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Absorption Costing - Managerial Accounting

Roland Andersson is the manager of the Ekland Division of Ystad Industries. His one of several managers being considered for position of CEO, as the current CEO is retiring in a year.

All divisions use standard absorption costing; normal capacity is the basis for application of fixed overhead. Normal capacity in the Ekland Division is 40,000 units per quarter, and quarterly fixed overhead is $500,000. Variable production cost is $50 per unit. Ralph has been looking at the report for the first three months of the year and is not happy with the results.

Cost of Goods Sold
Beginning Inventory (10,000 Units) $625,000
Production Costs Applied 1,562,500
Total: 2,187,500
Less ending inventory 625,000
Gross Profit 1,562,500
Volume variance 187,500
Selling and general expenses 500,000
Net Income 875,000

The sales forecast for the second quarter is 25,000 units. Roland had budgeted second quarter production at 25,000 units but changes it to 50,000 units, which is practical capacity for a quarter. The sales forecasts for each of the last two quarters of the year are also 25,000 units. Costs incurred in the second quarter are the same as budgeted, based on 50,000 units of production.

For the second quarter,

1. Compute cost of good sold and gross profit

2. Compute variable costs of goods sold and contribution margin

3. Compute variance

4. Compute complete absorption income statement

5. Compute complete behavioral (contribution margin) income statement

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Solution Summary

The answers are attached as an Excel spreadsheet where calculations can be viewed by highlighting the cells.