Chapter 5, Problem 1AE

1.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

To check: Worksheet and complete the calculation

Answer to Problem 1AE

Complete worksheet is given below

Explanation of Solution

Data	Amount $	`Amount $
Selling price per unit	50
Manufacturing cost
Variable per unit product
Direct material	11
Direct labor	6
Variable manufacturing overhead	3
Fixed manufacturing overhead per year	120000
Selling and administrative expenses
Variable per unit sold	4
Fixed per year	70000
	Year 1	Year 2
Units in beginning inventory	0
Units produced during the year	10000	6000
Units sold during the year	8000	8000
Contrasting variable and absorption costing
Ending inventory
Units beginning inventory	0	2000
Units product during the year	10000	6000
Unit sold during the year	8000	8000
Units in ending inventory	2000	0
The absorption costing units product cost
Direct material	11	11
Direct labor	6	6
Variable manufacturing overhead	3	3
Fixed manufacturing overhead	12	20
Absorption costing per unit product cost	32	40
The absorption costing income statement
Sales	400000	400000
Cost of goods	256000	304000
Gross margin	144000	96000
Selling and administrative expense	102000	102000
Net operating income	42000	(6000)
The variable costing unit products cost
Direct materials	11	11
Direct labor	6	6
Variable manufacturing overhead	3	3
Variable costing units production cost	20	20

Data	Year 1		Year 2
	Amount $	Amount $	Amount $	Amount $
Variable costing income statement.		400000		400000
Sales
Variable expense
Variable cost of goods sold	160000		160000
Variable selling and administrative expense	32000	192000	32000	192000
Contribution margin		208000		208000
Fixed expense
Fixed manufacturing overhead	120000		120000
Fixed selling and administrative expense	70000	190000	70000	190000
Net operating income		18000		18000

Net operating income of the company:

Data	Amount $	`Amount $
Selling price per unit	50
Manufacturing cost
Variable per unit product
Direct material	11
Direct labor	6
Variable manufacturing overhead	3
Fixed manufacturing overhead per year	120,000
Selling and administrative expenses
Variable per unit sold	4
Fixed per year	70,000
	Year 1	Year 2
Units in beginning inventory	0
Units produced during the year	10000	6,000
Units sold during the year	8000	6,000
Contrasting variable and absorption costing
Ending inventory
Units beginning inventory	0	2,000
Units product during the year	10,000	6,000
Unit sold during the year	8,000	6,000
Units in ending inventory	2,000	2,000
The absorption costing units product cost
Direct material	11	11
Direct labor	6	6
Variable manufacturing overhead	3	3
Fixed manufacturing overhead	12	20
Absorption costing per unit product cost	32	40
The absorption costing income statement
Sales	400,000	300,000
Cost of goods	256,000	240,000
Gross margin	144,000	60,000
Selling and administrative expense	102,000	94,000
Net operating income	42,000	(34,000)
The variable costing unit products cost
Direct materials	11	11
Direct labor	6	6
Variable manufacturing overhead	3	3
Variable costing units production cost	20	20

Data	Year 1		Year 2
	Amount $	Amount $	Amount $	Amount $
Variable costing income statement.		400,000		300,000
Sales
Variable expense
Variable cost of goods sold	160,000		120000
Variable selling and administrative expense	32,000	192,000	24,000	144,000
Contribution margin		208,000		156,000
Fixed expense
Fixed manufacturing overhead	120,000		120,000
Fixed selling and administrative expense	70,000	190,000	70,000	190,000
Net operating income		18,000		(34,000)

2.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

To prepare: Traditional format income statement and Contribution format income statement

Answer to Problem 1AE

Traditional format income statement and Contribution format income statement is given below:

Explanation of Solution

Data	Amount $	`Amount $
Selling price per unit	75
Manufacturing cost
Variable per unit product
Direct material	12
Direct labor	5
Variable manufacturing overhead	7
Fixed manufacturing overhead per year	150000
Selling and administrative expenses
Variable per unit sold	1
Fixed per year	60000
	Year 1	Year 2
Units in beginning inventory	0
Units produced during the year	15000	10000
Units sold during the year	12000	12000
Contrasting variable and absorption costing
Ending inventory
Units beginning inventory	0	3000
Units product during the year	15000	10000
Unit sold during the year	12000	12000
Units in ending inventory	3000	1000
The absorption costing units product cost
Direct material	12	12
Direct labor	5	5
Variable manufacturing overhead	7	7
Fixed manufacturing overhead	10	24
Absorption costing per unit product cost	24	24
The absorption costing income statement
Sales	900,000	900,000
Cost of goods	408,000	458,000
Gross margin	492,000	442,000
Selling and administrative expense	72,000	72,000
Net operating income	420,000	(37,000)
The variable costing unit products cost
Direct materials	12	12
Direct labor	5	5
Variable manufacturing overhead	7	7
Variable costing units production cost	24	24

Data	Year 1		Year 2
	Amount $	Amount $	Amount $	Amount $
Variable costing income statement.		900,000		900,000
Sales
Variable expense
Variable cost of goods sold	288,000		2,880,000
Variable selling and administrative expense	12,000	300,000	12,000	300,000
Contribution margin		600,000		600,000
Fixed expense
Fixed manufacturing overhead	150,000		120,000
Fixed selling and administrative expense	60,000	210,000	70,000	120,000
Net operating income		390,000		(390,000)

3.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

To prepare: Traditional format income statement and Contribution format income statement

Answer to Problem 1AE

Income statement and Contribution format income statement is given below:

Explanation of Solution

Data	Amount $	`Amount $
Selling price per unit	75
Manufacturing cost
Variable per unit product
Direct material	12
Direct labor	5
Variable manufacturing overhead	7
Fixed manufacturing overhead per year	150,000
Selling and administrative expenses
Variable per unit sold	1
Fixed per year	60,000
	Year 1	Year 2
Units in beginning inventory	0
Units produced during the year	15,000	50,000
Units sold during the year	12,000	12,000
Contrasting variable and absorption costing
Ending inventory
Units beginning inventory	0	3,000
Units product during the year	15,000	50,000
Unit sold during the year	12,000	12,000
Units in ending inventory	3,000	41,000
The absorption costing units product cost
Direct material	12	12
Direct labor	5	5
Variable manufacturing overhead	7	7
Fixed manufacturing overhead	10	3
Absorption costing per unit product cost	34	27
The absorption costing income statement
Sales	900,000	900,000
Cost of goods	408,000	324,000
Gross margin	492,000	576,000
Selling and administrative expense	72,000	72,000
Net operating income	420,000	(504,000)
The variable costing unit products cost
Direct materials	12	12
Direct labor	5	5
Variable manufacturing overhead	7	7
Variable costing units production cost	24	24

Data	Year 1		Year 2
	Amount $	Amount $	Amount $	Amount $
Variable costing income statement.		900,000		900,000
Sales
Variable expense
Variable cost of goods sold	288000		2880,000
Variable selling and administrative expense	12000	300,000	12,000	300,000
Contribution margin		600,000		600,000
Fixed expense
Fixed manufacturing overhead	150000		150,000
Fixed selling and administrative expense	60000	210,000	60,000	210,000
Net operating income		390,000		390,000