EXERCISE 5A-1 Super-Variable Costing Income Statement [LO 5-6 Zola Company manuf

Question

EXERCISE 5A-1 Super-Variable Costing Income Statement [LO 5-6 Zola Company manufactures and sells one product. The following information pertains to the company's first year of operations: Varlable cost per unit: $18 Flxed costs per year Direct labor Fixed manufacturing overheacd Flxed selling and administrative expenses $200,000 $250,000 $80,000 The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Zola produced 25,000 units and sold 20,000 units. The selling price of the company's product is $50 per unit. Required 1. Assume the company uses super-variable costing: a. Compute the unit product cost for the year. b. Prepare an income statement for the year.

Explanation / Answer

1. What is Super Variable Costing?

Super Variable Costing: Super variable costing considers only direct materials as variable costs. It treats the direct labour and other manufacturing overhead as fixed costs.

Variable costing method considers both direct material and direct labour as variable costs and both are taken for calculating cost per unit.

But as per Super Variable costing, only direct material is taken for calculating Cost per unit.

2. How to calculate cost per unit and prepare income statement under Super Variable Costing?

Step 1. Cost per unit = Direct Material Per unit

Step 2. Super Variable Costing – Contribution Margin Income Statement

Sales

xxxx

Less: Cost of Goods sold(only direct material)

Opening stock

xxxx

Add: cost of goods manufactured

xxxx

xxxx

Less: Closing stock

xxxx

xxxx

Contribution Margin

xxxx

Less: Fixed Expenses

          Direct Labour

xxxx

          Fixed Manufacturing Overhead

xxxx

          Fixed Selling and administrative expenses

xxxx

xxxx

Net Operating Income

xxxx

Now we will move to the question:

Information in the question

Zola Company

Variable cost per unit

Direct materials

$18

Fixed costs per year:

Direct labour

$200,000

Fixed manufacturing overhead

$250,000

Fixed selling and administrative expenses

$80,000

Units produced

25,000

Units sold

20,000

Selling price

$50 per unit

Question 1: Compute the unit product cost for the year under Super Variable Costing

Under Super variable costing

                                                                   Cost per unit = Direct material per unit

                                                                                                = $ 18

Question 2: Prepare an income statement for the year under Super Variable Costing

Super Variable Costing – Contribution Margin Income Statement

Sales (20,000 units x $50)

1,000,000

Less: Cost of Goods sold(only direct material)

Opening stock

Nil

Add: cost of goods manufactured(25,000 units x $ 18)

450,000

450,000

Less: Closing stock(5,000 units x $18)

90,000

360,000

Contribution Margin

640,000

Less: Fixed Expenses

          Direct Labour

200,000

          Fixed Manufacturing Overhead

250,000

          Fixed Selling and administrative expenses

80,000

530,000

Net Operating Income

110,000

Sales

xxxx

Less: Cost of Goods sold(only direct material)

Opening stock

xxxx

Add: cost of goods manufactured

xxxx

xxxx

Less: Closing stock

xxxx

xxxx

Contribution Margin

xxxx

Less: Fixed Expenses

          Direct Labour

xxxx

          Fixed Manufacturing Overhead

xxxx

          Fixed Selling and administrative expenses

xxxx

xxxx

Net Operating Income

xxxx

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