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Stark, Inc
Stark, Inc., produces and sells a unique robot antenna. The company has just opened a new plant to manufacture the antenna, and the following cost and revenue data have been reported for the first month of the new plant's operation:
Selling price
$108
Beginning inventory
0
Units produced
35,000
Units sold
30,000
Selling price per unit
$50
Selling and Admin expenses:
Variable per unit
$2
Fixed (total)
$360,000
Manufacturing costs:
Direct material cost per unit
$9
Direct labour cost per unit
$8
Variable overhead cost per unit
$3
Fixed overhead cost (Total)
$350,000
Management is anxious to see how profitable the new antenna will be and has asked that an income statement be prepared for the month. Assume that direct labour is a variable cost.
Submission instructions:
- Assuming that the company uses absorption costing, compute the unit product cost and make an income statement.
- Assuming that the company uses variable costing, compute the unit product cost and make an income statement.
- Explain the reason for any difference in the ending inventories under the two costing methods and the impact of this difference on reported operating income.
Expert Solution
| a.) | Amount $ | ||
| Direct material cost per unit | 9 | ||
| Direct labour cost per unit | 8 | ||
| Variable overhead cost per unit | 3 | ||
| Fixed Overhead cost per unit | 10 | =350000/35000 | |
| Unit Product Cost | 30 | ||
| Absorption Costing Income Statement | |||
| Amount $ | |||
| Sales | 1,500,000 | =30000*50 | |
| Cost of Goods Sold: | |||
| Beginning Inventory- | - | ||
| Add :Cost of goods manufactured | 1,050,000 | =30*35000 | |
| Less:Ending Inventory | 150000 | =5000*30 | |
| Cost of Goods Sold | 900,000 | ||
| Gross profit | 600,000 | ||
| Less :Fixed selling & administrative Expense | 360000 | ||
| Less :Variable selling & administrative Expense | 60000 | =30000*2 | |
| Net Income | 180,000 | ||
| b.) | Amount $ | ||
| Direct material cost per unit | 9 | ||
| Direct labour cost per unit | 8 | ||
| Variable overhead cost per unit | 3 | ||
| Unit Product Cost | 20 | ||
| Variable Costing Income Statement | |||
| Amount $ | |||
| Sales | 1,500,000 | =30000*50 | |
| Cost of Goods Sold: | |||
| Beginning Inventory | - | ||
| Add :Cost of goods manufactured | 700000 | =35000*20 | |
| Less :Ending inventory | 100000 | =5000*20 | |
| Variable cost of goods sold | 600000 | ||
| Less :Variable selling & administrative Expense | 60000 | =30000*2 | |
| Contribution margin | 840,000 | ||
| Fixed costs: | |||
| Less: Fixed Overhead Costs | 350000 | ||
| Less :Fixed selling & administrative Expense | 360000 | ||
| Total Fixed Cost | 710000 | ||
| Net Income | 130,000 | ||
|
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| c) Reconciliation of profits under both the methods:- | |||
| Net operating income under Absorption | 130,000 | ||
| Add:- Fixed manufacturing OH attributable to closing stock (since it is not considered in Variable costing approach) | 50,000 | ||
| Net Income under Variable costing approach | 180,000 | ||
The main reason is Variable costing approach does not take into account Fixed manufacturing OH in valuation of product cost but Absorption costing approach considers it in its product cost.
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