207 (226 of 861) 5-BI Contributi The following infomation ycar ending Deoember 3

Question

207 (226 of 861) 5-BI Contributi The following infomation ycar ending Deoember 31,2012. There were no beginning or ending inventorics. is taken from the rocords of the Zealand Manufacturing Company for the $14,000,000 Long-term rent, factory $ 85,000 Advertising Shipping expenses 470,000 430,000 320,000 Factory superintendent's salary Factory supervisors' salarics Direct materials used 31,000 105,000 3,500,000 1,700,000 53,000 42,000 99,000 950,000 430,000 100,000 Direct labor Cutting bits used Factory methods research Abrasives for machining Administrative clerical salaries (variable)370,000 Fire insurance on factory equipment 4,000 Indirect labor Property taxes on factory equipment 26,000 Depreciation on factory equipment 1. Prepare a contribution income statement and an absorption income statement. If you are in doubt about any cost behavior pattern, decide on the basis of whether the total cost in question will fluctuate substantially over a wide range of volume. Prepare a separate supporting schedule of indirect manufacturing costs subdivided between variable and fixed costs. 2. Suppose that all variable costs fluctuate directly in proportion to sales, and that fixed costs are unaffected over a wide range of sales. What would operating income have been if sales had been $12 million instead of $14 million? Which income statement did you use to help get your answer? Why? 5-B2 Special Order, Terminology, and Unit Costs t is the income statement of Pelle Company, a manufacturer of men's blue jeans:

Explanation / Answer

Ans 1 Absorption costing-Income statement Sales $14,000,000 Less: Cost of good sold Direct materials used 3,500,000 Direct labor 1,700,000 Manufacturing overhead $1,825,000 Cost of good sold 7,025,000 Gross profit $6,975,000 Less: Selling expenses (470000+430000+320000) 1220000 Admisnistrative expenses (100000+370000) 470000 1690000 Mnet operating income $5,285,000 Schedule of Indirect manufacturing cost Variable Manufacturing overhead Cutting bits used 53,000 Abrasives for machining 99,000 Indirect labor 950,000 Total Variable Manufacturing overhead 1,102,000 Fixed Manufacturing overhead Long-term rent, factory $85,000 Factory superintendent’s salary 31,000 Factory supervisors’ salaries 105,000 Factory methods research 42,000 Depreciation on factory equipment 430,000 Fire insurance on factory equipment 4000 Property taxes on factory equipment 26000 Total Fixed Manufacturing overhead $723,000 Total indirect manufacturing overhead $1,825,000 Variable Costong-Income statement Sales $14,000,000 Less: Variable cost of good sold 6,302,000 Variable selling expenses (470000+320000) 790000 Variable administrative expenses 370000 Total variable cost 7,462,000 Contribution margin $6,538,000 Less: Fixed manufacturing overhead $723,000 Fixed selling expenses 430000 Fixed administrative expenses 100000 Total fixed cost $1,253,000 Net Operating Income $5,285,000 ans 2 Variable costing income statement should be used. As this statement keeps fixed cost same and there can be direct changes made in variable cost. The sales has ben decreased by % 14.29 so all variable cost will decraese by same % Variable Costong-Income statement Sales 14000000*(1-14.29%) $12,000,000 Less: Variable cost of good sold (6302000*(1-14.29%) 5,401,714 Variable selling expenses 677143 Variable administrative expenses 317143 Total variable cost 6,396,000 Contribution margin $5,604,000 Less: Fixed manufacturing overhead $723,000 Fixed selling expenses 430000 Fixed administrative expenses 100000 Total fixed cost $1,253,000 Net Operating Income $4,351,000 Operating income is $4,351,000

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