Problem 8-13 absorption and variable costing; production constant,

Leander Office Products Inc. produces and sells small storage and organizational products for office use. During the first month of operations, the products sold well. Andrea Leander, the owner of the company, was surprised to see a loss for the month on her income statement. This statement was prepared by a local bookkeeping service recommended to her by her bank manager. The statement follows:

 

 EANDER OFFICE PRODUCTS INC.
Income Statement

 

  Sales (45,600units)

 

 

 

$

264,480

 

  Variable expenses:

 

 

 

 

 

 

     Variable cost of goods sold*

        $

119,472

 

 

 

 

     Variable selling and administrative expenses

 

35,112

 

 

154,584

 

 

  Contribution margin

 

 

 

 

109,896

 

  Fixed expenses:

 

 

 

 

 

 

     Fixed manufacturing overhead

 

108,864

 

 

 

 

     Fixed selling and administrative expenses

 

13,224

 

 

122,088

 

 

  Operating loss

 

 

 

$

(12,192

)

 

 

 

 

 

   *Consists of direct materials, direct labour, and variable manufacturing overhead.

 

      Leander is discouraged over the loss shown for the month, particularly since she had planned to use the statement to encourage investors to purchase stock in the new company. A friend who is an accountant 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

 

57,600

 

 

  Units sold

 

45,600

 

 

  Variable costs per unit:

 

 

 

 

     Direct materials

$

1.20

 

 

     Direct labour

$

1.17

 

 

     Variable manufacturing overhead

$

0.25

 

 

     Variable selling and administrative expenses

$

0.77

 

 

 

                       

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