QUESTION# 3 Zhou Inc . has the following cost data for its past year of operatio
ID: 2405838 • Letter: Q
Question
QUESTION# 3 Zhou Inc. has the following cost data for its past year of operations. Zhou Inc. produces tables and sells them for $150 each. You must show all your work in order to receive all the points available.
$$/ Per unit
Variable Costs:
Direct Materials (DM) $25
Direct Labour (DL) $20
Variable Mf’g Overhead $ 5
Variable Selling & Admin $10
Total Variable costs $60
Fixed Costs:
Fixed Mf’g Overhead $360,000
Fixed Selling & Admin $200,000
Total Fixed Costs $560,000
Unit data
Beginning Inventory 0
Units produced 12,000
Units sold 10,000
Required:
1) Calculate the unit cost per table under Variable Costing.
2) Calculate the unit cost per table under Absorption Costing.
3) Prepare a Contribution Margin format Income Statement using Variable Costing.
4) Prepare a Traditional format income statement using Absorption Costing.
5) Explain why the operating incomes were not the same under the different cost flow assumptions? And reconcile the difference in operating income.
Explanation / Answer
Answer
1.
Unit (Variable Costing)
Direct Material
25
Direct Labor
20
Variable Manufacturing Overhead
5
Per unit Cost
50
2.
Unit Cost(Absorption Costing)
$
Direct Material
25
Direct Labor
20
Variable Manufacturing Overhead
5
Fixed Manufacturing per unit
30.0
($360,000 / 12,000 Units)
Per unit Cost
80.0
3.
Income Statement (Variable Costing)
Detail
Net
Sales (@ 150 per unit)
1,500,000
Less: Cost of Goods Sold
Opening Inventory
-
Add: Cost of goods Manufactured
600,000
(12,000 Units * 50)
Less: Closing Inventory
(100,000)
(2,000 Units * 50)
500,000
Gross Contribution Margin
1,000,000
Less: Variable Selling and Adm. Expenses
100,000
(10,000 Units * $10)
Contribution Margin
900,000
Less: Fixed Cost
Fixed Manufacturing Cost
360,000
Fixed Selling and Adm. Expenses
200,000
560,000
Net Operating Income
340,000
4.
Sales (@ 150 per unit)
1,500,000
Cost of Goods Sold
(800,000)
(Opening Stock + Produced – Closing Stock)
{0 + (12,000 Units * $80) – (2,000 Units * $80)}
Gross Margin
700,000
Selling Expenses
(Variable Selling expenses + Fixed Selling Expenses)
{(10,000 Units * $10) + 200,000)}
(300,000)
Net Operating Income
400,000
5.
The difference is because we don’t include the Per unit Manufacturing Overhead cost while calculating profit under Variable costing.
i.e. $30 per unit Manufacturing cost is not included in 2,000 Closing Stock while following Variable cost method.
Profit as per Variable costing
340,000
Add: Fixed Mfg. overhead deferred in Inventory
(2,000 * $30)
60,000
Profit according to Absorption Costing
400,000
Dear Student, if u have any doubt, plz feel free to reach me.
Unit (Variable Costing)
Direct Material
25
Direct Labor
20
Variable Manufacturing Overhead
5
Per unit Cost
50
2.
Unit Cost(Absorption Costing)
$
Direct Material
25
Direct Labor
20
Variable Manufacturing Overhead
5
Fixed Manufacturing per unit
30.0
($360,000 / 12,000 Units)
Per unit Cost
80.0
3.
Income Statement (Variable Costing)
Detail
Net
Sales (@ 150 per unit)
1,500,000
Less: Cost of Goods Sold
Opening Inventory
-
Add: Cost of goods Manufactured
600,000
(12,000 Units * 50)
Less: Closing Inventory
(100,000)
(2,000 Units * 50)
500,000
Gross Contribution Margin
1,000,000
Less: Variable Selling and Adm. Expenses
100,000
(10,000 Units * $10)
Contribution Margin
900,000
Less: Fixed Cost
Fixed Manufacturing Cost
360,000
Fixed Selling and Adm. Expenses
200,000
560,000
Net Operating Income
340,000