Please answer 3 a, b, and c: We Produce Anything, Inc., a small manufacturing co
ID: 2449750 • Letter: P
Question
Please answer 3 a, b, and c:
We 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.
Explanation / Answer
Anything Inc. Variable costing Income Statement Q1 Q2 Units Produced 50,000 50,000 Units sold 46,000 54,000 Details Amt/Unit Total Amt Amt/Unit Total Amt Sales Revenue 50.00 2,300,000 50.00 2,700,000 Variable Cost of Production Opening Stock - 19.80 79,200 Direct Materials 4.20 210,000 4.20 210,000 Direct Labor 14.40 720,000 14.40 720,000 Variable Mfg OH 1.20 60,000 1.20 60,000 Less Closing Stock 19.80 (79,200) - - Total Variable cost of Production 910,800 19.80 1,069,200 Variablselling & Admin 8.00 368,000 8.00 432,000 Total Variable cost of sales 27.80 1,278,800 27.80 1,501,200 Contribution 22.20 1,021,200 22.20 1,198,800 Less Fixed costs Fixed Mfg OH 600,000 600,000 Fixed selling & Admin OH 431,200 431,200 Total Fixed costs 1,031,200 1,031,200 Net operating Income (10,000) 167,600 Anything Inc. Absorption Costing Income statement Q1 Q2 Units Produced 50,000 50,000 Units sold 46,000 54,000 Details Amt/Unit Total Amt Amt/Unit Total Amt Sales Revenue 50.00 2,300,000 50.00 2,700,000 Cost of Production Opening Stock - 31.80 127,200 Direct Materials 4.20 210,000 4.20 210,000 Direct Labor 14.40 720,000 14.40 720,000 Variable Mfg OH 1.20 60,000 1.20 60,000 Fixed Manufacturinh OH 12.00 600,000 12.00 600,000 Less Closing Stock 31.80 (127,200) - - Total cost of Production 1,462,800 31.80 1,717,200 Gross Profit 837,200 982,800 Variablselling & Admin 8.00 368,000 8.00 432,000 Fixed selling & Admin OH 431,200 431,200 Net operating Income 38,000 119,600 Proft reconciliation Diifferecnce between Variable costing & Absorption costing net Income 48,000 Opening stock Qty 4,000 Rate difference in Op stock 12.00 Value difference in Opening stock 48,000 So absorption costing has 48,000 more value in opening inventory and 48,000 more in COGS. So net income in absorption costing is less by $48000
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