Bairstow Company manufactures and sells a single product. The following costs were incurred during 2021, the company’s first year of operations: Variable Costs per unit: Production: Direct materials $ 6.00 Direct labour $ 9.00 Variable Manufacturing Overhead $ 3.00 Selling and administrative $ 4.00 FIXED COSTS PER YEAR Manufacturing Overhead $ 300,000 Selling and administrative $ 190,000 During 2021, the company produced 25,000 units and sold 20,000 units. The selling price of the company’s product is $ 50 per unit. Required: 1. Assume that the company uses the absorption costing method: Compute the cost to produce one unit of product. Prepare an income statement for 2021. Reconcile the variable costing and absorption costing operating incomes. Explain the reasons for the differences between the variable costing and absorption costing net incomes.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Bairstow Company manufactures and sells a single product. The following costs were incurred during 2021, the company’s first year of operations:
|
Variable Costs per unit:
|
|
|
Production: |
|
|
Direct materials |
$ 6.00 |
|
Direct labour |
$ 9.00 |
|
Variable Manufacturing Overhead |
$ 3.00 |
|
Selling and administrative |
$ 4.00 |
|
FIXED COSTS PER YEAR |
|
|
Manufacturing Overhead |
$ 300,000 |
|
Selling and administrative |
$ 190,000 |
During 2021, the company produced 25,000 units and sold 20,000 units. The selling price of the company’s product is $ 50 per unit.
Required: 1. Assume that the company uses the absorption costing method:
- Compute the cost to produce one unit of product.
- Prepare an income statement for 2021.
- Reconcile the variable costing and absorption costing operating incomes. Explain the reasons for the differences between the variable costing and absorption costing net incomes.
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