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The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:
| Beginning inventory | 0 | |
| Units produced | 28,100 | |
| Units sold | 21,900 | |
| Selling price per unit | $ | 410 |
| Selling and administrative expenses: | ||
| Variable per unit | $ | 23 |
| Fixed per year | $ | 306,600 |
| Manufacturing costs: | ||
| Direct materials cost per unit | $ | 229 |
| Direct labor cost per unit | $ | 58 |
| Variable manufacturing overhead cost per unit | $ | 36 |
| Fixed manufacturing overhead per year | $ | 421,500 |
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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.
Expert Answer
| 1- | absorption costing | variable costing | |||
| Direct materials cost per unit | 229 | 229 | |||
| Direct labor cost per unit | 58 | 58 | |||
| Variable manufacturing overhead cost per unit | 36 | 36 | |||
| Fixed manufacturing overhead per year | 421500/28100 | 15 | |||
| unit product cost | 338 | 323 | |||
| 2- | income statement using absorption costing | ||||
| sales | 21900*410 | 8979000 | |||
| less total product cost | 21900*338 | 7402200 | |||
| gross profit | 1576800 | ||||
| less selling and administrative expenses | |||||
| variable | 21900*23 | 503700 | |||
| fixed per year | 306600 | ||||
| net operating income | 766500 | ||||
| 3- | income statement using variable costing | ||||
| sales | 21900*410 | 8979000 | |||
| less total product cost | 21900*323 | 7073700 | |||
| gross margin | 1905300 | ||||
| less variable selling and administrative expenses | 21900*23 | 503700 | |||
| contribution margin | 21900*23 | 1401600 | |||
| less fixed selling and administrative expenses | 306600 | ||||
| less fixed manufacturing overhead per year | 421500 | ||||
| net operating income | 673500 | ||||
| 4- | net operating income under absorption costing | 766500 | |||
| net operating income under variable costing | 673500 | ||||
| difference in net operating income | 93000 | ||||
| change in inventory (=28100-21900) | (28100-21900) | 6200 | |||
| Fixed manufacturing deferred in inventory (6200* | 6200*15 | 93000 |
