Assume that direct labor is a variable cost. Required:a. Compute the unit product cost under both the absorption costing and variable costing approaches. b. Prepare an income statement for the year using absorption costing. c. Prepare an income statement for the year using variable costing. d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Part a

Unit Product Cost :

Variable Costing = $387

Absorption Costing = $403

Part b

Absorption Costing Income Statement

Sales ($466 x 24,000)                                                          $11,184,000

Less Cost of Sales

Beginning Inventory                                          $0

Add Cost of Goods Manufactured            $11,284,000

Less Ending Inventory                                ($1,612,000)    ($9,672,000)

Gross Profit                                                                             $1,512,000

Less Expenses

Selling and Administrative expenses :

Variable ($21 x 24,000)                               $504,000

Fixed                                                             $336,000         ($840,000)

Net Income (Loss)                                                                   $672,000

Part c

Variable Costing Income Statement

Sales ($466 x 24,000)                                                          $11,184,000

Less Cost of Sales

Beginning Inventory                                          $0

Add Cost of Goods Manufactured            $10,836,000

Less Ending Inventory                                ($1,548,000)    ($9,288,000)

Contribution                                                                            $1,896,000

Less Expenses

Fixed Manufacturing overheads                 $448,000

Selling and Administrative expenses :

Variable ($21 x 24,000)                               $504,000

Fixed                                                             $336,000         ($1,288,000)

Net Income (Loss)                                                                     $608,000

Part d

Reconciliation of Absorption Costing Profit to Variable Costing Profit

Absorption Costing Profit                                                       $672,000

Add Fixed Costs in Opening Inventory                                       $0

Less Fixed Costs in Ending Inventory ($4,000 x $16)           ($64,000)

Variable Costing Profit                                                            $608,000

Explanation:

Variable Costing calculations

Unit Product Cost = Variable Manufacturing Cost

                              = $296 + $57 + $34

                              = $387

Cost of Goods Manufactured (28,000 x $387)  =  $10,836,000

Ending Inventory (4,000 x $387) =  $1,548,000

Absorption Costing calculations

Unit Product Cost = Variable Manufacturing Cost + Fixed Manufacturing Costs

                              = $296 + $57 + $34 + ($448,000 ÷ $28,000)

                              = $296 + $57 + $34 + $16

                              = $403

Cost of Goods Manufactured (28,000 x $403)  =  $11,284,000

Ending Inventory (4,000 x $403) =  $1,612,000

Ending Inventory units

Ending Inventory units = Opening units + Production - Sales

                                      = 0 + 28,000 - 24,000

                                      = 4,000 units

The difference in absorption costing and variable costing net operating income is due to fixed manufacturing costs deferred in ending inventory

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