Zurgot Inc. has just organized a new division to manufacture and sell specially

Question

Zurgot Inc. has just organized a new division to manufacture and sell specially designed computer tables, using select hardwoods. The division’s monthly costs are shown in the schedule below:

Manufacturing Costs

Variable Costs per unit

Direct Materials

$152

Variable manufacturing overhead

$10

Fixed manufacturing overhead costs

$340,000

Selling and Administrative costs

Variable

%15 of sales

Fixed

$160,000

Zurgot regards all of its workers as full-time employees and the company has a long-standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labour costs in its fixed manufacturing overhead. The tables sell for $400 each.

During the first month of operations, the following activity was recorded.

Units Produced           4,000

Units Sold                   3,200

1. Compute the unit product cost under

a. Absorption costing

b. Variable costing

2. Prepare an income statement for the month using absorption costing

3. Prepare a contribution format income statement for the month using variable costing.

4. Assume that the company must obtain additional financing. As a member of top management, which of the statements that you have prepared in 2 and 3 above would you say you prefer to have with you when you negotiate with the bank? Why?

5. Reconcile the absorption costing and variable costing operating income figures in 2 and 3 above.

Manufacturing Costs

Variable Costs per unit

Direct Materials

$152

Variable manufacturing overhead

$10

Fixed manufacturing overhead costs

$340,000

Selling and Administrative costs

Variable

%15 of sales

Fixed

$160,000

Explanation / Answer

4. will use Variable costing income statements as it shows more profit which will help to fetch more loan and more favourable terms.

Absorption Variable Cost per unit Cost per unit    Direct Material              152.00              152.00    Direct Labor                      -                        -      Variable manufacturing overhead                10.00                10.00    Annual fixed manufacturing overhead                85.00                      -      Variable selling expenses                      -                        -      Fixed selling and administrative expense (irrelevent)                      -                        -                247.00              162.00

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