Problem (3):
AMS Company sells a special putter for $20 each. In March it sold 28,000 putters while
manufacturing 30,000. There was no beginning inventory on March 1. Production information
for March was:
Direct manufacturing Labor per unit
15 minutes
Fixed selling and administrative cost
$40,000
Fixed manufacturing overhead
$132,000
Direct material cost per unit
$2
Direct manufacturing labor per hour
$24
Variable manufacturing overhead per unit $4
Variable selling expense per unit
$2
Required:
a. Compute the cost per unit under both absorption and variable costing.
b. Compute the ending inventory under both absorption and variable costing.
c. Compute the operating income under both absorption and variable costing.
Solution
Calculating Inventory
Beginning Inventory
+ Units Produced
= Units available for sale
- Units Sold
= Ending Inventory
March
0
30,000
30,000
(28,000)
2,000
a.
Variable Costing
Variable Mfg. Cost
DM
DL (15minutes÷60 ×24)
Variable MOH
+ Fixed Mfg. Cost
($132,000 ÷ 30,000 units)
= Product Cost per unit
Absorption Costing
2
6
4
2
6
4
----
4.4
$12
$16.4
b.
Ending inventory (Absorption Costing)
Ending inventory (Variable Costing)
= $16.4 × 2,000 unit = $32,800
= $12 × 2,000 unit = $24,000
c.
Cost of Goods Sold (Absorption Costing) = $16.4 × 28,000 unit
Cost of Goods Sold (Variable Costing)
= $12 × 28,000 unit
= $459,200
= $336,000
Income Statement
Absorption costing
Sales Revenues [28,000 units sold × $20]
- Cost of Goods Sold
Beginning Inventory [0 units × $16.4]
+ Cost of Goods Manufactured [30,000 produced × $16.4]
= Cost of Goods Available for Sale
- Ending Inventory [2,000 units × $16.4]
= Cost of Goods Sold
= Gross Margin
- Selling & Administrative Expense
Variable Selling & Administrative [28,000 units × $2]
Fixed Selling & Administrative
Total Selling & Administrative
Net Income
560,000
0
492,000
492,000
(32,800)
(459,200)
100,800
56,000
40,000
(96,000)
$4,800
Income Statement
Variable costing
Sales Revenues [28,000 units sold × $20]
- Variable Costs
Variable Cost of Goods Sold
Beginning Inventory [0 units × $12]
+ V. Cost of Goods Manufactured [30,000 produced × $12]
= Cost of Goods Available for Sale
- Ending Inventory [2,000 units × $12]
Variable Cost of Goods Sold
+ Variable Selling & Administrative Costs [28,000 units × $2]
Total Variable Costs
= Contribution Margin
- Fixed Costs
Fixed Manufacturing Costs
Fixed Selling & Administrative
Total Fixed Costs
Net Loss
560,000
0
360,000
360,000
(24,000)
336,000
56,000
(392,000)
168,000
132,000
40,000
(172,000)
($4,000)
Reconciliation between Net Income under Absorption Costing & Variable Costing
Net Income Under Variable Costing
+ FC in Ending Inventory [2,000 units × $4.4]
- FC in Beginning Inventory
= Net Income Under Absorption Costing
(4,000)
8,800
(0)
$4,800