Variable and Absorption Costing Summarized data for 2016 (the first year of operations) for Gorman Products, Inc., are as follows: Sales (75,000 units)         $4,500,000 Production costs (80,000 units)           Direct material         1,320,000 Direct labor         1,080,000 Manufacturing overhead:           Variable         816,000 Fixed         480,000 Operating expenses:           Variable         252,000 Fixed         360,000 Depreciation on equipment         90,000 Real estate taxes         27,000 Personal property taxes (inventory & equipment)         43,200 Personnel department expenses         45,000   a. Prepare an income statement based on full absorption costing. Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable. Absorption Costing Income Statement Sales             Cost of Goods Sold:             Beginning Inventory             Direct materials             Direct labor                           Less: Ending Inventory             Cost of Goods Sold                                         Net Income (Loss)               b. Prepare an income statement based on variable costing. Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable. Variable Costing Income Statement Sales             Variable cost of Goods Sold:             Beginning Inventory             Direct materials             Direct labor                           Less: Ending Inventory             Variable cost of goods sold                                         Fixed costs:                           Operating expenses             Total Fixed Cost             Net Income (Loss)               c. Assume that you must decide quickly whether to accept a special one-time order for 1,000 units for $45 per unit. Which income statement presents the most relevant data? Answer Determine the apparent profit or loss on the special order based solely on these data. Use a negative sign with your answer if the special order creates an apparent loss. Round answer to the nearest whole number. $Answer   d. If the ending inventory is destroyed by fire, which costing approach would you use as a basis for filing an insurance claim for the fire loss? Why? Select the most appropriate statement. Absorption costing approach because the cost should include a reasonable portion of fixed manufacturing costs. Variable costing approach because the cost should include a reasonable portion of fixed manufacturing costs.

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Variable and Absorption Costing
Summarized data for 2016 (the first year of operations) for Gorman Products, Inc., are as follows:

Sales (75,000 units)         $4,500,000
Production costs (80,000 units)          
Direct material         1,320,000
Direct labor         1,080,000
Manufacturing overhead:          
Variable         816,000
Fixed         480,000
Operating expenses:          
Variable         252,000
Fixed         360,000
Depreciation on equipment         90,000
Real estate taxes         27,000
Personal property taxes (inventory & equipment)         43,200
Personnel department expenses         45,000

 

a. Prepare an income statement based on full absorption costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Absorption Costing Income Statement
Sales            
Cost of Goods Sold:            
Beginning Inventory            
Direct materials            
Direct labor            
             
Less: Ending Inventory            
Cost of Goods Sold            
             
             
Net Income (Loss)            

 

b. Prepare an income statement based on variable costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Variable Costing Income Statement
Sales            
Variable cost of Goods Sold:            
Beginning Inventory            
Direct materials            
Direct labor            
             
Less: Ending Inventory            
Variable cost of goods sold            
             
             
Fixed costs:            
             
Operating expenses            
Total Fixed Cost            
Net Income (Loss)            

 

c. Assume that you must decide quickly whether to accept a special one-time order for 1,000 units for $45 per unit.

Which income statement presents the most relevant data? Answer

Determine the apparent profit or loss on the special order based solely on these data.
Use a negative sign with your answer if the special order creates an apparent loss. Round answer to the nearest whole number.

$Answer  

d. If the ending inventory is destroyed by fire, which costing approach would you use as a basis for filing an insurance claim for the fire loss? Why?
Select the most appropriate statement.

Absorption costing approach because the cost should include a reasonable portion of fixed manufacturing costs.
Variable costing approach because the cost should include a reasonable portion of fixed manufacturing costs.

 

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