Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 46,000 units and sold 38,000 units at a price of $120 per unit.

Manufacturing costs

Direct materials per unit $48
Direct labor per unit $18
Variable overhead per unit $6
Fixed overhead for the year $420,000

Selling and administrative cost
Variable selling and administrative cost per unit $12
Fixed selling and administrative cost per year $110,000

a. Assume the company uses absorption costing. Determine its product cost per unit.
b. Assume the company uses absorption costing. Prepare its income statement for the year under absorption costing.
c. Assume the company uses variable costing. Determine its product cost per unit.
d. Assume the company uses variable costing. Prepare its income statement for the year under variable costing.

1a.

Cost per unit                                  Absorption costing

Direct material cost                          $ 48

Direct Labour                                            $ 18

Variable manufacturing overhead      $  6

Fixed Manufacturing overhead ($460,000 divided by 46,000)$ 10

Cost per unit                                                 $  82

1b.

COOL SKY

Absorption costing income statement

Sales ($120*38,000)                             $ 4,560,000

Cost of goods sold  

Direct Material                         38,000multiply$48 = $1,824,000  

Direct Labour                                    38,000multiply$18 = $684,000  

Variable Manufacturing overhead38,000multiply$6 = $228,000  

Fixed Manufacturing overhead            38,000multiply$10 = $380,000  

Total Cost of goods sold                               $ 3,116,000

Gross Margin                                                        $ 1,444,000

Selling and administrative expenses  

Variable selling administrative expenses38,000*$11 = $418,000  

Fixed selling and administrative expenses                                 $115,000  

Total Selling and administrative expenses                $533,000

net operating income (Loss)                                       $911,000

2a.

Cost per unitVariable costing

Direct material cost                       $ 48

Direct Labour                                       $ 18

Variable manufacturing overhead$ 6

Cost per unit                                        $ 72

2b

COOL SKY

Variable costing income statement

Sales ($120 multiply 38,000)                       $ 4,560,000

Variable Expenses  

Direct Material                       38,000multiply$48 = $1,824,000  

Direct Labour                                     38,000multiply$18 = $684,000  

Variable Manufacturing overhead38,000multiply$6 = $228,000  

Variable selling administrative expenses38,000multiply$11 = $418,000  

Total Variable expenses                              $ 3,154,000

Contribution margin                                        $ 1,406,000

Fixed Expenses  

Fixed Manufacturing overhead                                         $ 460,000  

Fixed selling and administrative expenses                        $ 115,000  

Total Fixed Expenses                                                  $575,000

net operating income (Loss)                                          $ 831,000

Notice that the fixed manufacturing overhead cost has not been included while computing the cost of one unit under variable costing system.

Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost.

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