7. Sandi Scott obtained a patent on a small electronic device and organized Scot
ID: 2468559 • Letter: 7
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7. Sandi Scott obtained a patent on a small electronic device and organized Scot Products, Inc., to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to a healthy profit. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data. The statement follows: Scolt Products, Inc Income Statement Sales (23,000 units) Variable expenses $ 834.900 Variable cost of goods sold Variable selling and administrative expenses 276,000 182,850 458,850 Contribution margin Fixed expenses 376,050 Fixed manufacturing overhead Fixed selling and administrative expenses 213,200 220,000 433,200 Net operating loss (57,150) Ms. Scott is discouraged over the loss shown for the month, particularly because she had planned to use the statement to encourage investors to purchase stock in the new company.A friend, who is a CPA, 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 pront for the month. Selected cost data relating to the product and to the first month of operations follow Units produced Units sold Variable costs per unit 26,000 23,000 Direct materials Direct labor Variable manufacturing overhead 7.20 s 280 $ 2.00Explanation / Answer
Answer 1. a Calculation Cost Per Unit Under Absorption Costing Direct Materials 7.20 Direct Labor 2.80 variable MOH 2.00 Fixed MOH ($213200 / 26000 Units) 8.20 Total Cost per Unit 20.20 Note: Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost. Answer 1. b Income Statement Under Absorption Costing Sales (23000 Units) 834,900 Less: Cost of Goods Sold (23000 Units X $20.20) (464,600) Operating Income 370,300 Less: Fixed Selling Expenses & Admn. Exp. (220,000) Less: Variable Selling Expenses & Admn. Exp. (23000 Units X $7.95) (182,850) Net Operating Profit / (Loss) (32,550) Answer 1. c Reconcilation Statement of variable & Absortion Costing Net Operating Incomes Variable Costing - Net Operating Income / (Loss) (57,150) Add: Difference of Closing Stock of Inventory ($20.20 - $12) X 3000 Units 24,600 Absorption Costing - Net Operating Income / (Loss) (32,550) Answer 3. a. Variable Costing Income Statement Sales (29000 Units X $36.30) 1,052,700 Less: Variable Expenses Cost of Goods Sold (29000 Units X $12) (348,000) Selling & Admn. Exp. (29000 Units X $7.95) (230,550) (578,550) Contribution 474,150 Less: Fixed Expenses Fixed MOH (213,200) Fixed Selling & Admn. Exp. (220,000) (433,200) Net Opearting Profit / (Loss) 40,950 Answer 3. b. Absorption Costing Income Statement Sales (29000 Units X $36.30) 1,052,700 Less: Cost Of Goods Sold (585,800) Gross profit 466,900 Less: Fixed Selling & Admn Exp. (220,000) Less: Variable Selling & Admn Exp. (29000 Units X $7.95) (230,550) Net Operating Profit / (Loss) 16,350 Calculation of Cost of goods Sold Direct Materials ($7.20 X 26000 Units) 187,200 Direct Labor ($2.80 X 26000 Units) 72,800 variable MOH ($2 X 26000 Units) 52,000 Fixed MOH 213,200 Opening Stock (3000 Units X $20.20) 60,600 Total COGS 585,800 Answer 3. c. Reconcilation Statement of variable & Absortion Costing Net Operating Incomes Variable Costing - Net Operating Income / (Loss) 40,950 Less: Difference of Opening Stock of Inventory ($20.20 - $12) X 3000 Units (24,600) Absorption Costing - Net Operating Income / (Loss) 16,350
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