W Produce Anything, Inc., a small manufacturing company, commenced operations at the beginning of the year. The following income statement for the first quarter was prepared by MBA graduate #1.
For The Quarter Ended March 31
Sales (46,000 units) $2,300,000
Variable cost of goods sold 910,800
Variable selling & administrative 368,000 1,278,800
Contribution Margin 1,021,200
Fixed manufacturing overhead 600,000
Fixed selling & administrative 431,200 1,031,200
Net Operating Loss $(10,000)
Management is discouraged about the loss. MBA graduate #2 insists that the company should be using absorption costing instead of variable costing. She (or he) states that, if absorption costing had been used, the company would have reported a profit for the quarter.
For the first quarter, the company is producing only one product. Production and cost data relating to that product for the first quarter is:
Units produced 50,000
Units sold 46,000
Variable costs per unit
Direct materials $4.20
Direct labor 14.40
Variable manufacturing overhead 1.20
Variable selling & administrative 8.00
1a] Compute the unit cost under absorption costing.
b] Redo the company’s income statement for the quarter using absorption costing.
c] Reconcile the variable and absorption costing net operating income (loss) figures.
2] Was the MBA graduate #2 correct in stating that the company really earned a profit for the quarter? Please explain your answer.
3] During the second quarter of operations, the company again produced 50,000 units but sold 54,000 units. (Assume no change in fixed costs.)
a) Prepare a contribution format income statement for the second quarter using variable costing.
b) Prepare an income statement for the second quarter using absorption costing.
c) Reconcile the variable and absorption costing net operating incomes.
The S Corporation makes two types of skis—Better and Great. The
data for the two product lines is:
Selling price per unit 210 150
Direct materials per unit ($) 110 80
Direct labor per unit ($) 30 15
Direct labor-hours per unit 2 1
Estimated annual production 12,500 55,000
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours.
Estimated total manufacturing overhead $2,000,000
Estimated total direct labor-hours 80,000DLHs
1] Using Exhibit 6-12 as a guide, compute the product margins for the Better and Great products under the company’s traditional costing systems. Assume all units are sold.
2] The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the other category contains organization-sustaining and idle capacity costs);
Activities and activity measuresEst. Overhead costsExpected activity
Better Great Total
Supporting direct labor(DLH) 784,000 25,000 55,000 80,000
Batch setups (set ups) 500,000 400 100 500
Product sustaining (# of products) 600,000 1 1 2
Other 116,000 N/A N/AN/A
Total manufacturing overhead 2,000,000
Using Exhibit 6-10 as a guide, compute the product margins for the Better and Great products under the activity-based costing system.