Leander Office Products Inc. produces and sells small products for office use. D
ID: 2569733 • Letter: L
Question
Leander Office Products Inc. produces and sells small products for office use. During the first month of operations, the 2. storage and organizational products sold well. Andrea Leander, the owner of the company was surprised to see a loss for the month on her income recommended to her by her bank manager. The statement follows statement. This statement was prepared by a local bookkeeping service Sales (40,000 units) Variable expenses: 200,000 Variable cost of goods sold Variable selling and administrative exspenses | $80,000 Contribution margin Fixed expenses: $110,000 Fixed manufacturing overhead Fixed selling and administrative $75,000 expenses $20,000 Total fixed expenses Operating income (loss) $95,000 S/5.000) 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 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. A friend who is an accountant insists that the company Units produced Units sold 50,000 40,000 Variable cost per unit: Direct materials Direct labour Variable manufacturing overhead $1.00 $0.80 S0.20 SO.75 Variable selling and administrative expenses Required: i. Complete the following. a Compute the unit product cost under absorption costing. b. Redo the company's income statement for month using absorption costing. c. Reconcile the variable and absorption costing operating income (loss) figures. d. Was the accountant correct in suggesting that the company really earned a "profit" for the month? Explain. li. ii. During the second month of operation, the company again produced 50,000 units but sold 60,000 units. (Assume no change in total fixed costs.) a. Prepare a contribution format income statement for the month using variable b. c. costing. Prepare an income statement for the month using absorption costing. Reconcile the variable and absorption costing operating income figures.Explanation / Answer
i.a
Key difference between variable costing & absorption costing is treatment of fixed manufacturing overheads- Under variable costing, such overheads are expensed out as and when incurred while in absorption costing, such overheads are "absorbed" over the actual production & form part of the inventory cost and therefore get expensed out as and when such inventory gets sold.
The per unit product cost under absorption costing using the data given for the first month is as shown below:
Cost ($ per unit)
Remarks
Direct material
1.00
As given in the question
Direct labour
0.80
As given in the question
Variable Mfg overheads
0.20
As given in the question
Fixed Mfg overheads
1.50
Fixed Mfg overheads as given in the question divided by 50000 units of actual production
Total
3.50
Please note that variable selling & adminstration overheads are not part of product cost under absorption costing.
i.b
Using the above data, the income statement for the first month under absorption costing is as shown below:
Units produced
50000
Units sold
40000
Sales
200,000
Cost of sales
Direct material
40,000
Direct labour
32,000
Variable Mfg overheads
8,000
Fixed Mfg overheads
60,000
Total cost of sales
140,000
Gross profit [Sales (-) cost of sales]
60,000
Selling & Admn overheads [Variable + Fixed]
50,000
Operating income [Gross profit (-) Selling & Admn overheads]
10,000
i.c
Reconciliation between the profits as per variable costing and absorption costing is given below:
Operating income as per variable costing
(5,000)
Add Fixed manufacturing overheads charged lower to P&L under absorption costing
15,000
Operating income as per absorption costing
10,000
ii
Where the quantity produced and quantity sold do not match over a period, usage of absorption costing is a better way to account for inventory and compute the operating results of a going-concern organisation. Charging off all fixed manufacturing overheads as & when incurred irrespective of inventory movements during the period is not proper & in that sense the accountant was right in recommending absorption costing to Leander.
iii.a.
Income statement under variable costing for the second month is shown below:
Sales (60000 units)
300,000
Variable expenses
-Direct material
60,000
-Direct labour
48,000
-Variable Mfg overheads
12,000
-Variable selling & admn overheads
45,000
Total cost of sales
165,000
Contribution
135,000
Fixed expenses
-Fixed manufacturing overheads
75,000
-Fixed Selling & Admn overheads
20,000
95,000
Operating income
40,000
Variable selling & administration overheads above are computed as $ 0.75 per unit x 60000 units sold = $ 45,000
iii.b.
Income statement for the second month under absorption costing is shown below:
Units produced
50000
Units sold
60000
Sales
300,000
Cost of sales
Direct material
60,000
Direct labour
48,000
Variable Mfg overheads
12,000
Fixed Mfg overheads
90,000
Total cost of sales
210,000
Gross profit [Sales (-) cost of sales]
90,000
Selling & Admn overheads [Variable + Fixed]
65,000
Operating income [Gross profit (-) Selling & Admn overheads]
25,000
iii.c.
Reconciliation of operating income for the second month between variable costing and absorption costing is as below:
Operating income as per variable costing
40,000
Less Fixed manufacturing overheads charged higher to P&L under absorption costing
(15,000)
Operating income as per absorption costing
25,000
Cost ($ per unit)
Remarks
Direct material
1.00
As given in the question
Direct labour
0.80
As given in the question
Variable Mfg overheads
0.20
As given in the question
Fixed Mfg overheads
1.50
Fixed Mfg overheads as given in the question divided by 50000 units of actual production
Total
3.50
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