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All divisions use standard absorption costing. The division has the capacity to produce 50,000 units a quarter and quarterly fixed overhead amounts to $700,000 Mr Rose has been looking at the report for the first 3 months of the year and is not happy with the results.

Division Income Statement

For the quarter ending June 30 2013
Sales (25,000 units) = $2,500,000
Cost of Goods sold = 1,800,000
Gross profit = 700,000
Selling & general expenses = 350,000
Net Income =350,000

The sales forecast for the second quarter is 25,000 units. Mr Rose had budgeted second quarter production at 25,000 units but changes it to 50,000 units, which is total capacity for a quarter. The sales forecast for each of the last two quarters of the year remain at 25,000 units. Actual fixed cost incurred remain constant in total and variable costs remain constant on per unit basis.

Computations:

1. Convert the divisional absorption income statement to a contribution margin income statement for the quarter.

2. Prepare absorption and contribution margin income statements for the succeeding quarter for the division.

3. Compute production costs per unit for both approaches and for both quarters.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M941642

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