Question

Nelter Corporation, which has only one product, has provided the following data conceming its most recent month of operations:

Selling price 108
Units in beginning inventory 955
Units produced 2390
Units sold 3000
Units in ending inventory 345
Variable costs per unit
Direct materials 25
Direct labor 20
Variable manufacturing overhead 1
Variable selling and administrative 14
expense
Fixed costs
Fixed manufacturing overhead 64530
Fixed selling and administrative 9000
expense
The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month
Required:
a. Prepare a contribution format income statement for the month using variable costing.
b. Prepare an Income statement for the month using absorption costing

Answer 1

Part a

Nelter Corporation

Contribution format income statement for the month using variable costing

Sales ($108 x 3,000) $324,000

Less Cost of Sales ($138,000)

Contribution $186,000

Less Expenses

Fixed manufacturing overhead $64,530

Fixed selling and administrative $9,000

Variable selling and administrative (14 x 3,000) $42,000 ($115,530)

Net Income (loss) $70,470

Part b

Nelter Corporation

Income statement for the month using absorption costing

Sales ($108 x 3,000) $324,000

Less Cost of Sales ($219,000)

Gross Profit $105,000

Less Expenses

Fixed selling and administrative $9,000

Variable selling and administrative (14 x 3,000) $42,000 ($51,000)

Net Income (loss) $54,000

Step-by-step explanation:

Calculation of Ending Units

Beginning Inventory 955

Add Production 2,390

Total Available for Sale 3,345

Less Sales (3000)

Ending Inventory 345

Variable Costs Calculations

Product Cost = Variable Manufacturing costs

= $25 + $20 + $1

= $46

Cost of Sales = units sold x product cost

= 3,000 x $46

= $138,000

Absorption Cost Calculation

Product Cost = Variable Manufacturing costs

= $25 + $20 + $1 + ($64,530 / 2,390)

= $25 + 20 + $ 1 + $27

= $73

Cost of Sales = units sold x product cost

= 3,000 x $73

= $219,000