Question

Leander Office Products Inc. produces and sells small storage and organizational products for office use. During the first month of operations, the products sold well. Andrea Leander, the owner of the company, was surprised to see a loss for the month on her income statement. This statement was prepared by a local bookkeeping service recommended to her by her bank manager. The statement follows:

LEANDER OFFICE PRODUCTS INC. Income Statement
Sales (45,600 units)				$	264,480
Variable expenses:
Variable cost of goods sold*	$	119,472
Variable selling and administrative expenses		35,112			154,584
Contribution margin					109,896
Fixed expenses:
Fixed manufacturing overhead		108,864
Fixed selling and administrative expenses		13,224			122,088
Operating loss				$	(12,192	)

*Consists of direct materials, direct labour, and variable manufacturing overhead.

Leander is discouraged over the loss shown for the month, particularly since she had planned to use the statement to encourage investors to purchase stock in the new company. A friend who is an accountant 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		57,600
Units sold		45,600
Variable costs per unit:
Direct materials	$	1.20
Direct labour	$	1.17
Variable manufacturing overhead	$	0.25
Variable selling and administrative expenses	$	0.77

Required:

1.	Complete the following:

a.

Compute the unit product cost under absorption costing. b. Redo the company’s income statement for the month using absorption costing. c. Reconcile the variable and absorption costing operating income (loss) figures. (Loss amounts should be entered with a minus sign.)               2. Not available in Connect. 3. During the second month of operations, the company again produced 57,600 units but sold 69,600 units. (Assume no change in total fixed costs.) a. Prepare a contribution format income statement for the month using variable costing. b. Prepare an income statement for the month using absorption costing. Cost of goods sold:000$0 c. Reconcile the variable costing and absorption costing operating income figures.             eBook & Resources

Answer 1

Answer:
1 b.	Income Statement (Under absorption costing)
	Sales	$                  264,480.00
Less:	Cost of goods sold	$                  205,656.00	(45600*4.51)
	Gross profit	$                    58,824.00
Less:	Selling and administrative expense	$                    48,336.00	=35112+13224
	Net profit	$                    10,488.00
1 c.	Absorption costing net operating income (loss)	$                    10,488.00
	Less: Fixed manufacturing overhead	$                    22,680.00	=(57600-45600)*108864/57600
	Variable cost net operating income	$                  (12,192.00)
3
a.	Contribution format income statement if 69,600 units were sold
	Sales		$       403,680.00	=264480/45600*69600
Less:	Variable Cost
	Direct material	$                    83,520.00		=1.2*69600
	Direct labour	$                    81,432.00		=1.17*69600
	Variable manufacturing overhead	$                    17,400.00		=0.25*69600
	Variable selling and administrative expense	$                    53,592.00	$       235,944.00	=0.77*69600
	Contribution margin		$       167,736.00
Less:	Fixed cost
	Fixed manufacturing overhead	$                  108,864.00
	Fixed selling and administrative expense	$                    13,224.00	$       122,088.00
	Net income		$         45,648.00
b.	Absorption costing income statement if 69,600 units were sold
	Sales	$                  403,680.00
Less:	Cost of goods sold	$                  313,896.00	($83,520+81,432+17400+108,864)
	Gross profit	$                    89,784.00
Less:	Selling and administrative expense	$                    66,816.00	(53,592+13,224)
	Net profit	$                    22,968.00
c.	Reconcile the variable costing and absorption costing operating income figures.
	Absorption costing net operating income (loss)	$                    22,968.00
	Less: Fixed manufacturing overhead	$                  (22,680.00)	=(57600-69600)*108864/57600
	Variable cost net operating income	$                    45,648.00
	Work Note:
	Cost of goods sold
	Direct material	$                               1.20
	Direct labour	$                               1.17
	Variable manufacturing overhead	$                               0.25
	Fixed munafacturing overhead	$                               1.89	=108864/57600
	Cost of goods sold	$                               4.51