1. During Heaton Company’s first two years of operations, the company reported absorption costing
net operating income as follows:
Year 1
Sales (@
$61 per unit)
Cost of
goods sold
(@ $33 per
unit) $ 976,000 Gross
margin
Selling and
administrativ
e expenses*
Net
operating
income Year 2 $ $ 1,586,000 528,000 858,000 448,000 728,000 298,000 328,000 150,000 $ 400,000 * $3 per unit variable; $250,000 fixed each year.
The company’s $33 unit product cost is computed as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
($294,000 ÷ 21,000 units) $ 6
9
4
14 Absorption costing unit product
cost $ 33 Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists
of depreciation charges on production equipment and buildings.
Production and cost data for the two years are:
Units produced
Units sold Year 1
21,000
16,000 Year 2
21,000
26,000 Required:
1. Prepare a variable costing contribution format income statement for each year. 2. Reconcile the absorption costing and the variable costing net operating income
figures for each year. (Losses should be indicated by a minus sign.) 2. High Country, Inc., produces and sells many recreational products. The company has just
opened a new plant to produce a folding camp cot that will be marketed throughout the United
States. The following cost and revenue data relate to May, the first month of the plant’s
operation:
Beginning inventory
Units produced
Units sold
Selling price per unit
Selling and administrative expenses:
Variable per unit
Fixed per month
Manufacturing costs:
Direct materials cost per unit
Direct labor cost per unit
Variable manufacturing overhead cost per unit
Fixed manufacturing overhead cost per month 0
43,000
38,000
$76
$2
$ 555,000
$16
$9
$2
$ 774,000 Management is anxious to see how profitable the new camp cot will be and has asked that an income
statement be prepared for May.
Required:
1.
Assume that the company uses absorption costing. a.
Determine the unit product cost. b.
Prepare an income statement for May.
2.
Assume that the company uses variable costing.
a. Determine the unit product cost.
b. Prepare a contribution format income statement for May. 3. Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the
year. Getting the company through its first quarter of operations placed a considerable strain on Ms.
Tyler’s personal finances. The following income statement for the first quarter was prepared by a friend
who has just completed a course in managerial accounting at State University.
Tami’s Creations, Inc.
Income Statement
For the Quarter Ended March 31
Sales (23,000
units)
Variable
expenses:
Variable cost of
goods sold
Variable selling
and administrative $ $ Contribution
margin
Fixed expenses:
Fixed
manufacturing
overhead
Fixed selling
and administrative 834,900 285,200
179,400 464,600 370,300 215,800
215,000 430,800 Net operating loss $ ( 60,500) Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to
use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be
using absorption costing rather than variable costing and argues that if absorption costing had been used
the company would probably have reported at least some profit for the quarter.
At this point, Ms. Tyler is manufacturing only one product, a swimsuit. Production and cost data relating
to the swimsuit for the first quarter follow:
Units produced
Units sold
Variable costs per unit:
Direct materials
Direct labor
Variable manufacturing overhead
Variable selling and administrative Required:
1.
Complete the following: 26,000
23,000
$
$
$
$ 7.50
3.00
1.90
7.80 a.
Compute the unit product cost under absorption costing. (Round your intermediate and final answers
to 2 decimal places.) b.
Redo the company’s income statement for the quarter using absorption costing. (Round your
intermediate calculations to 2 decimal places.) c.
Reconcile the variable and absorption costing net operating income (loss) figures. (Round your
intermediate calculations to 2 decimal places.)
3.
During the second quarter of operations, the company again produced 26,000 units but sold 29,000 units.
(Assume no change in total fixed costs.)
a. Prepare a contribution format income statement for the quarter using variable costing. (Round your
intermediate calculations to 2 decimal places.)
b. Prepare an income statement for the quarter using absorption costing. (Round your intermediate
calculations to 2 decimal places.)
c. Reconcile the variable costing and absorption costing net operating incomes. (Round your
intermediate calculations to 2 decimal places.)

 

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