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) $4,500,000 Production costs (80,000 units) Direct material 1,320,000 Direct labor 1,080,000 Manufacturing overhead: Variable 816,000 Fixed 480,000 Operating expenses: Variable 252,000 Fixed 360,000 Depreciation on equipment 90,000 Real estate taxes 27,000 Personal property taxes inventory & equipment) 43,200 Personnel department expenses 45,000 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 $ 4,500,000 Cost of Goods Sold: Beginning inventory Direct materials 1,320,000 Direct labor 1,080,000 Manufacturing overhead ✓ 1,296,000 Less: Ending Inventory 0X Cost of Goods Sold Gross profit Operating expenses Net Income (Loss) S

Answer 1

Answer is given below

$4,500,000 Gorman Products Inc. Income statement Full Absorption Costing Sales Less: Cost of Goods Sold Beginning Inventory $0 Direct Material $1,320,000 Direct Labor $1,080,000 Manufacturing overhead $1,296,000 Less : Ending FG Inventory 5,000 units $231,000 Cost of Goods sold Gross margin Less: Operating expense Net Income (Loss) $3,465,000 $1,035,000 $817,200 $217,800 Closing inventory = Total manufacturing cost/80,000 *5,000 units b. $4,500,000 Gorman Products Inc. Income statement Variable Costing Sales Less: Cost of Goods Sold Beginning Inventory Direct Material $1,320,000 Direct Labor $1,080,000 Variable Manufacturing cost $816,000 Less : Ending FG Inventory 5,000 units $201,000 Variable Cost of Goods Sold Variable Operating expenses Contribution Margin Less : Fixed cost Manufacturing overheads $480,000 Operating expense $565,200 Total Fixed Cost Net Income (Loss) $3,015,000 $252,000 $1,233,000 $1,045,200 $187,800 Closing inventory = Variable manufacturing cost/80,000 *5,000 units C. Variable Costing Income statement presents the most relevant data Profit of Special order $1,440 Evaluation of special one-time order Sales- $45 per unit Less: Variable manufacturing cost Variable Operating cost Incremental contribution $45,000 (1,000*$45) $40,200 (1,000*540.20) $3,360 (1,000*$3.36) $1,440 Variable Manufacturing cost Production units Variable cost per unit $3,216,000 80,000 $40.20 Variable Operating cost Sales units Variable cost per unit $252,000 75,000 $3.36 d) Answer is Absorption Costing Reason being the closing inventory of finished goods will have portion of fixed manufacturing overhead in it