The vice-president of Abscorp Ltd. is not happy. Sales have been rising steadily, but profits have been
Question:
You have been asked to explain to the vice-president that the problem is more a matter of appearance than reality by reinterpreting the results in a variable-costing format. You obtain the following information that will help you:
Additional information about the company's operations is as follows:
¢ There were 5,000 units of finished goods in the opening inventory on July 1, 2012.
¢ Fixed manufacturing overhead costs totaled $1,680,000 per quarter and were incurred evenly throughout the quarter.
The fixed manufacturing overhead cost is applied to the units of production based on a budgeted production volume of 80,000 units per month.
¢ Variable selling and administrative expenses are $6 per unit sold. The remaining selling and administrative expenses on the comparative monthly income statements are fixed.
¢ The company uses a FIFO cost flow assumption. Work in process inventories are small enough to be ignored.
Instructions
(a) Calculate the monthly break-even point under variable costing.
(b) 1. Calculate the net income for each month under variable costing.
2. Reconcile the variable-costing and absorption-costing net incomes for each month.
3. Explain why profits have not been more closely related to changes in the sales volume.
Step by Step Answer:
Managerial Accounting Tools for Business Decision Making
ISBN: 978-1118033890
3rd Canadian edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly