Question

Variable and Absorption Costing
Summarized data for 2016 (the first year of operations) for Gorman Products, Inc., are as follows:

Sales (75,000 units)					$3,000,000
Production costs (80,000 units)
Direct material					880,000
Direct labor					720,000
Manufacturing overhead:
Variable					544,000
Fixed					320,000
Operating expenses:
Variable					168,000
Fixed					240,000
Depreciation on equipment					60,000
Real estate taxes					18,000
Personal property taxes (inventory & equipment)					28,800
Personnel department expenses					30,000

a. Prepare an income statement based on full absorption costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Absorption Costing Income Statement
Sales						Answer
Cost of Goods Sold:
Beginning Inventory					Answer
Direct materials					Answer
Direct labor					Answer
Answer					Answer
Less: Ending Inventory					Answer
Cost of Goods Sold						Answer
Answer						Answer
Answer						Answer
Net Income (Loss)						Answer

b. Prepare an income statement based on variable costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Variable Costing Income Statement
Sales						Answer
Variable cost of Goods Sold:
Beginning Inventory					Answer
Direct materials					Answer
Direct labor					Answer
Answer					Answer
Less: Ending Inventory					Answer
Variable cost of goods sold						Answer
Answer						Answer
Answer						Answer
Fixed costs:
Answer					Answer
Operating expenses					Answer
Total Fixed Cost						Answer
Net Income (Loss)						Answer

c. Assume that you must decide quickly whether to accept a special one-time order for 1,000 units for $30 per unit.

Which income statement presents the most relevant data? Answer

Determine the apparent profit or loss on the special order based solely on these data.
Use a negative sign with your answer if the special order creates an apparent loss. Round answer to the nearest whole number.

$Answer

d. If the ending inventory is destroyed by fire, which costing approach would you use as a basis for filing an insurance claim for the fire loss? Why?
Select the most appropriate statement.

A. Absorption costing approach because the cost should include a reasonable portion of fixed manufacturing costs.

B. Variable costing approach because the cost should include a reasonable portion of fixed manufacturing costs.

Answer 1

Answer with working notes and explanation is given below

$3,000,000 Absorption Costing Income Statement Sales Cost of Goods Sold: Beginning Inventory Direct materials $880,000 Direct labor $720,000 Manufacturing overheads $864,000 $2,464,000 Less: Ending Inventory - ($2,464,000/80,000*5,000) $154,000 Cost of Goods Sold Gross profit Less: Operating expense Variable $168,000 Fixed $240,000 Depreciation on equipment $60,000 Real estate taxes $18,000 Personal property taxes (inventory & equipment) $28,800 Personnel department expenses $30,000 Net Income (Loss) $2,310,000 $690,000 $544,800 $145,200 b) $3,000,000 Variable Costing Income Statement Sales Variable cost of Goods Sold: Beginning Inventory Direct materials $880,000 Direct labor $720,000 Variable manufacturing expenses $544,000 $2,144,000 Less: Ending Inventory -($2,144,000/80,000*5,000) $134,000 Variable cost of goods sold Variable Operating expanses Contribution Margin Fixed costs: Manufacturing cost $320,000 Fixed Operating expenses $240,000 Depreciation on equipment $60,000 Real estate taxes $18,000 Personal property taxes (inventory & equipment) $28,800 Personnel department expenses $30,000 Net Income (Loss) $2,010,000 $168,000 $822,000 $696,800 $125,200 c) Variable Costing Income statement presents the most relevant data $30,000 Evaluation of Special order Sales revenue Les: Variable Cost Direct Material Direct Labor Variable manufacturing overhead Variable Operating expenses Total variable cost Incremental Contribution $11,000 $9,000 $6,800 $2,240 $29,040 $960 Total cost Direct materials Direct labor Variable manufacturing expenses Variable Operating expenses $880,000 $720,000 $544,000 $168,000 Special per unit order Cost $11.00 $11,000.00 Direct Material/80,000*1,000 $9.00 $9,000.00 Direct Labor/80,000*1,000 $6.80 $6,800.00 Variable Manu OH/80,000*1,000 $2.24 $2,240.00 Operating expenses/75,000*1,000 Direct cost is divided by production units - 80,000 units Operating expenses is divided by units sold - 75,000 units d) Absorption costing approach because the cost should include a reasonable portion of fixed manufacturing costs. explanation: In absorption costing, fixed overhead is absorbed by units manufactured hence closing stock will carry component of fixed cost in it