Question

Income statement under absorption costing and variable costing

The following information applies to the questions displayed below.
Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 42,000 units and sold 34,000 units at a price of $140 per unit.
Manufacturing costs
Direct materials per unit $60
Direct labor per unit $22
Variable overhead per unit $8
Fixed overhead for the year $504,000
Selling and administrative costs
Variable selling and administrative cost per unit $12
Fixed selling and administrative cost per year $115,000
1a. Assume the company uses absorption costing. Determine its product cost per unit.
1b. Assume the company uses absorption costing. Prepare its income statement for the year under absorption costing.
2a. Assume the company uses variable costing. Determine its product cost per unit.
2b. Assume the company uses variable costing. Prepare its income statement for the year under variable costing.

Answer 1

Results are below.

Step-by-step explanation:

The absorption costing method includes all costs related to production, both fixed and variable. The unit product cost is calculated using direct material, direct labor, and total unitary manufacturing overhead.

The variable costing method incorporates all variable production costs (direct material, direct labor, and variable overhead).

1)

First, we need to calculate the unitary fixed manufacturing overhead:

Fixed unitary manufacturing overhead= 504,000 / 42,000= $12

Now, the unitary production cost under the absorption costing method:

Unitary production cost= 60 + 22 + 8 + 12= $102

Finally, the income statement:

Sales= 34,000*140= 4,760,000

COGS= 34,000*102= (3,468,000)

Gross profit= 1,292,000

Total selling and administrative cost= 115,000 + 34,000*12= (523,000)

Net operating income= 769,000

2)

Unitary production cost= 60 + 22 + 8= $90

Now, the income statement:

Sales= 4,760,000

Total variable cost= (90 + 12)*34,000= (3,468,000)

Total contribution margin= 1,292,000

Total fixed overhead= (504,000)

Total selling and administrative cost= (115,000)

Net operating income= 673,000