PROBLEM 5-15 Comprehensive Problem with Labor Fixed [LO1, LO2, LO3, LO4] Far Nor

Question

PROBLEM 5-15 Comprehensive Problem with Labor Fixed [LO1, LO2, LO3, LO4] Far North Telecom, Ltd., of Ontario, has organized a new division to manufacture and sell specialty cellular telephones. The division's monthly costs are shown below: Manufacturing costo Variable coste per unit: Direct materials Variable manufacturing overhead S48 S2 $360,000 Fixed manufacturing overhead costs (total) Selling and administrative costs: 12% of sales $470,000 Variable Fixed (total) Far North Telecom 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 labor costs in its fixed manufacturing overhead. The cellular phones sell for $150 each. During September, the first month of operations, the following activity was recorded Required: 1. Compute the unit product cost under: a. Absorption costing b. Variable costing Prepare an absorption costing income statement for September Prepare a contribution format income statement for September using variable costing Assume that the company must obtain additional financing in order to continue operations. As a mem ber of top management, would you prefer to rely on the statement in (2) above or in (3) above when meeting with a group of prospective investors? Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above. 2. 3. 4. 5.

Explanation / Answer

1.(a)(b), Computation of Unit Product Cost Particular Absorption Costing Variable Costing Direct materials $48.00 $48.00 Variable manufacturing overhead $2.00 $2.00 Fixed manufacturing overhead $30.00 ($360,000 ÷ 12,000 units Unit product cost $80.00 $50.00 2. Absorption Costing Income Statement Particular Amount Amount Sales (10,000 units × $150 per unit) $1,500,000 Less : cost of goods sold: Cost of goods manufactured (12000* $80) $960,000 Less : Ending inventory (2000* $80) -$160,000 $800,000 Gross margin $700,000 Less: selling and administrative expenses $650,000 [(12% × $1,500,000) + $470,000] Net operating income $50,000 3. Variable Costing Income Statement Particular Amount Amount Sales (10,000 units × $150 per unit) $1,500,000 Less: variable manufacturing costs (10000*$50) $500,000 Variable selling and administrative expenses $180,000 $680,000 Contribution margin $820,000 Less: Fixed Expense Fixed manufacturing overhead $360,000 Fixed selling and administrative expenses $470,000 $830,000 Net operating loss -$10,000 4. A manager may prefer to take the statement prepared under the absorption approach in part (2), since it shows a profit for the month.

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