Lesley Company which has just started its operation and has only one product, hired you as management consultant to help them evaluate their operations. The CEO is quite confused with absorption costing and variable costing and which to base their future decisions. Their bookkeeper has provided the following data concerning its most recent month of operations:

Selling price........................................................P143

Units in beginning inventory..............................0

Units produced...................................................1,200

Units sold..............................................................1,000

Units in ending inventory.................................200

Variable costs per unit:

Direct materials..................................................P33

Direct labor...........................................................P52

Variable manufacturing overhead...............P1

Variable selling and administrative.............P7

Fixed costs:

Fixed manufacturing overhead.....................P38,400

Fixed selling and administrative....................P4,000

15. Prepare income statement for the month using the contribution format and the variable costing method.

16. Prepare income statement for the month using the absorption costing method.

17. Cite the advantages and disadvantages of variable costing method and which method should the company use if they want to know how many units they should sell next period to achieve their target profit? Address and explain this to the management of Lesley Company.

Silvanna Company's absorption costing income statements for the last two years are presented below:

.....................................................................................Year 1..............................................Year 2

Sales.......................................................................P70,000.........................................P90,000

Less cost of goods sold:

Beginning inventory.................................................0....................................................6,000

Add cost of goods manufactured...............48,000............................................48,000

Goods available for sale...................................48,000...........................................54,000

Less ending inventory........................................6,000..................................................0

Cost of goods sold.............................................42,000............................................54,000

Gross margin..........................................................28,000..........................................36,000

Less selling & admin. expenses....................25,000............................................31,000

Net operating income........................................P3,000.............................................P5,000

Data on units produced and sold in each of these years are given below:

..........................................................................................Year 1...............................................Year 2

Units in beginning inventory...................................0.....................................................1,000

Units produced........................................................8,000................................................8,000

Units sold....................................................................7,000................................................9,000

Fixed factory overhead totaled P16,000 in each year. This overhead was applied to products at a rate of P2 per unit. Variable selling and administrative expenses were P3 per unit sold.

12. Compute the unit product cost in each year under variable costing.

13. Prepare new income statements for each year using variable costing.

14. Reconcile the absorption costing and variable costing net operating income for each year.