Managerial Accounting: P6-22 Sandi Scott obtained a patent on a small electronic device

Managerial Accounting

Problem 6-22 Absorption and Variable Costing; Production Constant, Sales Fluctuate
(excluding Requirement 2)
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 (40,000 units) 200,000
Variable expenses:
Variable cost of goods sold 80,000
Variable selling and administrative expenses 30,000 110,000
Contribution margin 90,000
Fixed expenses:
Fixed manufacturing overhead 75,000
Fixed selling and administrative expenses 20,000 95,000
Net operating loss $(5,000)

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 50,000
Units sold 40,000
Variable costs per unit:
Direct materials $1.00
Direct labor $0.80
Variable manufacturing overhead $0.20
Variable selling and administrative expenses $0.75

Required:
1. Complete the following:
a. Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)
b. Redo the company’s income statement for the month using absorption costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places. Omit the "$" sign in your response.)
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. Omit the "$" sign in your response.)
3. During the second month of operations, the company again produced 50,000 units but sold 60,000 units. (Assume no change in total fixed costs.)
a. Prepare a contribution format income statement for the month using variable costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places. Omit the "$" sign in your response.)
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. Omit the "$" sign in your response.)
c. Reconcile the variable costing and absorption costing net operating incomes. (Loss amounts and amounts to be deducted should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places. Omit the "$" sign in your response.)
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