Leander Office Products Inc. produces and sells small storage and organizational
ID: 2542781 • Letter: L
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 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.
Compute the unit product cost under absorption costing.
Redo the company’s income statement for the month using absorption costing.
Reconcile the variable and absorption costing operating income (loss) figures. (Loss amounts should be entered with a minus sign.)
During the second month of operations, the company again produced 57,600 units but sold 69,600 units. (Assume no change in total fixed costs.)
Prepare a contribution format income statement for the month using variable costing.
Prepare an income statement for the month using absorption costing.
Reconcile the variable costing and absorption costing operating income figures.
eBook & Resources
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:
Explanation / Answer
Answer: 1 b. Income Statement (Under absorption costing) Sales $ 264,480.00 Less: Cost of goods sold $ 205,656.00 (45600*4.51) Gross profit $ 58,824.00 Less: Selling and administrative expense $ 48,336.00 =35112+13224 Net profit $ 10,488.00 1 c. Absorption costing net operating income (loss) $ 10,488.00 Less: Fixed manufacturing overhead $ 22,680.00 =(57600-45600)*108864/57600 Variable cost net operating income $ (12,192.00) 3 a. Contribution format income statement if 69,600 units were sold Sales $ 403,680.00 =264480/45600*69600 Less: Variable Cost Direct material $ 83,520.00 =1.2*69600 Direct labour $ 81,432.00 =1.17*69600 Variable manufacturing overhead $ 17,400.00 =0.25*69600 Variable selling and administrative expense $ 53,592.00 $ 235,944.00 =0.77*69600 Contribution margin $ 167,736.00 Less: Fixed cost Fixed manufacturing overhead $ 108,864.00 Fixed selling and administrative expense $ 13,224.00 $ 122,088.00 Net income $ 45,648.00 b. Absorption costing income statement if 69,600 units were sold Sales $ 403,680.00 Less: Cost of goods sold $ 313,896.00 ($83,520+81,432+17400+108,864) Gross profit $ 89,784.00 Less: Selling and administrative expense $ 66,816.00 (53,592+13,224) Net profit $ 22,968.00 c. Reconcile the variable costing and absorption costing operating income figures. Absorption costing net operating income (loss) $ 22,968.00 Less: Fixed manufacturing overhead $ (22,680.00) =(57600-69600)*108864/57600 Variable cost net operating income $ 45,648.00 Work Note: Cost of goods sold Direct material $ 1.20 Direct labour $ 1.17 Variable manufacturing overhead $ 0.25 Fixed munafacturing overhead $ 1.89 =108864/57600 Cost of goods sold $ 4.51
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