Question 1

Advance Products, Inc., has just organized a new division to manufacture and sell specially designed bookshelves using select hardwoods for personal computers. The divisions monthly costs are shown in the schedule below:

Manufacturing costs:

Variable costs per unit: Direct materials .......................................... $172 Variable manufacturing overhead ............... $8 Fixed manufacturing overhead costs (total) ... $240,000 Selling and administrative costs: Variable .......................................................... 20% of sales Fixed (total) .................................................... $300,000

Advance Products regards all of its workers as full-time employees and the company has a long-standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The bookshelf sell for $600 each.

During the first month of operations, the following activity was recorded: Units produced ................... 4,000 Units sold ............................ 3,000

Required:

1. Compute the unit product cost under: a. Absorption costing. b. Variable costing. 2. Prepare an income statement for the month using absorption costing. 3. Prepare a contribution format income statement for the month using variable costing. 4. Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.