Variable and Absorption Costing

Summarized data for the first year of operations for Gorman Products, Inc., are as follows:

Sales $(70,000$ units$)$ $$2,800,000$

Production costs $(80,000$ units$)$

Direct material $880,000$

Direct labor $720,000$

Manufacturing overhead:

Variable $544,000$

Fixed $320,000$

Operating expenses:

Variable $175,000$

Fixed $240,000$

Depreciation on equipment $60,000$

Real estate taxes $18,000$

Personal property taxes $($inventory & equipment$)28,800$

Personnel department expenses $30,000$

a$.$ Prepare an income statement based on full absorption costing.

Only use a negative sign with your answer for net income $($loss$),$ if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Absorption Costing Income Statement

Sales Answer

$2,800,000$

Cost of Goods Sold:

Beginning Inventory Answer

$0$

Direct materials Answer

$880,000$

Direct labor Answer

$720,000$

Answer

Manufacturing overhead

Answer

$864,000$

Less: Ending Inventory Answer

$308,000$

Cost of Goods Sold Answer

$2,156,000$

Answer

Gross profit

Answer

$644,000$

Answer

Operating expenses

Answer

$415,000$

Net Income $($Loss$)$ Answer

$229,000$

b$.$ Prepare an income statement based on variable costing.

Only use a negative sign with your answer for net income $($loss$),$ if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Variable Costing Income Statement

Sales Answer

$2,800,000$

Variable cost of Goods Sold:

Beginning Inventory Answer

$0$

Direct materials Answer

$880,000$

Direct labor Answer

$720,000$

Answer

Variable manufacturing overhead

Answer

$544,000$

Less: Ending Inventory Answer

$268,000$

Variable cost of goods sold Answer

$1,876,000$

Answer

Contribution margin

Answer

$924,000$

Answer

Gross profit

Answer

$0$

Fixed costs:

Answer

Manufacturing overhead

Answer

$320,000$

Operating expenses Answer

$551,800$

Total Fixed Cost Answer

$540$

Net Income $($Loss$)$ Answer

$52,200$

c$.$ Assume that you must decide quickly whether to accept a special one$-$time order for $1,000$ units for $$25$ per unit.

Which income statement presents the most relevant data? Answer

variable costing

Determine the apparent profit or loss on the special order based solely on these data.

Use a negative sign with your answer if the special order creates an apparent loss. Round answer to the nearest whole number.

$Answer

$(1,800)$

d$.$ If the ending inventory is destroyed by fire, which costing approach would you use as a basis for filing an insurance claim for the fire loss? Why?

Select the most appropriate statement.

Absorption costing approach because the cost should include a reasonable portion of fixed manufacturing costs.

Variable costing approach because the cost should include a reasonable portion of fixed manufacturing costs.