Scoot Speed Limited manufactures electric scooter. The company provided the following financial information for the year 2019: Required: (a) Calculate the unit product cost per electric scooter under BOTH Absorption costing and Variable costing. (5 marks) (b) Prepare an income statement for the year using Absorption costing. (5 marks) (c) Prepare a contribution format income statement for the year using Variable costing. (5 marks) (d) Reconcile the operating profit derived from (b) and (c) under the two costing methods. (5 marks)
To calculate the unit product cost per electric scooter under absorption costing, you need the following information:
- Direct materials cost per unit
- Direct labor cost per unit
- Variable manufacturing overhead per unit
- Fixed manufacturing overhead per unit (allocated using a predetermined overhead rate)
- Number of scooters produced in 2019
Add up all these costs to get the unit product cost per electric scooter under absorption costing.
To calculate the unit product cost per electric scooter under variable costing, you only need the variable costs:
- Direct materials cost per unit
- Direct labor cost per unit
- Variable manufacturing overhead per unit
Add up these costs to get the unit product cost per electric scooter under variable costing.
For part (b), you need the following information to prepare an income statement using absorption costing:
- Sales revenue
- Cost of goods sold (unit product cost per electric scooter under absorption costing multiplied by the number of scooters sold)
- Selling and administrative expenses
- Other income and expenses (if any)
After deducting cost of goods sold and selling and administrative expenses from sales revenue, and adding or subtracting other income and expenses, you will get the operating profit under absorption costing.
For part (c), you need the following information to prepare a contribution format income statement using variable costing:
- Sales revenue
- Variable expenses (unit product cost per electric scooter under variable costing multiplied by the number of scooters sold)
- Fixed expenses (including selling and administrative expenses)
Deducting variable expenses from sales revenue, and subtracting fixed expenses from the result, will give you the contribution margin. Subtracting any other income or adding any other expenses will give you the operating profit under variable costing.
For part (d), you need to compare the operating profit derived from the income statements prepared in parts (b) and (c). Calculate the difference between the two to reconcile the operating profit under the two costing methods.
To calculate the unit product cost per electric scooter under both Absorption costing and Variable costing, we need the following information:
Absorption costing considers both variable and fixed manufacturing costs as part of the product costs. The unit product cost is calculated as follows:
(a) Calculate the unit product cost per electric scooter under Absorption costing:
1. Determine the total variable manufacturing cost: Add up all variable manufacturing costs for the year (such as direct materials, direct labor, and variable overhead).
2. Determine the total fixed manufacturing cost: Add up all fixed manufacturing costs for the year (such as fixed overhead).
3. Determine the total number of electric scooters manufactured: This information should be provided in the question.
4. Calculate the unit product cost: Divide the total variable manufacturing cost plus the total fixed manufacturing cost by the total number of electric scooters manufactured.
Variable costing only considers variable manufacturing costs as part of the product costs. The unit product cost is calculated as follows:
(b) Calculate the unit product cost per electric scooter under Variable costing:
1. Determine the total variable manufacturing cost: Add up all variable manufacturing costs for the year (such as direct materials, direct labor, and variable overhead).
2. Determine the total number of electric scooters manufactured: This information should be provided in the question.
3. Calculate the unit product cost: Divide the total variable manufacturing cost by the total number of electric scooters manufactured.
Moving on to the next steps:
(c) Prepare an income statement for the year using Absorption costing:
1. Determine the sales revenue: This information should be provided in the question.
2. Determine the cost of goods sold: Multiply the unit product cost calculated in (a) by the number of electric scooters sold.
3. Determine the gross profit: Subtract the cost of goods sold from the sales revenue.
4. Determine the total operating expenses: Add up all operating expenses for the year.
5. Determine the operating profit (income before taxes): Subtract the total operating expenses from the gross profit.
(d) Prepare a contribution format income statement for the year using Variable costing:
1. Determine the sales revenue: This information should be provided in the question.
2. Determine the variable cost of goods sold: Multiply the unit product cost calculated in (b) by the number of electric scooters sold.
3. Determine the variable expenses: Add up all variable operating expenses for the year.
4. Calculate the contribution margin: Subtract the variable cost of goods sold and variable expenses from the sales revenue.
5. Determine the fixed expenses: Add up all fixed operating expenses for the year.
6. Determine the operating profit (income before taxes): Subtract the fixed expenses from the contribution margin.
To reconcile the operating profit derived from (b) and (c) under the two costing methods:
Compare the operating profit calculated using Absorption costing (from step (c)) with the operating profit calculated using Variable costing (from step (d)). The difference between the two operating profit figures is primarily due to the treatment of fixed manufacturing costs. Absorption costing allocates fixed manufacturing costs to the units produced, while Variable costing treats fixed manufacturing costs as period expenses and does not include them in the unit product cost.