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Absorption and Variable Costing

George Goodman obtained a patent on a small electronic device and organized Goodman Electronics in order to produce and sell the device. During the first month of operations, the device sold very well, so Mr. Goodman looked forward to a healthy profit from sales. However, he was surprised to see a loss for the month on his income statement. The statement follows:

GOODMAN'S ELECTRONICS
INCOME STATEMENT

Sales (40,000 units) \$200,000
Less variable expenses:
Variable cost of goods sold* \$80,000
Variable selling and administrative expenses 30,000 110,000 Contribution margin 90,000
Less fixed expenses:
Fixed selling and administrative expenses 20,000 95,000
Net operating loss \$ (5,000)
*Consists of direct materials, direct labor, and variable manufacturing overhead.
Selected cost data relating to the product and to the first month of operations follow:
Units produced 50,000
Units sold 40,000
Variable costs per unit:
Direct materials \$1.00
Direct labor 0.80
Variable selling and administrative expenses 0.75

1. Complete the following:
a. Compute the unit product cost under absorption costing.
b. Redo company's income statement for the month using absorption costing.
c. Reconcile the variable and absorption costing net operating income figures.

2. Would the company have made a profit if it had used absorption costing rather than variable costing? Explain.

3. During the month of operations, the company again produced 50,000 units but sold 60,000 units (there were no change in total fixed costs).

a. Prepare an income statement for the month using variable costing.
b. Prepare an income statement for the month using absorption costing.
c. Reconcile the variable costing and absorption costing net income figures.

Solution Summary

The solution explains the preparation of income statement under absorption costing and variable costing.

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