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 (53,400 units)				$	336,420
Variable expenses:
Variable cost of goods sold*	$	145,248
Variable selling and administrative expenses		65,682			210,930
Contribution margin					125,490
Fixed expenses:
Fixed manufacturing overhead		119,306
Fixed selling and administrative expenses		19,224			138,530
Operating loss				$	(13,040	)

*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		63,800
Units sold		53,400
Variable costs per unit:
Direct materials	$	1.44
Direct labour	$	1.05
Variable manufacturing overhead	$	0.23
Variable selling and administrative expenses	$	1.23

During the second month of operations, the company again produced 63,800 units but sold 74,200 units. (Assume no change in total fixed costs.)

b. Prepare an income statement for the month using absorption costing. (Do not leave any empty spaces; input a 0 wherever it is required.) $ 467,460 Sales Cost of goods sold: Beginning inventory 340,578 340,578 이 Add: Cost of goods manufactured Goods available for sale Less: Ending inventory Gross margin Selling and administrative expenses Operaing income 340,578 126,882 110,490 16,392 $ c. Reconcile the variable costing and absorption costing operating income figures. $ (39,540) Variable costing operating income (loss) Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing Absorption costing operating income (loss) $ (39,540)

Answer 1

Unit Product cost if Company Uses Absorption Costing Direct Material Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Unit Product cost 1.44 1.05 0.23 1.87 4.59 Fixed Manufacturing Overhead Per unit = Total Fixed Manufacturing Overhead/Total units Produced = 119306 / 63800 = $ 1.87 Absorption costing Income Statement 336,420 Sales Cost of Goods Sold: Beginning Inventory Add:Cost of goods Manufactured Goods available for sale Less: Ending Inventory Cost of Goods Sold Gross Margin Selling & Administrative expense Operating Income 292,842 292,842 47,736 245,106 91,314 84,906 6,408 Less Working: Cost of Goods Manufactured = Units produced x unit product cost = 63800 x 4.59 = 292842 Units in ending inventory = units produced units sold = 63800 - 53400 = 10400 units Ending Inventory = Units in ending inventory x unit product cost = 10400 x 4.59 = 47736 selling & administrative cost = Variable + Fixed = 65682 + 19224 =84906 Reconciliation of variable & absorption costing Net Operating income under variable costing Add Fixed Manufacturing OH cost deffered in inventory Net Operating income under absorption costing (13,040) 19,448 (10400 x 1.87) 6,408 In absorption costing fixed mfg cost is conidered only for units sold but in variable costing total fixed mfg cost is deducted hence the difference. Here ending inventory is 10400 units and fixed mfg cost per unit is $ 1.87, multiply both to get defferred mfg oh.