Question

Alice Bohne obtained a patent on a small electronic device and organized Bohne Products, Inc., to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Bohne looked forward to a healthy profit. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data. The statement follows:

Bohne Products, Inc. Income Statement
Sales (21,000 units)			$	875,700
Variable expenses:
Variable cost of goods sold	$	291,900
Variable selling and administrative expenses		175,140		467,040
Contribution margin				408,660
Fixed expenses:
Fixed manufacturing overhead		208,800
Fixed selling and administrative expenses		255,000		463,800
Net operating loss			$	(55,140)

Ms. Bohne is discouraged over the loss shown for the month, particularly because she had planned to use the statement to encourage investors to purchase stock in the new company. A friend, who is a CPA, insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month.

Selected cost data relating to the product and to the first month of operations follow:

Units produced		24,000
Units sold		21,000
Variable costs per unit:
Direct materials	$	8.00
Direct labor	$	3.60
Variable manufacturing overhead	$	2.30
Variable selling and administrative expenses	$	8.34

  

Required:

1.	Complete the following:

a. Compute the unit product cost under absorption costing. (Round your intermediate and final answer to 2 decimal places.) Unit Product Cost:
Redo the company’s income statement for the month using absorption costing. (Round your intermediate calculations to 2 decimal places.) c. Reconcile the variable and absorption costing net operating income (loss) figures. (Loss and deduction amounts should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

2.	During the second month of operations, the company again produced 24,000 units but sold 27,000 units. (Assume no change in total fixed costs.)

a.	Prepare a contribution format income statement for the month using variable costing. (Round your intermediate calculations to 2 decimal places.)

b.	Prepare an income statement for the month using absorption costing. (Round your intermediate calculations to 2 decimal places.)

c.	Reconcile the variable costing and absorption costing net operating incomes. (Loss and deduction amounts should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

Answer 1