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BUSI 1005 Tutorial 6 – Variable Costing Question 1 Alta Products Ltd. has just treated a new division to manufacture and sell DVD players. The facility is highly automated and thus has high monthly fixed costs, as shown in the following schedule of budgeted monthly costs. This schedule was prepared based on an expected monthly production volume of 1,500 units. Manufacturing costs Variable cost per unit Direct materials $ Direct labour 30 Variable overhead 5 Total fixed overhead $60, Selling and administrative costs Variable 6% of sales Fixed $45, During August 20x5, the following activity was recorded: Units produced 1, Units sold 1, Selling price per unit $ Required - (a) Prepare an income statement for the month ended August 31, 20x5, under absorption costing. (b) Prepare an income statement for the month ended August 31, 20x5, under variable costing. (c) Reconcile the absorption costing and variable costing income figures for the month.
Question 2 RAP Company reported the following information about the production and sales of its only product W: Direct materials used $16, Direct labor $10, Variable factory overhead $ 6, Fixed factory overhead $ 8, Variable selling and administrative expenses $ 2, Fixed selling and administrative expenses $ 3, Units produced 1, Beginning inventories none Ending inventories: Finished goods 300 units Sales ($45 per unit) $31, Required – (a) Prepare an income statement using absorption costing. (b) Prepare an income statement using variable costing. (c) Reconcile the operating income under both approaches.
Question 2 (a) Sales (700 x $45) $31, Cost of goods sold Cost of goods manufactured* Variable costs 32, Fixed costs 8,000 40, Ending inventory: $40,000 / 1,000 x 300 (12,000) 28, Gross margin 3, Operating expenses Variable $2, Fixed 3,000 5, Operating loss ($1,500) (b) Sales (700 x $45) $31, Variable costs Manufacturing: $32,000 / 1,000 x 700 22, Operating 2,000 24, Contribution margin 7, Fixed costs ($8,000 + 3,000) 11, Operating loss ($3,900) (c) Operating loss – absorption ($1,500) Less fixed costs in ending inventory $8,000 / 1,000 x 300 (2,400) Operating loss – variable costing ($3,900)
- alternatively, COGS can be calculated as follows: Variable: ($16 + 10 + 6) x 700 units $22, Fixed: $8,000 / 1,000 x 700 5, $28,
