Answered Essay: Stark Corporation manufactures and sells a single product. Cost data for the product are given below

Stark Corporation manufactures and sells a single product. Cost data for the product are given below:

Variable costs per unit:

Direct materials                                  $10

Direct labor                                        14

Variable manufacturing overhead       5

Variable selling and administrative     3

Total variable cost per unit                $32

Fixed costs per month:

Fixed manufacturing overhead          $600,000

Fixed selling and administrative       300,000

Total fixed cost per month                 $900,000

The product sells for $80 per unit. Production and sales data for August follow:

There was no beginning inventory.

Units               Units

Produced         Sold

August                                    25,000             20,000

Required:

(a)Determine the unit product cost under:

Absorption costing

Variable costing

Throughput costing

(b)Prepare a variable costing income statement for August.

(c)Prepare an absorption costing income statement for August.

(d)Explain why the operating income is different in parts (a) and (b).

Expert Answer

 

(a)

Variable costs per unit:
Direct materials 10
Direct labor 14
Variable factory overhead 5 $29.00
Variable selling & administrative 3
Total variable costs per unit $32.00
Fixed costs per month:
Fixed manufacturing overhead 600,000 $24
Fixed selling & administrative 300,000
Total fixed cost per month 900,000 $53
The product sells for $80 per unit. Production and sales data for august
Units Units
Produced Sold
august 25000 20000
(c)
Income statementsusing absorption costing,is presented below:
:
august
Sales 1600000
Cost of goods sold
Beginning inventory $0
Add cost of goods manufactured 1325000
Goods available for sale 1325000
Less ending inventory 265000 –
     Cost of goods sold 1060000
Gross margin 540000
Selling & administrative expenses 360000,
Operating income 180000
(a) The unit product cost under:
Absorption Variable
Costing Costing
Direct materials 10 10
Direct labor 14 14
Variable manufacturing overhead 5 5
Fixed manufacturing overhead ($600000/25,000) 24
production unit cost 53 29

(b)

Stark CorporationVariable Costing Income Statements
august
Sales (20,000 X $80) 1600,000
Variable expenses:
Variable cost of goods sold 580,000
Variable selling & administrative 60,000
    Total variable expenses 640000
Contribution margin 960,000
Fixed expenses:
Fixed manufacturing overhead $600,000
Fixed selling & administrative 300,000
     Total fixed expenses $900,000
Operating income 60000
(d)
When production is more than sales then the fixed manufacturing overhead is deferred in inventory that causes a higher net operating income under absorption costing than under variable costing.so the operating income is different in part a & b
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