Unit cost 4. During 2015, M Co. sold 30000 units at $60 per unit. The beginning period showed 5000 units in
inventory and produced 25000 units during the year. The following production costs and selling
and administrative expenses were:
Number of
Total costs
Units
Beginning inventory:
Direct materials
$ 33,500
5,000
Direct labor
77,500
5,000
Variable factory overhead
9,000
5,000
Fixed factory overhead
10,000
5,000
$
6.70
15.50
1.80
2.00
$
Current period costs:
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
$ 175,000
405,000
45,000
50,000
25,000
25,000
25,000
25,000
7.00
16.20
1.80
2.00
Selling and administrative expenses:
Variable
Fixed
$ 65,000
45,000
Instructions: NOTE: SHOW ALL WORK.
1. Prepare both an absorption and variable costing income statement.
2. Determine and give reason for difference in income from operations in part (1).

M Co.

1. Absorption and Variable Costing Income Statements:

                                            Absorption Costing      Variable Costing

Sales Revenue                              $1,800,000                  $1,800,000

Product Cost of goods sold:

Beginning Inventory        130,000                       120,000

Period's Production cost 675,000  (805,000)    625,000

Variable Selling & Administration expenses        65,000  (810,000)

Contribution                                                                       $990,000

Gross profit                                     $995,000

Period Costs:

Beginning Inventory  overhead                          10,000

Fixed factory overhead                                      50,000

Selling & Admin expenses              (110,000)    45,000   (105,000)

Net Income                                   $885,000                   $885,000

2a. Determination of difference in income from part 1:

Absorption costing has a gross profit of $995,000

While variable costing has a contribution of $990,000

Their net income is the same at $885,000

2b. Reason for difference in income from part 1:

The reason for the difference is that absorption costing calculates gross profit, which includes all the costs of production (variable and fixed) in the cost of goods sold, while variable costing system calculates contribution, which includes only the variable costs in the cost of goods sold with fixed costs treated as period costs for arriving at the net income.

We would have noticed some differences in the Net Income under absorption and variable costing systems if there had been some ending inventory.

Explanation:

Data and Calculations:

1. Sales = 30,000 units at $60 per unit = $1,800,000

Beginning inventory = 5,000 units

Production during the year = 25,000

2. Production costs and Expenses:

                                      Number of  Units   Unit costs     Total Costs

Beginning inventory:              5,000

Direct materials                      5,000               $6.70       $ 33,500

Direct labor                            5,000                15.50           77,500

Variable factory overhead    5,000                  1.80             9,000

Fixed factory overhead        5,000                  2.00           10,000

Variable unit cost = $24 ($6.70 + 15.50 + 1.80)

Variable cost  =    $120,000 (5,000 x $24)

Total cost = $130,000 ($120,000 + 10,000)

Current period costs:

Direct materials                   25,000                7.00       $ 175,000

Direct labor                          25,000              16.20         405,000

Variable factory overhead  25,000                1.80           45,000

Fixed factory overhead      25,000               2.00           50,000

Variable cost per unit    = $25 ($7.00 + 16.20 + 1.80)

Total variable cost = $625,000 (25,000 x $25)

Total absorption cost = $675,000 ($625,000 + 50,000)

Selling and administrative expenses:

     Variable                                                                   $ 65,000

     Fixed                                                                           45,000

Total selling and administrative expenses                 $110,000

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