XYZ Company manufactures a unique device that is used by internet users to boost Wi-fi signals. The following data relates to the first month of operation:

Beginning inventory 0 units
Units produced 40,000 units
Units sold 35,000 units
Selling price $120 per unit

Marketing and administrative expenses

Variable marketing and administrative expenses per unit $4
Fixed marketing and administrative expenses per month $1,120,000

Manufacturing costs
Direct materials cost per unit $30
Direct labor cost per unit $14
Variable manufacturing overhead cost per unit $4
Fixed manufacturing overhead cost per month $1,280,000

Using the information given, above:

a. Calculate unit product cost under the variable costing method and the absorption costing method.
b. Prepare an Income Statement under the variable costing method, as well as the absorption costing method.
c. Prepare a schedule to reconcile the net operating income under the variable and absorption costing methods

Answer:

XYZ Company

a. Unit product cost under:

1. variable costing method

Direct materials cost per unit                                              $30

Direct labor cost per unit                                                      $14

Variable manufacturing overhead cost per unit                  $4

Variable marketing and administrative expenses per unit $4

Total variable cost                                                               $52

2. absorption costing method:

Direct materials cost per unit                             $30

Direct labor cost per unit                                     $14

Variable manufacturing overhead cost per unit  $4

Fixed manufacturing overhead cost                  $32 ($1,280,000/40,000)

Total product cost per unit                                 $80

b1. Income Statement under the variable costing method

Sales revenue                             $4,200,000 ($120 * 35,000)

Cost of goods sold:

Variable cost of goods sold          1,680,000 ($48 * 35,000)

Variable marketing and admin        140,000 ($4 * 35,000)

Total cost of goods sold               1,820,000

Contribution margin                  $2,380,000

Fixed expenses:

Fixed marketing and

administrative expenses          $1,120,000

Fixed manufacturing overhead 1,280,000

Total fixed expenses               $2,400,000

Net operating loss                        $20,000

b2. Income Statement under the absorption costing method

Sales revenue                             $4,200,000 ($120 * 35,000)

Cost of goods sold:

Variable cost of goods sold          1,920,000 ($48 * 40,000)

Fixed manufacturing overhead    1,280,000

Less Ending inventory                   (400,000)

Total cost of goods sold              2,800,000

Contribution margin                   $1,400,000

Period expenses:

Marketing and Administrative:

Fixed                 $1,120,000

Variable                 140,000       $1,260,000

Net operating income                  $140,000

c. Schedule to reconcile the net operating income under the variable and absorption costing methods:

Net operating income under absorption = $140,000

Fixed cost absorbed in ending inventory =  160,000 ($32 * 5,000)

Net operating loss under variable =           ($20,000)

Explanation:

a) Data and Calculations:

Beginning inventory       0 units

Units produced    40,000 units

Units sold             35,000 units

Ending inventory   5,000 units

Selling price $120 per unit

Marketing and administrative expenses:

Variable marketing and administrative expenses per unit $4

Fixed marketing and administrative expenses per month $1,120,000

Manufacturing costs:

Direct materials cost per unit $30

Direct labor cost per unit $14

Variable manufacturing overhead cost per unit $4

Fixed manufacturing overhead cost per month $1,280,000

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