

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