Darwin Company manufactures only one product that it sells for $200 per unit. Th

Question

Darwin Company manufactures only one product that it sells for $200 per unit. The company uses plantwide overhead cost allocation based on the number of units produced. It provided the following estimates at the beginning of the year: Number of units produced Total fixed manufacturing overhead costs Variable manufacturing overhead per unit produced 50,000 $1,000,000 12 During the year, the company had no beginning inventories of any kind and no ending raw materials or work in process inventories. All raw materials were used in production as direct materials. An unexpected business downturn caused annual sales to drop to 38,000 units. In response to the decline in sales, Darwin decreased its annual production to 40,000 units. The company's actual costs for the year were as follows: Variable costs per unit: Manufacturing: 78 60 12 15 Directmaterials Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expenses $1,000,000 $ 350,000

Explanation / Answer

c) COST OF GOODS MANUFACTURED Direct materials: Beginning inventory 0 Purchases (40000*78) 3120000 Total raw materials available 3120000 Ending inventory 0 Raw materials used in production 3120000 Direct labor (40000*60) 2400000 Manufacturing overhead applied = 40000*(20+12) = 1280000 [Fixed overhead predetermined rate = 1000000/50000 = $20] = Total manufacturing costs 6800000 Add: Beginning WIP 0 6800000 Less: Ending WIP 0 Cost of goods manufactured 6800000 COST OF GOODS SOLD Beginning finished goods inventory 0 Cost of goods manufactured 6800000 Cost of goods available for sale 6800000 Ending finished goods inventory (680000*2000/40000) 340000 Unadjusted cost of goods sold 6460000 Add: Overhead under applied 200000 Adjusted cost of goods sold 6660000 WORKINGS: Overhead incurred = 1000000+40000*12 = 1480000 Overhead applied 1280000 Overhead under applied 200000 2) a) ACTUAL COST: Direct materials: Beginning inventory 0 Purchases (40000*78) 3120000 Total raw materials available 3120000 Ending inventory 0 Raw materials used in production 3120000 Direct labor (40000*60) 2400000 Manufacturing overhead (Actuals) 1480000 Total manufacturing costs 7000000 Add: Beginning WIP 0 7000000 Less: Ending WIP 0 Cost of goods manufactured 7000000 Number of units produced 40000 Actual cost of production per unit      175.00 Answer b) COST OF GOODS SOLD (ACTUALS) Beginning finished goods inventory 0 Cost of goods manufactured 7000000 Cost of goods available for sale 7000000 Ending finished goods inventory (7000000*2000/40000) 350000 Cost of goods sold 6650000 ABSORPTION COSTING NET OPERATING INCOME Sales (38000*200) 7600000 Cost of goods sold 6650000 Gross profit 950000 Selling and administrative expenses (350000+15*38000) 920000 Net operating income 30000 Answer

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