PROBLEM 5-21 Prepare and Reconcile Variable Costing Statements (LO 5-1, LO 5-2, LO 5-3)
Linden Company manufactures and sells a single product. Cost data for the product follow:
Variable costs per unit:
Direct materials……………………………………………. $ 6
Direct labor …………………………………………………. 12
Variable factory overhead………………………….. 4
Variable selling and administrative…………….. 3
Total variable costs per unit……………………………………. $ 25
Fixed costs per month :
Fixed manufacturing overhead …………………….. $ 240, 000
Fixed selling and administrative ……………………. $ 180, 000
Total fixed cost per month ………………………………………. $ 420, 000
The product sells for $40 per unit. Production and sales data for May and June, the first two
months of operation, are as follows:
Units Units
Produced Sold
May……………………… 30, 000 26, 000
June……………………..30, 000 34, 000
Income statements prepared by the accounting department, using absorption costing, are
presented below:
May June
Sales………………………………………………………. $ 1, 040, 000 $ 1, 360, 000
Cost of goods sold…………………………………..780, 000 1, 020, 000
Gross margin………………………………………….260, 000 340, 000
Selling and administrative expense………. 260, 000 282, 000
Net operating income…………………………… $2, 000 $ 58, 000
REQUIRED:
1. Determine the unit product cost under:
a. Absorption costing
b. Variable costing
2. Prepare contribution formal variable costing income statements for May and June.
3. Reconcile the variable costing and absorption costing net operating incomes.
4. The company’s Accounting Department has determined the break-even point to be
28,000 units per month, computed as follows:
Fixed cost per month = $ 420,000
= 28,000 units
Unit contribution margin
$ 15 per unit
Upon receiving this figure, the president commented. “There’s something peculiar here. The controller says that the break-even point is 28,000 units per month. Yet we sold only 26, 000 units in May, and the income statement we received showed a $ 2, 000 profit. Which figure do we believe?” Prepare a brief explanation of what happened on the May income statement.
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