question archive A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (5,000 units): Direct materials $70,000 Direct labor 20,000 Variable factory overhead 10,000 Fixed factory overhead 2,000 $102,000 Operating expenses: Variable operating expenses $17,000 Fixed operating expenses 1,000 18,000 1,000 units remain unsold at the end of the month and sales total $150,000 for the month
A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (5,000 units): Direct materials $70,000 Direct labor 20,000 Variable factory overhead 10,000 Fixed factory overhead 2,000 $102,000 Operating expenses: Variable operating expenses $17,000 Fixed operating expenses 1,000 18,000 1,000 units remain unsold at the end of the month and sales total $150,000 for the month
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A business operated at 100% of capacity during its first month and incurred the following costs:
|
Production costs (5,000 units): |
||
|
Direct materials |
$70,000 |
|
|
Direct labor |
20,000 |
|
|
Variable factory overhead |
10,000 |
|
|
Fixed factory overhead |
2,000 |
$102,000 |
|
Operating expenses: |
||
|
Variable operating expenses |
$17,000 |
|
|
Fixed operating expenses |
1,000 |
18,000 |
1,000 units remain unsold at the end of the month and sales total $150,000 for the month.
Calculate the amount of i) income from operations and ii) ending inventory:
Hints:
- Calculate the production costs per unit under each costing system.
- Under absorption costing: Production costs per unit = DM + DL + VFOH + FFOH
- Under variable costing: Production costs per unit = DM + DL + VFOH
- Use the production costs per unit to calculate income from operation and ending inventory.
- Under the absorption costing income statement
Income from operation:
Ending Inventory:
- Under the variable costing income statement
Income from operation:
Ending Inventory:
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Answer:
Production cost per unit
| Absorption Costing | Variable Costing | |
| Direct Materials per unit ($70,000 / 5,000) | $14.00 | $14.00 |
| Direct Labor per unit ($20,000 / 5,000) | $4.00 | $4.00 |
| Variable factory overhead ($10,000 / 5,000) | $2.00 | $2.00 |
| Fixed factory overhead ($2,000 / 5,000) | $0.40 | |
| Product cost per unit | $20.40 | $20.00 |
Units sold = 5,000 units - 1,000 units = 4,000 units
Requirement A:
Absorption Costing Income Statement
| $ | $ | |
| Sales | 150,000 | |
| Less: Cost of Goods Sold | ||
| Cost of goods manufactured (5,000 units x $20.40) | 102,000 | |
| Less: Ending inventory (1,000 units x $20.40) | 20,400 | |
| Total Cost of goods sold | 81,600 | |
| Gross Profit | 68,400 | |
| Less: Selling and Administrative expenses | 18,000 | |
| Income from operation | 50,400 |
| Ending Invenotry = 1,000 units x $20.40 per unit = $20,400 |
Requirement B:
Variable Costing Income Statement
| $ | $ | |
| Sales | 150,000 | |
| Less: Variable Cost of Goods Sold | ||
| Variable manufacturing costs (5,000 units x $20) | 100,000 | |
| Less: Ending inventory (1,000 units x $20) | 20,000 | |
| Total Variable Cost of goods sold | 80,000 | |
| Manufacturing Margin | 70,000 | |
| Less: Variable selling and administrative expenses | 17,000 | |
| Contribution Margin | 53,000 | |
| Less: Fixed costs | ||
| Fixed Manufacturing costs | 2,000 | |
| Fixed seliing and administrative expenses | 1,000 | |
| Total Fixed costs | 3,000 | |
| Income from operations | 50,000 |
| Ending inventory = 1,000 units x $20 per unit = $20,000 |
