Answer:
Cook Sky
1a. Per unit product cost using, Absorption costing :
Cost per unit
Manufacturing Costs:
Direct materials $48
Direct labor $18
Variable overhead $6
Fixed overhead $10 ($420,000/42,000)
Product cost per unit $82
1b. COOL SKY
Absorption Costing Income Statement
Sales $4,080,000 (34,000 x $120)
Cost of goods sold $2,788,000 (34,000 x $82)
Gross profit $1,292,000
Other Expenses:
Variable selling & admin.($408,000) (34,000 x $12)
Fixed selling & admin. ($110,000)
Net income (loss) $774,000
2a. Per unit product cost using, Variable costing :
Cost per unit
Manufacturing Costs:
Direct materials $48
Direct labor $18
Variable overhead $6
Product cost per unit $72
2b. COOL SKY
Variable Costing Income Statement
Sales $4,080,000 (34,000 x $120)
Cost of goods sold $2,448,000 (34,000 x $72)
Contribution $1,632,000
Other Expenses:
Manufacturing overhead ($420,000)
Variable selling & admin. ($408,000)
Fixed selling & admin. ($110,000)
Net income (loss) $694,000
Explanation:
a) Absorption costing includes all costs, including fixed costs, related to production. This implies that the cost of a finished product includes the following costs: direct materials, direct labor, variable and fixed manufacturing overhead.
b) Variable costing includes only the variable costs directly incurred in production. The cost of a finished product, therefore, includes the following costs: direct materials, direct labor, and variable manufacturing overhead.
The difference in the two is the inclusion of fixed manufacturing overhead in the absorption costing technique in order to arrive at the product cost. Whereas, in variable costing, the fixed manufacturing overhead is regarded as a period cost and not a product cost.
Another difference is that with absorption costing, you arrive at the gross profit from which period costs are deducted to obtain the net income (loss). With variable costing, you arrive at the contribution from which expenses are deducted to get the net income (loss).
