Sandi Scott obtained a patent on a small electronic device and organized Scott Products, Inc., to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to a healthy profit. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data. The statement follows:

Scott Products, Inc.

Income Statement

Sales (23,000 units) $ 834,900

Variable expenses:

Variable cost of goods sold $ 271,400

Variable selling and administrative expenses 179,400 450,800

Contribution margin 384,100

Fixed expenses:

Fixed manufacturing overhead 221,000

Fixed selling and administrative expenses 221,000 442,000

Net operating loss $ ( 57,900)

Ms. Scott is discouraged over the loss shown for the month, particularly because she had planned to use the statement to encourage investors to purchase stock in the new company. A friend, who is a CPA, 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:

Units produced 26,000

Units sold 23,000

Variable costs per unit:

Direct materials $ 7.50

Direct labor $ 2.60

Variable manufacturing overhead $ 1.70

Variable selling and administrative expenses $ 7.80

Required:

Complete the following:

a.

Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

Unit product cost $

b.

Redo the companys income statement for the month using absorption costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places. Round your final answers to the nearest whole number. Omit the "$" sign in your response.)

Absorption Costing Income Statement

$

$

c.

Reconcile the variable and absorption costing net operating income (loss) figures. (Loss amounts and amounts to be deducted should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places. Round your final answers to the nearest whole number. Omit the "$" sign in your response.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes

Variable costing net operating income (loss) $

:

Absorption costing net operating income (loss) $

During the second month of operations, the company again produced 26,000 units but sold 29,000 units. (Assume no change in total fixed costs.)

a.

Prepare a contribution format income statement for the month using variable costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places. Round your final answers to the nearest whole number. Omit the "$" sign in your response.)

Variable Costing Income Statement

$

Variable expenses:

$

Fixed expenses:

$

b.

Prepare an income statement for the month using absorption costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places. Round your final answers to the nearest whole number. Omit the "$" sign in your response.)

Absorption Costing Income Statement

$

$

c.

Reconcile the variable costing and absorption costing net operating incomes. (Loss amounts and amounts to be deducted should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places. Round your final answers to the nearest whole number. Omit the "$" sign in your response.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes

Variable costing net operating income (loss) $

:

Absorption costing net operating income (loss) $