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    Reconcile the variable and absorption costing

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    Adsorption and Varible Costing; Production Constant, sales fluctuate:

    Sandi Scott obtained a patent on a small electronic device and organized scott products, Inc. in order to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to a healthy profit from sales. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting services, which takes great pride in providing its clients with timely financial data. The statement follows:

    SCOTTS PRODUCTS, INC.
    Income Statement

    Sales (40,000).....................................................................$200,000
    Less variable expences:
    Variable cost of goods sold...................................$80,000
    Variable selling and administrative expenses........... 30,000 110,000

    Contribution margin............................................ 90,000
    Less fixed expenses:
    Fixed manufacturing overhead ...............................75,000
    Fixed selling and administrative expenses.................20,000 95,000

    Net operating loss...................................................................(5,000)

    Ms. Scott is discouraged over the loss shown for themonth, particularly since she had planned to use the statment to encourage investors to purchase stock in the new company. A friend, who is CPA, insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, th company would probably have reported a nice profit for the month.

    Selected cost data relating to the produc and to first month of opecations follow:

    units produced .........................................................50,000
    units sold .................................................................40,000
    Variable costs per unit:
    Direct materials.......................................................$1.00
    Direct labor...............................................................0.80
    Variable manufacturing overhead................................0.20
    Varable selling and administrative expenses.................0.75

    1. Complete the following:
    A. compute the units product cost under absorption costing.
    B. Redo the company's income statement for the month using absorption costing.
    C. Reconcile the variable and absorption costing net operation income figures.

    2. was the CPA correct in suggestion that the company really earned a profit for the month explain.

    3. During the second month of operations, the company again produced 50,000 unit but sold 60,000 units. (Asssume no change in total fixed costs.)
    A. Prepare an income statment for the month using variable costing.
    B. Prepare an income statment for the month using absorption costing
    c. Reconcile the variable costing and absorption costing net operation income figures.

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    Solution Preview

    Adsorption and Varible Costing; Production Constant, sales fluctuate:

    Sandi Scott obtained a patent on a small electronic device and organized scott products, Inc. in order to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to a healthy profit from sales. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting services, which takes great pride in providing its clients with timely financial data. The statement follows:

    SCOTTS PRODUCTS, INC.
    Income Statement

    Sales ...

    Solution Summary

    This provides the steps to reconcile the variable and absorption costing

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