Solution:
Step 1:
To measure the sage unit cost of the year of a commodity, plan the statement below:
Details Year 1 Year 2
Direct materials per unit $25 $25
Add: Direct labour per unit $15 $15
Add: Variable manufacturing overhead per unit $5 $5
Total product cost per unit $45 $45
Thus, the unit product cost under variable costing for yea 1 and year 2 is $45
Step 2:
Variable costing income statement
For the year ended year 1 and year 2
Details Year 1 Year 2
Unit sold (a) 40,000 50,000
Sales [ b=a x 60 each ] 2,400,000 3,000,000
Variable product cost [c=a*45 each] 1,800,000 2,250,000
Variable selling and administrative costs
[d=a*$2] 80,000 1,00,000
Contribution margin [e=b-c-d] 520,000 650,000
Fixed manufacturing overhead [f] 250,000 250,000
Fixed selling and administrative expense [g] 80,000 80,000
Net operating income [e-f-g] $190,000 $320,000
Step 3:
Details Year 1 Year 2
Direct materials per unit $25 $25
Add: Direct labour per unit $15 $15
Add: Variable manufacturing overhead per unit $5 $5
Add: Fixed manufacturing overhead per unit
Year - 1 - ($250,000 + 50,000 units)
Year - 1 - ($250,000 + 40,000 units) $5 $6
Total product cost per unit $50.00 $51.25
Step 4:
Absorption Costing Income Statement
For the years ended Year 1 and Year 2
Details Year 1 Year 2
Number of units produced [a] 50000 40000
Units sold [b] 40000 50000
Sales [c = b x $60 each] $2400000 $3000000
Cost of goods sold:
Beginning inventory [d]
Year - 1 - No Beginning inventory
Year - 2 - (10,000 units x $50.00 each) $0 $500,000
Cost of goods manufactured [e]
Year - 1 - (a x $50.00 each) $2,500,000
Year - 2 - (a x $51.25 each) $2,050,000
Ending inventory [f]
Year - 1 - (10,000 units x $50.00 each) $500,000
Year - 2 - No Ending inventory $ - $ -
Cost of goods sold [g = d + e - f] $2000000 $2550000
Gross margin [h = c - g] $400,000 $450,000
Selling and administrative expenses [i]
[(b x $2 each) + $80,000] $160,000 $180000
Net operating income [h- i] $240000 $270000
Step 5:
Reconciliation of Net Operating Income
Details Year 1 Year 2
Net operating income as per variable costing $190,000 $320,000
Add/(Less): Difference in valuation of inventory due to fixed manufacturing overhead
Year - 1 - [(50,000 units - 40,000 units) x $5.00 each]
Year - 2 - [(50,000 units - 40.000 units) x $5.00 each] $50000 $(50000)
Net operating income as per absorption costing $240000 $270000
Reconciliation of Net Operating Income
Details Year 1 Year 2
Net operating income as per variable costing $190,000 $320,000
Add (Less): Difference in valuation of inventory due to fixed manufacturing overhead
Year - 1 - [(50,000 units - 40,000 units) x $5.00 each]
Year - 2 - [(50,000 units - 40.000 units) x $5.00 each] $50000 $ (50000)
Net operating income as per absorption costing $240000 $270,000
