Problem: Absorption vs Variable Costing 36 The Lawn Furniture Manufacturing Comp

Question

Problem: Absorption vs Variable Costing 36 The Lawn Furniture Manufacturing Company has no inventories of any type on January 1, 2014. The company does not generally carry any Work in Process Inventories at the end of a time period. Variable production costs per unit are the same for 2014, 2015, and 2016. These costs include $10 per unit for direct materials, $7 per unit for direct labor and $8 per unit for variable overhead. Total fixed overhead costs are $60,000 per year. Variable selling and administrative expenses are $3 per unit sold each year and fixed selling and administrative expenses are $45,000 per year. The selling price is $50 per unit for all 3 years. Product and sales figures (in units) for all 3 years are as follows: Production (units) Sales (units) 2014 10,000 units 2015 15,000 units 16,500 units 2016 12,000 units 11,000 units 8,000 units The company uses the FIFO method to assign cost to any units left in ending Finished Goods Inventory Prepare in good form an income statement for the year ending December 31, 2015. Remember to use a proper heading on your financial statement. Use Absorption Costing (14 points). Use this space for your worksheet and the following blank page for your income statement. DELL

Explanation / Answer

Income statement (absorption) Particulars Amount Sales (16500 units X $ 50)(c ) 825000 Cost of goods sold:(d) opening inventory ( 2000 units X $29)(a) 58000 Production cost (15000 units X $29)(b) 435000 Cost of goods available for sale(a+b) 493000 Less: closing inventory (500units X $29) 14500 478500 Gross profit (c-d) 346500 less : variable selling & administrative cost (3 X 16500) 49500 less : Fixed selling & administrative cost 45000 Net operating income 252000 Computation of closing inventory Units Opening inventory 2000 ADD: production 15000 Less: sales 16500 Closing inventory 500 Calculation of cost per unit Direct material 10 Direct labor 7 Variable overhead 8 Fixed overhead (60000/1500) 4 Total 29

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