Part A: Variable And Absorption Costing Unit Product Costs ✓ Solved
Part A Variable And Absorption Costing Unit Product Costs
Part A: Variable and Absorption Costing Unit Product Costs and Income Statements High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation: Beginning inventory 0 Units produced 10,000 Units sold 8,000 Selling price per unit $ 75 Selling and administrative expenses: Variable per unit $ 6 Fixed (per month) $ 200,000 Manufacturing costs: Direct materials cost per unit $ 20 Direct labor cost per unit $ 8 Variable manufacturing overhead cost per unit $ 2 Fixed manufacturing overhead cost (per month) $ 100,000 Management is anxious to assess the profitability of the new camp cot during the month of May.
Required: 1. Assume that the company uses absorption costing. a. Determine the unit product cost. b. Prepare an income statement for May. 2. Assume that the company uses variable costing. a. Determine the unit product cost. b. Prepare a contribution format income statement for May.
Paper For Above Instructions
In this paper, we will conduct a thorough analysis of High Country, Inc., focusing on the relevance of variable and absorption costing unit product costs as well as income statements for the month of May. The initial focus will be on how to calculate the product costs under both absorption and variable costing methods. We will present financial data accurately and project income statements accordingly. First, let's address the absorption costing method.
1. Absorption Costing Unit Product Cost
Under absorption costing, all manufacturing costs are included in the cost of a product, which includes direct materials, direct labor, and both variable and fixed manufacturing overhead. Given the data provided:
- Direct Materials Cost per Unit: $20
- Direct Labor Cost per Unit: $8
- Variable Manufacturing Overhead Cost per Unit: $2
- Fixed Manufacturing Overhead Cost per Month: $100,000
- Units Produced: 10,000
First, calculate the fixed manufacturing overhead cost per unit:
Fixed Manufacturing Overhead Cost per Unit: $100,000 / 10,000 = $10
Now, we can determine the total unit product cost under absorption costing:
Total Absorption Cost per Unit: $20 (Direct Materials) + $8 (Direct Labor) + $2 (Variable Overhead) + $10 (Fixed Overhead) = $40
2. Prepare an Income Statement for May under Absorption Costing
To prepare the income statement, we need to calculate total sales, cost of goods sold (COGS), and gross margin:
Total Sales: 8,000 units sold x $75 = $600,000
Cost of Goods Sold (COGS): 8,000 units sold x $40 (absorption cost per unit) = $320,000
Gross Margin: Total Sales - COGS = $600,000 - $320,000 = $280,000
Selling and Administrative Expenses:
Total Selling and Administrative Expenses = (8,000 x $6) + $200,000 = $48,000 + $200,000 = $248,000
Now to find the Net Operating Income:
Net Operating Income: Gross Margin - Selling and Administrative Expenses = $280,000 - $248,000 = $32,000
Income Statement for May (Absorption Costing)
High Country, Inc.Income Statement for May
- Total Sales: $600,000
- Cost of Goods Sold: $320,000
- Gross Margin: $280,000
- Selling and Administrative Expenses: $248,000
- Net Operating Income: $32,000
Part B: Variable Costing Unit Product Cost
In contrast to absorption costing, variable costing considers only variable manufacturing costs as product costs. Thus:
- Direct Materials Cost per Unit: $20
- Direct Labor Cost per Unit: $8
- Variable Manufacturing Overhead Cost per Unit: $2
Total Variable Cost per Unit: $20 + $8 + $2 = $30
Contribution Format Income Statement for May Under Variable Costing
We will prepare the contribution format income statement as follows:
Total Sales: 8,000 units x $75 = $600,000
Variable Cost of Goods Sold: 8,000 units x $30 (variable cost per unit) = $240,000
Contribution Margin: Total Sales - Variable Cost of Goods Sold = $600,000 - $240,000 = $360,000
Fixed Costs: $100,000 (Manufacturing Overhead) + $200,000 (Selling and Administrative Expenses) = $300,000
Net Operating Income: Contribution Margin - Fixed Costs = $360,000 - $300,000 = $60,000
Contribution Format Income Statement for May (Variable Costing)
High Country, Inc.Contribution Format Income Statement for May
- Total Sales: $600,000
- Variable Cost of Goods Sold: $240,000
- Contribution Margin: $360,000
- Fixed Costs: $300,000
- Net Operating Income: $60,000
Conclusion
This report has provided a detailed analysis of High Country, Inc.'s absorption and variable costing. The net operating income indicated different outcomes under the two methods, with variable costing demonstrating higher profitability. Both methods are essential for managerial decision-making and profitability assessment.
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