Question

Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 44,000 units and sold 36,000 units at a price of \(140 per unit.

Manufacturing costs
Direct materials per unit	\)60
Direct labor per unit	\(22
Variable overhead per unit	\)8
Fixed overhead for the year	\(528,000
Selling and administrative costs
Variable selling and administrative cost per unit	\)11
Fixed selling and administrative cost per year	$105,000

Assume the company uses absorption costing.

a. Determine its product cost per unit.

b. Prepare its income statement for the year under absorption costing.

Assume the company uses variable costing.

a. Determine its product cost per unit.

b. Prepare its income statement for the year under variable costing.

Short answer

The net income under absorption costing is$867,000.

The net income under variable costing is$771,000.

Step-by-step solution

Meaning of Costing System

A costing system refers to an approach designed by the business entities to capture varieties of costs incurred to produce a product or service. This system comprises various forms, processes, and reports.

Determination of product cost per unit under absorption costing

Particulars	Amounts ($)
Direct materials per unit	$60
Direct labor per unit	22
Variable overhead per unit	8
Fixed overhead per unit (528000/44000)	12
Absorption cost per unit	$102

Preparation of income statement under absorption costing

Cool Sky
Absorption Costing Income Statement
Particulars	Details	Amounts ($)
Sales	(36000*140)	$5,040,000
Less: Cost of goods sold	Working note	3,672,000
Gross profit		1,368,000
Less: Selling and administrative expenses
Variable	(36000*11)	396,000
Fixed		105,000
Net income		$867,000

Working Note:

Computation of cost of goods sold:

Particulars	Amounts ($)
Direct material (36000*60)	$2,160,000
Direct labor (36000*22)	792,000
Variable overhead cost (36000*8)	288,000
Fixed overhead cost (36000*12)	432,000
Cost of goods sold	$3,672,000

Determination of product cost per unit under variable costing

Particulars	Amounts ($)
Direct materials per unit	$60
Direct labor per unit	22
Variable overhead per unit	8
Variable cost per unit	$90

Preparation of income statement under variable costing  

Cool Sky
Absorption Costing Income Statement
Particulars	Details	Amounts ($)
Sales	(36000*140)	$5,040,000
Less: Variable costs:
Direct materials	(36000*60)	2,160,000
Direct labor	(36000*22)	792,000
Variable overhead	(36000*8)	288,000
Variable selling and administrative expenses	(36000*11)	396,000
Contribution margin		$1,404,000
Less: Fixed costs:
Fixed selling and administrative expenses		105,000
Fixed overhead		528,000
Net income		$771,000