Leander Office Products Inc. produces and sells small storage and organizational products for office use. During the first month of operations, the products sold well. Andrea Leander, the owner of the company, was surprised to see a loss for the month on her income statement. This statement was prepared by a local bookkeeping service recommended to her by her bank manager. The statement follows:
| LEANDER OFFICE PRODUCTS INC. | ||||||
| Income Statement | ||||||
| Sales (46,400 units) | $ | 273,760 | ||||
| Variable expenses: | ||||||
| Variable cost of goods sold* | $ | 135,024 | ||||
| Variable selling and administrative expenses | 44,080 | 179,104 | ||||
| Contribution margin | 94,656 | |||||
| Fixed expenses: | ||||||
| Fixed manufacturing overhead | 103,774 | |||||
| Fixed selling and administrative expenses | 9,280 | 113,054 | ||||
| Operating loss | $ | (18,398) | ||||
*Consists of direct materials, direct labour, and variable manufacturing overhead.
Leander is discouraged over the loss shown for the month, particularly since she had planned to use the statement to encourage investors to purchase shares in the new company. A friend who is an accountant insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month.
Selected cost data relating to the product and to the first month of operations follow:
| Units produced | 58,300 |
| Units sold | 46,400 |
| Variable costs per unit: | |
| Direct materials | 1.49 |
| Direct labour | 1.05 |
| Variable manufacturing overhead | 0.37 |
| Variable selling and administrative expenses | 0.95 |
Required:
1. Complete the following:
a. Compute the unit product cost under absorption costing. (Round your answer to 2 decimal places.)
b. Redo the company’s income statement for the month using absorption costing. (Do not leave any empty spaces; input a 0 wherever it is required.)
c. Reconcile the variable and absorption costing operating income (loss) figures. (Loss amounts should be entered with a minus sign.)
2. This part of the question is not part of your Connect assignment.
3. During the second month of operations, the company again produced 58,300 units but sold 70,200 units. (Assume no change in total fixed costs.)
a. Prepare a contribution format income statement for the month using variable costing.
b. Prepare an income statement for the month using absorption costing. (Do not leave any empty spaces; input a 0 wherever it is required.)
c. Reconcile the variable costing and absorption costing operating income figures.
Solution
1. a. Correct Answer – 4.69
| Direct materials | 1.49 |
| Direct labour | 1.05 |
| Variable manufacturing overhead | 0.37 |
| Fixed manufacturing overhead ($103,774 ÷ 58,300 units) | 1.78 |
| Unit product cost | 4.69 |
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