Question

Variable and Absorption Costing
Summarized data for 2016 (the first year of operations) for Gorman Products, Inc., are as follows:

Sales (75,000 units)					$1,500,000
Production costs (80,000 units)
Direct material					440,000
Direct labor					360,000
Manufacturing overhead:
Variable					272,000
Fixed					160,000
Operating expenses:
Variable					84,000
Fixed					120,000
Depreciation on equipment					30,000
Real estate taxes					9,000
Personal property taxes (inventory & equipment)					14,400
Personnel department expenses					15,000

a. Prepare an income statement based on full absorption costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Absorption Costing Income Statement
Sales						Answer
Cost of Goods Sold:
Beginning Inventory					Answer
Direct materials					Answer
Direct labor					Answer
AnswerGross profitOperating expensesVariable manufacturing overheadManufacturing overheadContribution margin					Answer
Less: Ending Inventory					Answer
Cost of Goods Sold						Answer
AnswerGross profitOperating expensesVariable manufacturing overheadManufacturing overheadContribution margin						Answer
AnswerGross profitOperating expensesVariable manufacturing overheadManufacturing overheadContribution margin						Answer
Net Income (Loss)						Answer

b. Prepare an income statement based on variable costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Variable Costing Income Statement
Sales						Answer
Variable cost of Goods Sold:
Beginning Inventory					Answer
Direct materials					Answer
Direct labor					Answer
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin					Answer
Less: Ending Inventory					Answer
Variable cost of goods sold						Answer
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin						Answer
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin						Answer
Fixed costs:
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin					Answer
Operating expenses					Answer
Total Fixed Cost						Answer
Net Income (Loss)						Answer

c. Assume that you must decide quickly whether to accept a special one-time order for 1,000 units for $15 per unit.

Which income statement presents the most relevant data? Answerabsorption costingvariable costing

Determine the apparent profit or loss on the special order based solely on these data.
Use a negative sign with your answer if the special order creates an apparent loss. Round answer to the nearest whole number.

$Answer  

d. If the ending inventory is destroyed by fire, which costing approach would you use as a basis for filing an insurance claim for the fire loss? Why?
Select the most appropriate statement.

Absorption costing approach because the cost should include a reasonable portion of fixed manufacturing costs.

Variable costing approach because the cost should include a reasonable portion of fixed manufacturing costs.

Answer 1

a.

Absorption Costing Income Statement
Sales		1500000
Cost of Goods Sold:
Beginning inventory	0
Direct materials	440000
Direct labor	360000
Manufacturing overhead ($272000 + $160000)	432000
Less: Ending inventory*	77000
Cost of Goods Sold		1155000
Gross profit		345000
Operating expenses ($84000 + $120000)		204000
Net income (loss)		141000

*Ending inventory = ($440000 + $360000 + $432000) x (80000 - 75000)/80000 = $1232000 x 5000/80000 = $77000

b.

Variable Costing Income Statement
Sales		1500000
Variable cost of goods sold:
Beginning inventory	0
Direct materials	440000
Direct labor	360000
Variable manufacturing overhead	272000
Less: Ending inventory*	67000
Variable cost of goods sold		1005000
Variable operating expenses		84000
Contribution margin		411000
Fixed costs:
Manufacturing overhead	160000
Operating expenses	120000
Total fixed cost		280000
Net income (loss)		131000

*Ending inventory = ($440000 + $360000 + $272000) x (80000 - 75000)/80000 = $1072000 x 5000/80000 = $67000

c. Variable costing

Profit on special order = [1000 x $15] - [1000 x ($1005000 + $84000)/75000) = $15000 - [1000 x $14.52] = $15000 - $14520 = $480

d. Absorption costing approach because the cost should include a reasonable portion of fixed manufacturing costs.