Question 1

PA5-7 (Static) Comparing Full Absorption and Variable Costing [LO 5S-1]

Dance Creations manufactures authentic Hawaiian hula skirts that are purchased for traditional Hawaiian celebrations, costume parties, and other functions. During its first year of business, the company incurred the following costs:

Variable Cost per Hula Skirt
Direct materials	$ 9.60
Direct labor	3.40
Variable manufacturing overhead	1.05
Variable selling and administrative expenses	0.40
Fixed Costs per Month
Fixed manufacturing overhead	$ 16,125
Fixed selling and administrative expenses	4,950

Dance Creations charges $30 for each skirt that it sells. During the first month of operation, it made 1,500 skirts and sold 1,375.

Required:

1. Assuming Dance Creations uses variable costing, calculate the variable manufacturing cost per unit for last month.

2. Complete a contribution margin income statement for the last month.

3. Assuming Dance Creations uses full absorption costing, calculate the full manufacturing cost per unit for the last month.

4. Complete a full absorption costing income statement.

6. Suppose next month Dance Creations expects to produce 1,500 hula skirts and sell 1,600. Without recreating the new income statements, calculate the difference in profit between variable costing and full absorption costing. Which would be higher?

Required 1

Assuming Dance Creations uses variable costing, calculate the variable manufacturing cost per unit for last month. Note: Round answer to two decimal places.

Total Variable Manufacturing Cost per Unit

Required 2

Complete contribution margin income statement for last month. Note: Round answers to two decimal places.

Dance Creations
Contribution Margin Income Statement
For the Last Month
Contribution Margin
Net Operating Income

Required 3

Assuming Dance Creations uses full absorption costing, calculate the full manufacturing cost per unit for the last month.

Note: Round answer to two decimal places.

Total Absorption Cost per Unit

Required 4

Complete full absorption costing income statement.

Note: Do not round intermediate calculations.

Dance Creations
Full Absorption Income Statement
For Last Month
Gross Margin
Net Operating Income

Required 6

Suppose next month Dance Creations expects to produce 1,500 hula skirts and sell 1,600. Without recreating the new income statements, calculate the difference in profit between variable costing and full absorption costing. Which would be higher?

Difference in profit
Which would be higher?