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Managerial Accounting (Fixed Labor)

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 in the table below. 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:12,000 units produced, 10,000 units sold. Comment on the five questions below the table.

Manufacturing costs:
Variable costs per unit:
Direct Materials ...........................................$48
Variable manufacturing overhead................$2
Fixed Manufacturing overhead cost (total) $360,000
Selling and administration costs:
Variable ...................................................12% of sales
Fixed (total) ............................................$470,000

a. Compute the unit product cost under:
i. absorption costing
ii. variable costing
b. Prepare an absorption costing income statement for September
c. Prepare a contribution format income statement for September using variable costing.
d. Assume that the company must obtain additional financing in order to continue operations. As a member of top management, would you prefer to rely n the statement in (b) above or in (3) above when meeting with a group of prospective investors?
e. Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.

Solution Preview

See excel attached for A-E.

D. I would rather show $50,000 profit than $10,000 loss if I am going ...

Solution Summary

Your tutorial shows cost per unit and profits under both variable costing and absorption costing and reconciles the two methods showing why they differ. The tutorial is in excel giving you a template for other problems. Click in cells to see computations.

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