Variable and Absorption Costing
Summarized data for 2016 (the first year of operations) for Gorman Products, Inc., are as follows:
| Sales (75,000 units) |
$3,000,000 |
| Production costs (80,000 units) |
| Direct material |
880,000 |
| Direct labor |
720,000 |
| Manufacturing overhead: |
| Variable |
544,000 |
| Fixed |
320,000 |
| Operating expenses: |
| Variable |
168,000 |
| Fixed |
240,000 |
| Depreciation on equipment |
60,000 |
| Real estate taxes |
18,000 |
| Personal property taxes (inventory & equipment) |
28,800 |
| Personnel department expenses |
30,000 |
a. Prepare an income statement based on full absorption costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.
Sales
Cost of Goods Sold:
Beginning Inventory
Direct materials
Direct labor
Gross profit
Operating expenses
Variable manufacturing overhead
Manufacturing overhead
Contribution margin
Less: Ending Inventory
Cost of Goods Sold
Net Income (Loss)
b. Prepare an income statement based on variable costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.
c. Assume that you must decide quickly whether to accept a special one-time order for 1,000 units for $30 per unit.
Which income statement presents the most relevant data? Answerabsorption costingvariable costing
Determine the apparent profit or loss on the special order based solely on these data.
Use a negative sign with your answer if the special order creates an apparent loss. Round answer to the nearest whole number.
d. If the ending inventory is destroyed by fire, which costing approach would you use as a basis for filing an insurance claim for the fire loss? Why?
Select the most appropriate statement.
Absorption costing approach because the cost should include a reasonable portion of fixed manufacturing costs.Variable costing approach because the cost should include a reasonable portion of fixed manufacturing costs.