Raw Materials (straw and wood) Direct Labor $3.00 Variable Overhead $2.00 $1.00 Problem: Williams Company ( Variable vs. Full Fixed Manufacturing Costs $6,000/year Absorption Costing) Williams Company produces Nonmanufacturing Costs: SG&A brooms and had the following costs, volumes, and Fixed SG&A Variable $4,000/year prices in 1996: Variable Manufacturing Costs (per SG&A $4/unit broom): 1996 Selling Price 1996 $18.00/unit Sales 3,000 units Required: (1) Assume that 1996 production was 3,000 units. Compute the unit manufacturing costs and prepare the income statements under variable and full absorption costing. (2) Assume that 1996 production was 4,000 units. Compute the unit manufacturing costs and prepare the income statements under variable and full absorption costing. Reconcile variable and full absorption profits (1) Variable Costing Unit Manufacturing Cost = DM + DL + VOH= $3.00 + $2.00 + $1.00= $6.00 Fixed Manufacturing Costs= $6,000/year expensed Contribution Margin Format: Sales ($18 x 3,000 units $54,000 COGS ($6.00 x 3,000 units) Variable SG&A ($4.00 18,000 x 3,000 units) Contribution Margin Fixed Manufacturing Costs 12,000 Fixed Nonmanufacturing Costs Operating Profit $24,000 ,000 4.000 $14,000 Full Absorption Costing: Unit Manufacturing Cost = DM + DL + VOH + FOH/unit = $3 + $2 + $1 + $6,000/3,000=$8.00 Gross Margin Format: Sales ($18 x 3,000 units) $54,000 COGS ($8.00 x 3,000 units) Variable SG&A ($4.00 24,000 x 3,000 units) Gross Margin Fixed Nonmanufacturing Costs 12.000 Net Income $18,000 4.000 $14,000 (2) Variable Costing: Unit Manufacturing Cost = DM + DL + VOH= $3.00 + $2.00 + $1.00= $6.00 Fixed Manufacturing Costs= $6,000/year expensed Contribution Margin Format: Sales ($18 x 3,000 units $54,000 COGS ($6.00 x 3,000 units) Variable SG&A ($4.00 18,000 x 3,000 units) Contribution Margin Fixed Manufacturing Costs 12.000 Fixed Nonmanufacturing Costs Operating Profit $24,000 6,000 4.000 $14,000 Full Absorption Costing: Unit Manufacturing Cost = DM + DL + VOH + FOH/unit= $3 + $2"+ $1 + $6,000/4,000= $7.50 Gross Margin Format: Sales ($18 x 3,000 units) $54,000 COGS ($7.50 x 3,000 units) Variable SG&A ($4.00 22,500 x 3,000 units) Gross Margin Fixed Nonmanufacturing Costs 12.000 Net Income $19,500 4.000 $15,500 Reconciliation of Operating Profit and Net Income: Net Income under Full Absorption $15,500 Plus: FOH included in beginning inventory Less: FOH charged to ending inventory ($1.50/unit x 1,000 units not sold) Operating Profit under Variable Costing (1.500) $14,000