PROBLEM 5A–11 Comprehensive Problem with Labor Fixed [ LO5 , LO6 , LO7 ]

Far North Telecom, Ltd., of Ontario, has organized a new division to manufacture and sell specialty cellular telephones. The division’s monthly costs are shown below:

Manufacturing costs:

Variable costs per unit:

Direct materials ......................................................... $48 Variable manufacturing overhead ............................. $2 Fixed manufacturing overhead costs (total) .................. $360,000 Selling and administrative costs:

Variable ......................................................................... 12% of sales Fixed (total) ................................................................... $470,000 Far North Telecom regards all of its workers as full-time employees and the company has a longstanding no layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The cellular phones sell for $150 each. During September, the first month of operations, the following activity was recorded:

Units produced ............. 12,000 Units sold ...................... 10,000 Required:

1. Compute the unit product cost under:

a. Absorption costing.

b. Variable costing.

2. Prepare an absorption costing income statement for September.

3. Prepare a contribution format income statement for September using variable costing.

4. Assume that the company must obtain additional financing in order to continue operations. As a member of top management, would you prefer to rely on the statement in (2) above or in (3) above when meeting with a group of prospective investors?

5. Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.