Posted in (Convert variable to absorption) George Massat started a new business in 1999 to produce portable, climate-controlled shelters. The shelters have many applications in special events and sporting activities. George’s accountant prepared the variable costing income statement shown after part (d3) after the first year to help him in making decisions. During the year, the following variable production costs per unit were recorded: direct material, $800; direct labor, $300; and overhead, $200. Mr. Massat was upset about the net loss because he had wanted to borrow funds to expand capacity. His friend who teaches accounting at a local university suggested that the use of absorption costing could change the picture.
a. Prepare an absorption costing pretax income statement.
b. Explain the source of the difference between the net income and the net loss figures under the two costing systems.
c. Would it be appropriate to present an absorption costing income statement to the local banker in light of Mr. Massat’s knowledge of the net loss determined under variable costing? Explain. (continued)
d. Assume that during the second year of operations, Mr. Massat’s company
produced 1,750 shelters, sold 1,850, and experienced the same total fixed
costs. For the second year:
1. Prepare a variable costing pretax income statement.
2. Prepare an absorption costing pretax income statement.
3. Explain the difference between the incomes for the second year under the two systems.
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Sales (1,500 shelters @ $2,500) |
$3,750,000 |
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Variable cost of goods sold: |
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Beginning inventory |
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Cost of goods manufactured (1,750 @ $1,300) |
$ 0 |
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Cost of goods available for sale |
2,275,000 |
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Less ending inventory (250 @ $1,300) |
$2,275,000 |
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Product contribution margin |
(325,000) |
(1,950,000) |
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Less variable selling and administrative |
$1,800,000 |
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expenses (1,500 @ $180) |
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Total contribution margin |
(270,000) |
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Less fixed expenses: |
$1,530,000 |
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Fixed factory overhead |
$1,500,000 |
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Fixed selling and administrative expenses |
190,000 |
(1,690,000) |
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Net loss |
$ (160,000) |
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