The EG Company produces and sells one product. The following data refer to the year just completed: Beginning Inventory 0 units Units produced 25,000 Units sold 20,000 Sales price per unit $400 Variable selling and administrative expenses per unit $ 15 Fixed Selling and administrative expenses (Total) $275,000 Manufacturing Costs: Direct materials cost per unit$ 200 Direct labor cost per unit$ 50 Variable manufacturing overhead cost per unit$ 30 Fixed manufacturing overhead (Total)$300,000 Required: a. What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing? c. Prepare a contribution format income statement for the year using variable costing. d. Prepare an income statement for the year using absorption costing.

Part a. What is the unit product cost for the month under variable costing?

Direct Materials                                         200

Direct Labor                                                 50

Variable Manufacturing Overhead             30

Unit product cost                                       280

Therefore Unit Product cost is $280

Part b. What is the unit product cost for the month under absorption costing?

Direct Materials                                                                200

Direct Labor                                                                        50

Variable Manufacturing Overhead                                    30

Fixed Manufacturing Overheads(300,000/25000)          12      

Unit product cost                                                              292

Therefore Unit Product cost is $292

Part  c. Prepare a contribution format income statement for the year using variable costing.

Sales (20,000× $400)                                                                       8,000,000

Less Cost of Sales                                                                           ( 5,600,000)

Opening Stock                                                                                           0

Add Cost of Goods Manufactured (25,000× $280)                        7,000,000

Less Closing Stock (5,000×$280)                                                  ( 1,400,000)

Contribution                                                                                       2,400,000

Less Expenses:

Fixed Manufacturing Costs                                                                  300,000

Variable Selling and Administrative Expenses (20,000×$15)           300,000

Fixed Selling and Administrative Expenses                                        275,000

Net Income                                                                                          1,525,000

Part d. Prepare an income statement for the year using absorption costing.

Sales (20,000× $400)                                                                       8,000,000

Less Cost of Sales                                                                           ( 5,840,000)

Opening Stock                                                                                           0

Add Cost of Goods Manufactured (25,000× $292)                        7,300,000

Less Closing Stock (5,000×$292)                                                  ( 1,460,000)

Gross Profit                                                                                          2,160,000

Less Expenses:

Variable Selling and Administrative Expenses (20,000×$15)           300,000

Fixed Selling and Administrative Expenses                                        275,000

Net Income                                                                                          1,585,000

Explanation:

Part a. What is the unit product cost for the month under variable costing?

Only Variable Manufacturing Costs are included as Product Cost

Part b. What is the unit product cost for the month under absorption costing?

Both Variable Manufacturing Costs and Fixed Manufacturing Costs are included as Product Cost

Part  c. Prepare a contribution format income statement for the year using variable costing.

Fixed Manufacturing Costs and Non-Manufacturing Costs are treated as Period Costs

Part d. Prepare an income statement for the year using absorption costing.

Only Non-Manufacturing Costs are treated as Period Costs

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