Question

Diaz Company reports the following variable costing income statement for its single product. This company’s sales totaled 55,000 units, but its production was 85,000 units. It had no beginning finished goods inventory for the current period.
DIAZ COMPANY
Income Statement (Variable Costing)
Sales (55,000 units × $65.00 per unit) $ 3,575,000
Variable expenses
Variable manufacturing expense (55,000 units × $28.50 per unit) 1,567,500
Variable selling and admin. expense (55,000 units × $5.50 per unit) 302,500
Total variable expenses 1,870,000
Contribution margin 1,705,000
Fixed expenses
Fixed overhead 382,500
Fixed selling and administrative expense 191,250
Total fixed expenses 573,750
Net income $ 1,131,250

1. Convert Diaz's variable costing income statement to an absorption costing income statement.

2. Fill in the blanks:

Sales: $3,575,000
Less:
Cost of goods sold____________
Variable manufacturing cost____________
Fixed overhead cost____________

Cost of goods sold____________
Gross margin____________
Selling general and administrative expenses____________
Fixed selling and administrative costs____________

Variable selling and administrative expenses____________
Net income (loss) ____________

Answer 1

Answer:

Sales                               3,575,000

Variable Manufacturing   1,567,500

Fixed Manufacturing          247,500

COGS:                               1,815,000

gross profit                       1,760,000

Variable S&A expense      302,500

Fixed S&A expense            191,250  

Net Income                      1,266,250‬

Explanation:

Absorption cost will consider unit cost only the manufacturing department cost the rest are period cost.

We solve for the fixed overhead per unit using produced units:

Fixed overhead $382,500 / 85,000 = 4.5

Then we add it to the variable cost of 28.5 and get a unit cost of $33

Wer multiply by the 55,000 units to get COGS

the rest will be period cost.

Answer 2

Answer:

Sales:(55,000 units × $65.00 per unit)                                            $3,575,000

Less:

Cost of goods sold                                                                            (1,938,750)

Variable manufacturing cost ( 85,000 units × $28.50 per unit)      2,422,500

Fixed overhead cost (  85,000 units ×$ 6,75 per unit)                         573,750

Less Closing Stock ( 30,000 × $ 35,25 per unit)                             (1,057,500)

Gross margin                                                                                        1,636,250

Selling general and administrative expenses                                 (493,750)

Fixed selling and administrative cost                                                    191,250

Variable selling and administrative expenses                                    302,500

Net income (loss)                                                                                  1,142,500

Explanation:

Variable Cost of Manufacturing = Direct Materials + Direct Labor + Variable Overheads

                                                    = $28.50

Absorption Cost of Manufacturing = Direct Materials + Direct Labor + Variable Overheads + Fixed Overheads

                                                    = $ 28.50 + $ 6,75

                                                    = $ 35,25