All divisions use standard absorption costing. The division has the capacity to produce 50,000 units a quater and quarterly fixed…
All divisions use standard absorption costing. The division has the capacity to produce 50,000 units a quater and quarterly fixed overhead amounts to $500,000. Variable production cost is $55 per unit. Roland has been looking at the report for the first three months of the year and is not happy with the results. Ekland Division Income Statement For the Quarter Ending March 31, 2012 Production: 25,000 units Sales (25,000 units) $2,500,000 Cost of goods sold Beginning inventory (10,000 units) $650,000 Production costs applied 1,625,000 Total $2,275,000 Less ending inventory 650,000 1,625,000 Gross profit 875,000 Selling & general expenses 400,000 Net income $475,000 The sales forecast for the second quarter is 25,000 units. Roland had budgeted second quarter production at 25,000 units but changes it to 50,000 units, which is total capacity for a quarter. The sales forecasts for each of the last two quarters of the year are also 25,000 units. Costs incurred in the second quarter are the same as budgeted, based on 50,000 units of production. Required: Computations: • Convert the Ekland absorption income statement to a contribution margin income statement for the first quarter. Click here for an example showing how to convert from one approach to another. This example is for guidance only and the numbers have not bearing on the Ekland case. You can also find several videos on YouTube that explain the difference between the two types of income statements. • Prepare absorption and contribution margin income statements for the second quarter for Ekland. Compute production costs per unit for both approaches and for both years.
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