W Produce Anything, Inc., a small manufacturing company, commenced operations at the beginning of the year. The following income statement for the
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.
We Produce
Anything, Inc.
Income Statement
For The Quarter Ended March 31
Sales (46,000 units) $2,300,000
Variable expenses
Variable cost of goods
sold 910,800
Variable selling &
administrative 368,000 1,278,800
Contribution Margin
1,021,200
Fixed expenses
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 $4.20
Direct labor 14.40
Variable manufacturing
overhead
1.20
Variable selling &
administrative
8.00
Required:
1a] Compute the unit cost under
absorption costing.
b] Redo the company’s income
statement for the quarter using absorption costing.
c] Reconcile the variable and
absorption costing net operating income (loss) figures.
2] Was the MBA graduate #2 correct in
stating that the company really earned a profit for the quarter? Please explain
your answer.
3] During the second quarter of
operations, the company again produced 50,000 units but sold 54,000 units.
(Assume no change in fixed costs.)
a) Prepare a contribution format
income statement for the second quarter using variable costing.
b) Prepare an income statement for
the second quarter using absorption costing.
c) Reconcile the variable and
absorption costing net operating incomes.
The S Corporation makes two types of skis—Better and Great. The
data for the two product lines is:
Better Great
Selling price per unit 210 150
Direct materials per unit ($) 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
Required:
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.
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