Brown Printing, a small family-owned business, began operations on March 1, manufacturing premium quality books. The owners have expertise in printing but no accounting knowledge or experience. The company’s independent accountant compiled the following data for the month of March. They have also requested an income statement. Sales price $ 90 per book Number of units produced 15,000 books Number of units sold 10,000 books Direct materials cost $ 15 per book Direct labor cost $ 6 per book Variable manufacturing overhead $ 4 per book Fixed manufacturing overhead $ 240,000 per month Selling cost 3 per book Administrative expenses $ 160,000 per month The owners want to understand these numbers and how they can use the information to run the business. Question 1: Define and explain absorption costing and variable costing. Question 2: Prepare the income statement for March using variable costing. Brown Printing Sales Variable cost of goods sold Variable selling Contribution margin Fixed manufacturing overhead Administrative expenses Net income Question 3: Calculate the unit cost of goods sold using absorption costing. Question 4: Prepare the income statement for March using absorption costing. Brown Printing Sales revenue Cost of goods sold Gross margin Selling expenses Administrative expenses Net Income Question 5: Identify and describe two advantages of using variable costing. Question 6: Identify and describe two limitations of using absorption costing. Question 7: Explain why there is a difference in net income between variable costing and absorption costing. Show your calculations.
Brown Printing, a small family-owned business, began operations on March 1, manufacturing premium quality books. The owners have expertise in printing but no accounting knowledge or experience. The company’s independent accountant compiled the following data for the month of March. They have also requested an income statement.
Sales price | $ | 90 | per book |
Number of units produced | 15,000 | books | |
Number of units sold | 10,000 | books | |
Direct materials cost | $ | 15 | per book |
Direct labor cost | $ | 6 | per book |
Variable manufacturing |
$ | 4 | per book |
Fixed manufacturing overhead | $ | 240,000 | per month |
Selling cost | 3 | per book | |
Administrative expenses | $ | 160,000 | per month |
The owners want to understand these numbers and how they can use the information to run the business.
Question 1: Define and explain absorption costing and variable costing.
Question 2: Prepare the income statement for March using variable costing.
Brown Printing | |
---|---|
Sales | |
Variable cost of goods sold | |
Variable selling | |
Contribution margin | |
Fixed manufacturing overhead | |
Administrative expenses | |
Net income |
Question 3: Calculate the unit cost of goods sold using absorption costing.
Question 4: Prepare the income statement for March using absorption costing.
Brown Printing | |
---|---|
Sales revenue | |
Cost of goods sold | |
Gross margin | |
Selling expenses | |
Administrative expenses | |
Net Income |
Question 5: Identify and describe two advantages of using variable costing.
Question 6: Identify and describe two limitations of using absorption costing.
Question 7: Explain why there is a difference in net income between variable costing and absorption costing. Show your calculations.
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