Leander Office Products Inc. produces and sells small storage and organizational products for office use. During the first month of operations, the products sold well. Andrea Leander, the owner of the company, was surprised to see a loss for the month on her income statement. This statement was prepared by a local bookkeeping service recommended to her by her bank manager. The statement follows: $200,000 LEANDER OFFICE PRODUCTS INC. Income Statement Sales (40,000 units) Variable expenses: Variable cost of goods sold* Variable selling and administrative expenses $80,000 30,000 110,000 90,000 Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative expenses 75,000 20,000 95,000 Operating loss $ (5,000) *Consists of direct materials, direct labour, and variable manufacturing overhead. Leander is discouraged over the loss shown for the month, particularly since she had planned to use the statement to encourage investors to purchase stock in the new company. A friend who is an accountant insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month. Selected cost data relating to the product and to the first month of operations follow: 50,000 40,000 Units produced Units sold Variable costs per unit: Direct materials Direct labour Variable manufacturing overhead Variable selling and administrative expenses $ 1.00 $ 0.80 $ 0.20 0.75 $ Required: 1. Complete the following: a. Compute the unit product cost under absorption costing. (Round your answer to 2 decimal places.) Unit product cost b. Redo the company's income statement for the month using absorption costing. (Do not leave any empty spaces; input a 0 wherever it is required.) Cost of goods sold: c. Reconcile the variable and absorption costing operating income (loss) figures. (Loss amounts should be entered with a minus sign.) Variable costing operating income (loss) Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing Absorption costing operating income (loss) 2. Not available in Connect. 3. During the second month of operations, the company again produced 50,000 units but sold 60,000 units. (Assume no change in total fixed costs.) a. Prepare a contribution format income statement for the month using variable costing. Variable expenses: Fixed expenses b. Prepare an income statement for the month using absorption costing. (Do not leave any empty spaces; input a 0 wherever it is required.) Cost of goods sold: c. Reconcile the variable costing and absorption costing operating income figures. Variable costing operating income (loss) Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing Absorption costing operating income (loss)
