Chapter 6, Problem 9E

1.

a.

To determine

The product cost per unit under absorption costing.

Explanation of Solution

Given,

Direct material per unit is $60 per unit.
Direct labor per unit is $22 per unit.
Variable overhead per unit is $8 per unit.
Fixed overhead per unit is $12 per unit (working note).

The calculation of the product cost per unit using absorption costing is,

Particulars	Amount ($) Per Unit
Direct Material	60
Direct Labor	22
Variable Overheads	8
Fixed Overheads	12
Total	102
Table (1)

The product cost per unit under absorption costing is $102.

Working Note:

The formula to calculate fixed overheads per unit is,

$\text{Fixed Overhead Per Unit}=\frac{\text{Annual Fixed Overheads}}{\text{Units Produced}}$

Substitute $528,000 for annual fixed overheads and 44,000 for units produced.

$\begin{array}{c}\text{Fixed Overhead Per Unit}=\frac{\$528,000}{44,000}\\ =\$12\end{array}$

Thus, the product cost per unit using absorption costing is $102.

b.

To prepare: Income statement for the year under absorption costing.

C.S. Company Income Statement (Absorption Costing)
Particulars	Amount ($)	Amount($)
Sales $\left(36,000\times \$140\right)$		5,040,000
Cost of Goods sold (working note)		(3,672,000)
Gross Margin		1,368,000
Variable Selling and Administrative Cost $\left(36,000\times \$11\right)$	(396,000)
Fixed Selling and Administrative Cost	(105,000)	(501,000)
Net Income		867,000
Table (2)

The net income under absorption costing is $867,000.

Working Note:

Given,
Number of Units Sold is 36,000.
Product Cost per Unit is $102(calculated in part 1).

Calculation of cost of goods sold is,

$\text{Cost of Goods Sold}=\text{Number of Units Sold}\times \text{Cost Per Unit}$

Substitute 36,000 for number of units sold and $102 for cost per unit in the above formula.

$\begin{array}{c}\text{Cost of Goods Sold}=36,000\times \$102\\ =\$3,672,000\end{array}$

Thus, the net income under absorption method is $867,000.

2.

a.

To determine: The product cost per unit under variable costing.

Given,

Direct material per unit is $60 per unit.
Direct labor per unit is $22 per unit.
Variable overhead per unit is $8 per unit.

The calculation of the product cost per unit using variable method is,

Particulars	Amount ($) Per Unit
Direct Material	60
Direct Labor	22
Variable Overheads	8
Total	90
Table (3)

Thus, the product cost per unit is $90.

b.

To prepare: Income statement for the year under variable costing.

C.S. Company Income Statement (Variable Costing)
Particulars	Amount ($)	Amount($)
Sales $\left(36,000\times \$140\right)$		5,040,000
Direct Material Cost $\left(36,000\times \$60\right)$	(2,160,000)
Direct Labor Cost $\left(36,000\times \$22\right)$	(792,000)
Variable Overhead $\left(36,000\times \$8\right)$	(288,000)
Variable Selling and Administrative Cost $\left(36,000\times \$11\right)$	(396,000)	(3,636,000)
Contribution Margin		1,404,000
Fixed Overhead	(528,000)
Fixed Selling and Administrative Cost	(105,000)	(633,000)
Net Income		771,000
Table (4)

Thus, the net income of the company under variable costing is $771,000.

b.

To determine

To prepare: Income statement for the year under absorption costing.

Explanation of Solution

C.S. Company Income Statement (Absorption Costing)
Particulars	Amount ($)	Amount($)
Sales $\left(36,000\times \$140\right)$		5,040,000
Cost of Goods sold (working note)		(3,672,000)
Gross Margin		1,368,000
Variable Selling and Administrative Cost $\left(36,000\times \$11\right)$	(396,000)
Fixed Selling and Administrative Cost	(105,000)	(501,000)
Net Income		867,000
Table (2)

The net income under absorption costing is $867,000.

Working Note:

Given,
Number of Units Sold is 36,000.
Product Cost per Unit is $102(calculated in part 1).

Calculation of cost of goods sold is,

$\text{Cost of Goods Sold}=\text{Number of Units Sold}\times \text{Cost Per Unit}$

Substitute 36,000 for number of units sold and $102 for cost per unit in the above formula.

$\begin{array}{c}\text{Cost of Goods Sold}=36,000\times \$102\\ =\$3,672,000\end{array}$

Thus, the net income under absorption method is $867,000.

2.

a.

To determine: The product cost per unit under variable costing.

Given,

Direct material per unit is $60 per unit.
Direct labor per unit is $22 per unit.
Variable overhead per unit is $8 per unit.

The calculation of the product cost per unit using variable method is,

Particulars	Amount ($) Per Unit
Direct Material	60
Direct Labor	22
Variable Overheads	8
Total	90
Table (3)

Thus, the product cost per unit is $90.

b.

To prepare: Income statement for the year under variable costing.

C.S. Company Income Statement (Variable Costing)
Particulars	Amount ($)	Amount($)
Sales $\left(36,000\times \$140\right)$		5,040,000
Direct Material Cost $\left(36,000\times \$60\right)$	(2,160,000)
Direct Labor Cost $\left(36,000\times \$22\right)$	(792,000)
Variable Overhead $\left(36,000\times \$8\right)$	(288,000)
Variable Selling and Administrative Cost $\left(36,000\times \$11\right)$	(396,000)	(3,636,000)
Contribution Margin		1,404,000
Fixed Overhead	(528,000)
Fixed Selling and Administrative Cost	(105,000)	(633,000)
Net Income		771,000
Table (4)

Thus, the net income of the company under variable costing is $771,000.

2.

a.

To determine

The product cost per unit under variable costing.

Explanation of Solution

Given,

Direct material per unit is $60 per unit.
Direct labor per unit is $22 per unit.
Variable overhead per unit is $8 per unit.

The calculation of the product cost per unit using variable method is,

Particulars	Amount ($) Per Unit
Direct Material	60
Direct Labor	22
Variable Overheads	8
Total	90
Table (3)

Thus, the product cost per unit is $90.

b.

To prepare: Income statement for the year under variable costing.

C.S. Company Income Statement (Variable Costing)
Particulars	Amount ($)	Amount($)
Sales $\left(36,000\times \$140\right)$		5,040,000
Direct Material Cost $\left(36,000\times \$60\right)$	(2,160,000)
Direct Labor Cost $\left(36,000\times \$22\right)$	(792,000)
Variable Overhead $\left(36,000\times \$8\right)$	(288,000)
Variable Selling and Administrative Cost $\left(36,000\times \$11\right)$	(396,000)	(3,636,000)
Contribution Margin		1,404,000
Fixed Overhead	(528,000)
Fixed Selling and Administrative Cost	(105,000)	(633,000)
Net Income		771,000
Table (4)

Thus, the net income of the company under variable costing is $771,000.

b.

To determine

To prepare: Income statement for the year under variable costing.

Explanation of Solution

C.S. Company Income Statement (Variable Costing)
Particulars	Amount ($)	Amount($)
Sales $\left(36,000\times \$140\right)$		5,040,000
Direct Material Cost $\left(36,000\times \$60\right)$	(2,160,000)
Direct Labor Cost $\left(36,000\times \$22\right)$	(792,000)
Variable Overhead $\left(36,000\times \$8\right)$	(288,000)
Variable Selling and Administrative Cost $\left(36,000\times \$11\right)$	(396,000)	(3,636,000)
Contribution Margin		1,404,000
Fixed Overhead	(528,000)
Fixed Selling and Administrative Cost	(105,000)	(633,000)
Net Income		771,000
Table (4)

Thus, the net income of the company under variable costing is $771,000.