Question

Bracey Company manufactures and sells one product. The following information pertains to the company’s first year of operations:

Variable cost per unit:
Direct materials $ 28
Fixed costs per year:
Direct labor $ 367,500
Fixed manufacturing overhead $ 389,550
Fixed selling and administrative expenses $ 66,000
The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Bracey produced 24,500 units and sold 22,700 units. The selling price of the company’s product is $65 per unit.

Required:
Assume the company uses super-variable costing:
Compute the unit product cost for the year.
Prepare an income statement for the year.
Assume the company uses a variable costing system that assigns $15.00 of direct labor cost to each unit produced:
Compute the unit product cost for the year.
Prepare an income statement for the year.
Assume the company uses an absorption costing system that assigns $15.00 of direct labor cost and $15.90 of fixed manufacturing overhead cost to each unit produced:
Compute the unit product cost for the year.
Prepare an income statement for the year.
Reconcile the difference between the super-variable costing and variable costing net operating incomes.
Reconcile the difference between the super-variable costing and absorption costing net operating incomes.

Answer 1

Under super-variable costing, the unit product cost is $28, considering only direct materials. Under variable costing, it's $43, adding variable direct labor to direct materials. Under absorption costing, it's $58.90, including direct materials, variable direct labor, and fixed manufacturing overhead per unit. Income statements and reconciliation of net operating incomes differ due to the treatment of fixed manufacturing overhead and units sold versus produced.

Step-by-step explanation:

To compute the unit product cost for the year under super-variable costing and prepare the requested income statements we need to follow the required costing methods. When variable costing is used, only the variable manufacturing costs are assigned to the product. When absorption costing is used, both variable and fixed manufacturing costs are assigned to the product.

Super-Variable Costing

Under super-variable costing, only the variable costs, such as direct materials costs, are considered in the unit product cost. However, since super-variable costing is not a standard costing method, we assume it to be similar to direct costing where only direct materials are factored into the unit cost.

Unit Product Cost: Direct Materials = $28

Variable Costing

Unit Product Cost: Direct Materials + Variable Direct Labor = $28 + $15 = $43

Absorption Costing

Unit Product Cost: Direct Materials + Variable Direct Labor + Fixed Manufacturing Overhead per Unit = $28 + $15 + $15.90 = $58.90

The income statement under each method would list out sales, variable costs, and fixed costs to calculate net income, which are unique based on the costing method utilized.

Reconciliation of Incomes

The reconciliation between the net operating incomes of different costing methods primarily involves the treatment of fixed manufacturing overhead costs and the number of units sold versus produced.