This is the copy of the entire question from my book since my book is not included in your listing.
My question is that i am unsure how I am supposed to break down the Direct Labor since it has been included into the fixed MOH. It doesnt tell me that it is all of it of how much of it it is to subtract it out. On the Absorption costing i could always put Direct labor as 0 since Fixed MOH is included on it, but that wouldnt work with Variable Costing.
Advance Products, Inc., has just organized a new division to manufacture and sell specially designed tables using select hardwoods for personal computers. The division's monthly costs are shown in the schedule below:
Manufacturing cost:
Variable cost per unit:
Direct Materials . . . . . . . . . . . . . . . . . . . $86
Variable manufacturing overhead . . . . . . . . $4
Fixed manufacturing overhead cost (total) . . . . $240,000
Selling and administrative cost:
Variable . . . . . . . . . . . . . . . . . . . . . . . . . . 15% of sales
Fixed(total) . . . . . . . . . . . . . . . . . . . . . . . . $160,000
Advance Products regards all of its workers as full-time employees and the company has a long-standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The tables sell for $250 each.
During the first month of operations, the following activity was recorded:
Units produced . . . . . 4,000
Units Sold . . . . . . . . 3,200
Required:
1. Compute the unit product cost under:
a. Absorption costing.
b. Variable costing.
2. Prepare an income statement for the month using absorption costing.
3. Prepare a contribution format income statement for the month using variable costing.
4. Assume that the company must obtain additional financing. As a member of top management, which of the statements that you have prepared in (2) and (3) above would you prefer to take with you to negotiate with the bank? Why?
5. Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.