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.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter2: Basic Cost Management Concepts

Section: Chapter Questions

Problem 18E: Lakeesha Barnett owns and operates a package mailing store in a college town. Her store, Send It...

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Question

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.

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