We manufacture and sell toy remote control boats. Information for this problem: Manufacturing costs: Fixed overhead Variable overhead Direct labor Direct materials $100,000 $5 per boat $7 per boat $10 per boat Beginning inventory Boats produced Boats sold 3,000 boats 50,000 46,000 Selling and administrative costs: Fixed Variable $300,000 $6 per boat sold The boat sells for $150 Absorption Method A. Calculate cost for one unit using absorption method: Total B. Complete the Absorption Income Statement: Variable Method C. Calculate cost for one unit using Variable method: Total D. Variable Method Income Statement

A. $24

B.

Absorption Income Statement

Sales ($150 ×46,000)                                                                     $6,900,000

Less Cost of Sales

Opening Inventory ($24 × 3,000)                                  $72,000

Add Cost of Goods Manufactured ($24 × 50,000) $1,200,000

Less Closing Inventory ($24 × 7,000)                        ($168,000) ($1,104,000)

Gross Profit                                                                                     $5,796,000

Less Expenses :

Selling and administrative costs:

Fixed                                                                                                ($300,000)

Variable ($6×46,000)                                                                      ($276,000)

Net Income / (Loss)                                                                        $5,220,000

C. $22

D.

Variable Income Statement

Sales ($150 ×46,000)                                                                     $6,900,000

Less Cost of Sales

Opening Inventory ($22 × 3,000)                                  $66,000

Add Cost of Goods Manufactured ($22 × 50,000)   $1,100,000

Less Closing Inventory ($22 × 7,000)                         ($154,000) ($1,012,000)

Gross Profit                                                                                      $5,888,000

Less Expenses :

Fixed Manufacturing Overheads                                                   ($100,000)

Selling and administrative costs:

Fixed                                                                                                ($300,000)

Variable ($6×46,000)                                                                      ($276,000)

Net Income / (Loss)                                                                        $5,212,000

Explanation:

Absorption costing method also known as full costing takes into account both the fixed and variable manufacturing cost in determining the product cost. All Non - Manufacturing costs are treated as period costs.

cost for one unit = fixed manufacturing costs  + variable manufacturing costs

                            = $100,000 / 50,000 boats  + $5 + $7 +$10

                            = $2+ $5 + $7 +$10

                            = $24

Absorption Income Statement

Sales ($150 ×46,000)                                                                     $6,900,000

Less Cost of Sales

Opening Inventory ($24 × 3,000)                                  $72,000

Add Cost of Goods Manufactured ($24 × 50,000) $1,200,000

Less Closing Inventory ($24 × 7,000)                        ($168,000) ($1,104,000)

Gross Profit                                                                                     $5,796,000

Less Expenses :

Selling and administrative costs:

Fixed                                                                                                ($300,000)

Variable ($6×46,000)                                                                      ($276,000)

Net Income / (Loss)                                                                        $5,220,000

Calculation of Closing Inventory

                                           Boats

Opening Inventory             3,000

Add Production                50,000

Available for Sale             53,000

Less Sales                       (46,000)

Closing Inventory              7,000

Variable costing method also known as Contribution costing takes into account ONLY variable manufacturing cost in determining the product cost. Both the Fixed Manufacturing and  Non - Manufacturing costs are treated as period costs.

cost for one unit =  variable manufacturing costs

                            =  $5 + $7 +$10

                            = $22

Variable Income Statement

Sales ($150 ×46,000)                                                                     $6,900,000

Less Cost of Sales

Opening Inventory ($22 × 3,000)                                  $66,000

Add Cost of Goods Manufactured ($22 × 50,000)   $1,100,000

Less Closing Inventory ($22 × 7,000)                         ($154,000) ($1,012,000)

Gross Profit                                                                                      $5,888,000

Less Expenses :

Fixed Manufacturing Overheads                                                   ($100,000)

Selling and administrative costs:

Fixed                                                                                                ($300,000)

Variable ($6×46,000)                                                                      ($276,000)

Net Income / (Loss)                                                                        $5,212,000

15 pounds of apples and 6 cups of flour

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