Topic: Absorption Costing and Variable Costing

Guochang Li was hired as chief executive officer (CEO) in later November by the board of

directors of ContactGlobal, a company that produces an advanced global positioning system

(GPS) device. The previous CEO had been fired by the board of directors due to a series of

shady business practices including shipping defective GPS devices to dealers.

Guochang felt that his first priority was to restore employee morale?which had suffered

during the previous CEO's tenure. Je was particularly anxious to build a sense of trust between

himself and the company's employees. His second priority was to prepare the budget for the

coming year, which the board of directors wanted to review in their December 15 meeting.

After hammering out the details in meetings with key managers, Gouchang was able to put

together a budget that he felt the company could realistically meet during the coming yer. That

budget appears below:

Basic Budget Data Units in beginning inventory Units produced Units sold Units in ending inventory Variable costs per unit Direct Materials Direct labor Varible manufacturing overhead Variable selling and administrative Total variable cost per unit Fixed costs: Fixed manufacturing overhead Fixed selling and adminsitrative Total fixed costs 400,000 400,000 9' 57.20 15.00 5.00 10.00 9 87.20 9 6,388,000 4,560,000 $11,448,000 ContactGlobal Budgeted Income Statement (Absorption Method) Sales (400,000 units x P120 per unit) # 48,000,000 Cost of goods sold (400,000 units x P94.42 per unti) 37,768,000 Gross margin # 10,232,000 Selling and administrative expenses: Variable selling and administrative (400,000 units x P10 per unit) P 4,000,000 Fixed selling and administrative 4,560,000 8,560,000 Net operating income P 1,672,000