PROBLEM 1

1 a. Unit product cost (full absorption costing)

Year 1 Year 2
Direct materials 11.00 11.00
Direct labor 6.00 6.00
Variable manufacturing overhead 3.00 3.00
Fixed manufacturing overhead
(120,000/ 10,000 units) 12.00
(120,000/ 6,000 units) 20.00
32.00 40.00

b. Income statement (full absorption costing)

Year 1 Year 2
Sales (8,000 units x 50) 400,000.00 400,000.00
Less: Cost of goods sold
Beginning inventory - 64,000.00
Add: Cost of goods manufactured
(10,000 units x 32) 320,000.00
(6,000 units x 40) 240,000.00
Cost of goods available for sale 320,000.00 304,000.00
Less: Ending inventory
(2,000 units x 32) 64,000.00
(0 units x 40) -
256,000.00 304,000.00
Gross margin 144,000.00 96,000.00
Less: Selling and administrative expenses
(8,000 x 4 = 32,000 + 70,000) 102,000.00 102,000.00
Net income (loss) 42,000.00 - 6,000.00

2 a. Unit product cost (variable costing)

Year 1 Year 2
Direct materials 11.00 11.00
Direct labor 6.00 6.00
Variable manufacturing overhead 3.00 3.00
20.00 20.00

b. Income statement (variable costing)

Year 1 Year 2
Sales (8,000 units x 50) 400,000.00 400,000.00
Less: Variable costs
Variable cost of goods sold
(8,000 units x 20) 160,000.00 160,000.00
Variable selling and administrative expenses
(8,000 units x 4) 32,000.00 32,000.00
192,000.00 192,000.00
Contribution margin 208,000.00 208,000.00
Less: Fixed costs
Fixed manufacturing overhead 120,000.00 120,000.00
Fixed selling and administrative expenses 70,000.00 70,000.00
190,000.00 190,000.00
Net income (loss) 18,000.00 18,000.00

3 Reconciliation of variable and full absorption costing income:

Year 1 Year 2
 Net income under full absorption costing 42,000.00 - 6,000.00
Add: Fixed overhead in the beginning inventory - 24,000.00
Total 42,000.00 18,000.00
Less: Fixed overhead in the ending inventory 24,000.00 -
Net income under variable costing 18,000.00 18,000.00

Change in inventory (increase/ decrease) 2,000.00 - 2,000.00

Multiply by: Fixed factory overhead cost per unit 12.00 12.00
Difference in income 24,000.00 - 24,000.00

PROBLEM 2

1 Unit product cost (full absorption costing)

Direct materials 120.00
Direct labor 140.00
Variable manufacturing overhead 50.00
Fixed manufacturing overhead
(600,000/ 10,000 units) 60.00
370.00
2 Unit product cost (variable costing)
Direct materials 120.00
Direct labor 140.00
Variable manufacturing overhead 50.00
310.00

PROBLEM 3

1 2,000 units x 60 per unit fixed manufacturing overhead = 120,000

2 Income statement (variable costing)

Sales (8,000 units x 500) 4,000,000.00

Less: Variable costs
Variable cost of goods sold (8000 units x 310)
Beginning inventory -
Add: Variable manufacturing costs
(10,000 units x 310) 3,100,000.00
Cost of goods avaiable for sale 3,100,000.00
Less: Ending inventory
(2,000 units x 310) 620,000.00 2,480,000.00
Variable selling and administrative expenses
(8,000 units x 20) 160,000.00 2,640,000.00
Contribution margin 1,360,000.00
Less: Fixed costs
Fixed manufacturing overhead 600,000.00
Fixed selling and admin expenses 400,000.00 1,000,000.00
Net income (loss) 360,000.00

Reconciliation of variable and full absorption costing income:

Net income under full absorption costing 480,000.00

Add: Fixed overhead in the beginning inventory -
Total 480,000.00
Less: Fixed overhead in the ending inventory 120,000.00
Net income under variable costing 360,000.00

Change in inventory (increase/ decrease) 2,000.00

 Multiply by: Fixed factory overhead cost per unit 60.00
Difference in income 120,000.00

PROBLEM 4

1 The company is using variable costing method. The computations are:

Variable Absorption
costing costing
Direct materials 10.00 10.00
Direct labor 5.00 5.00
Variable manufacturing overhead 2.00 2.00
Fixed manufacturing overhead
(90,000/ 30,000 units) - 3.00
17.00 20.00

Total cost of 5,000 units 85,000.00 100,000.00

2 a. No, the 85,000 is not the correct figure to use, because variable costing is not generally accepted
for external reporting purposes or for tax purpoases.

b. The finished goods inventory account should be stated at 100,000, which represents the absorption
cost of the 5,000 unsold units. Thus, the account should be increased by 15,000 for external
reporting purposes. This 15,000 consists of the amount of fixed manufacturing overhead cost
that is allocated to the 5,000 unsold units under absorption costing:

5,000 units x 3 per unit fixed manufacturing overhead cost = 15,000