Question :

Direct and absorption costing

The information that follows pertains to XYZ Products for the year ended 31^st December, 20X8.

Inventory, 1/1/X8 26,000 units

Units manufactured 80,000

Units sold 83,000

Inventory, 12/31/X8 ? units

Manufacturing costs:

Direct materials $4 per unit

Direct labor $5 per unit

Variable factory overhead $9 per unit

Fixed factory overhead $300,000

Selling & administrative expenses:

Variable $2 per unit

Fixed $136,000

The unit selling price is $26. Suppose that costs have been stable in recent years.

Instructions:

a. Evaluate the number of units in the ending inventory.

b. Determine the cost of a unit assuming use of:

1. Direct costing.

2. Absorption costing.

c. Prepare an income statement for the year ended 31^st December, 20X8, by using direct costing.

d. Prepare an income statement for the year ended 31^st December, 20X8, by using absorption costing.