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 (56,000 units)				$	296,800
Variable expenses:
Variable cost of goods sold*	$	129,360
Variable selling and administrative expenses		46,480			175,840
Contribution margin					120,960
Fixed expenses:
Fixed manufacturing overhead		109,920
Fixed selling and administrative expenses		16,800			126,720
Operating loss				$	(5,760	)

*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		68,700
Units sold		56,000
Variable costs per unit:
Direct materials	$	1.08
Direct labour	$	0.98
Variable manufacturing overhead	$	0.25
Variable selling and administrative expenses	$	0.83

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing. (Round your answer to 2 decimal places.)

b. Redo the company’s income statement for the month using absorption costing. (Do not leave any empty spaces; input a 0 wherever it is required.)

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 68,700 units but sold 81,400 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. (Do not leave any empty spaces; input a 0 wherever it is required.)

c. Reconcile the variable costing and absorption costing operating income figures.

Answer 1

1)
a)
Absorption costing unit product cost
Direct materials	$                    1.08
Direct labour	$                    0.98
Variable manufacturing overhead	$                    0.25
Fixed Manufacturing overhead = $ 109,920 / 68700 units	$                    1.60
Unit Product Cost (absorption costing)	$                    3.91
b)
Leander Office Products Inc
Absorption Costing Income Statement
Sales	$         296,800.00
Cost of Goods Sold (56000 x $3.91)	$         218,960.00
GrossMargin	$           77,840.00
Selling and Administrative Expenses   ($ 16,800 + 56,000 units * $ 0.83 per unit)	$           63,280.00
Net Operating Income	$           14,560.00
c)
Variable Costing Net Operating Income	$           (5,760.00)
Add: Fixed Manufacturing Overhead Cost deferred in inventory (68700 - 56000) x $1.60	$           20,320.00
Net Operating Income (absorption costing)	$           14,560.00
2) a.
Leander Office Products Inc
Variable Costing Income Statement
Sales (81400 x $5.3)		$       431,420.00
Variable Expenses:
Variable Cost of Goods Sold (81400 x $2.31)	$         188,034.00
Variable Selling and Administrative Expenses (81400 x .83)	$           67,562.00	$       255,596.00
Contribution Margin		$       175,824.00
Fixed expenses:
Fixed manufacturing overhead	$         109,920.00
Fixed selling and administrative expenses	$           16,800.00	$       126,720.00
Net Operating Income		$         49,104.00
b)
Leander Office Products Inc
Absorption Costing Income Statement
Sales	$         431,420.00
Cost of Goods Sold (814000 x $3.91)	$         318,274.00
Gross Margin	$         113,146.00
Selling and Administrative Expenses   ($ 16,800 + 81400 units * $ 0.83 per unit)	$           84,362.00
Net Operating Income	$           28,784.00
c)
Variable Costing Net Operating Income	$           49,104.00
Add: Fixed Manufacturing Overhead Cost deferred in inventory (68700 - 81400) x $1.60	$         (20,320.00)
Net Operating Income (absorption costing)	$           28,784.00