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Absorption Essay

612 words - 3 pages

Absorption costing and Variable costing

The demand for shampoo, one of numerous products manufactured by Hardin Hair Care Products Inc., has dropped sharply because of recent competition from a similar product. The company's chemists are currently completing tests of various new formulas, and it is anticipated that the manufacture of a superior product can be started on March 1, one month hence. No changes will be needed in the present production facilities to manufacture the new product because only the mixture of the various materials will be changed.
The controller has been asked by the president of the company for advice on whether to continue production during February or to suspend the manufacture of shampoo until March 1. The controller has assembled the following pertinent data:

The production costs and selling and administrative expenses, based on production of 245,000 units in January, are as follows:

Sales for ...view middle of the document...

*Prepare an estimated income statement in variable costing form for February for shampoo, assuming that production continues during the month. Enter all amounts as positive numbers. However, use the minus sign to indicate a net loss.
*What would be the estimated loss in income from operations if the shampoo production were temporarily suspended for February?
2. During the first month of operations ended May 31, 2010, Dorm Room Appliance Company manufactured 10,300 microwaves, of which 9,700 were sold. Operating data for the month are summarized as follows:

* Prepare an income statement based on the absorption costing concept.
*Prepare an income statement based on the variable costing concept.

3. Contribution margin analysis—sales
The following data for Ergonomic Products Inc. are available: 

Prepare an analysis of the sales quantity and unit price factors. Use the minus sign to indicate any decrease.

4. Rugged Gear Inc. manufactures and sells men's athletic clothes. The company began operations on July 1, 2010, and operated at 100% of capacity (44,000 units) during the first month, creating an ending inventory of 4,000 units. During August, the company produced 40,000 garments during the month but sold 44,000 units at $110 per unit. The August manufacturing costs and selling and administrative expenses were as follows: 

a. Prepare an income statement according to the absorption costing concept for August. 
b. Prepare an income statement according to the variable costing concept for August.

4. Digital Edge Inc. assembles and sells MP3 players. The company began operations on May 1, 2010, and operated at 100% of capacity during the first month. The following data summarize the results for May:

a. Prepare an income statement according to the absorption costing concept.
b. Prepare an income statement according to the variable costing concept.

5. At the end of the first year of operations, 5,200 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:

Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable costing concept.

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