Sheila Corporation produces and sells a single product, a wooden hand loom for weaving small items such as scarves. Selected cost and operating data relating to the product for two years are given below: Selling price per unit P50 Manufacturing costs: Variable per unit produced: Direct materials 11 Direct labor 6 Variable manufacturing overhead 3 Fixed manufacturing overhead per year P120,000 Selling and administrative expenses: Variable per unit sold P 4 Fixed per year P70,000 Year 1 Year 2 Units in beginning inventory 0 2,000 Units produced during the year 10,000 6,000 Units sold during the year 8,000 8,000 Units in ending inventory 2,000 0 Required: Using Absorption Costing, Compute the Unit product cost in each year Prepare Income Statement in each year Using Variable costing, Compute the unit product cost in each year Prepare Income Statement for each year Reconcile the difference in operating income for the 2 years.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Sheila Corporation produces and sells a single product, a wooden hand loom for weaving small items such as scarves. Selected cost and operating data relating to the product for two years are given below:
Selling price per unit P50
Variable per unit produced:
Direct materials 11
Direct labor 6
Variable manufacturing
Fixed manufacturing overhead per year P120,000
Selling and administrative expenses:
Variable per unit sold P 4
Fixed per year P70,000
Year 1 Year 2
Units in beginning inventory 0 2,000
Units produced during the year 10,000 6,000
Units sold during the year 8,000 8,000
Units in ending inventory 2,000 0
Required:
Using Absorption Costing,
Compute the Unit product cost in each year
Prepare Income Statement in each year
Using Variable costing,
Compute the unit product cost in each year
Prepare Income Statement for each year
Reconcile the difference in operating income for the 2 years.
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