Income Statements under Absorption and Variable Costing The demand for solvent,
ID: 2484054 • Letter: I
Question
Income Statements under Absorption and Variable Costing
The demand for solvent, one of numerous products manufactured by Heyward Industries 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 June 1, one month in the future. 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.
Sales for May are expected to drop about 25% below those of the preceding month. No significant changes are anticipated in the fixed costs or variable costs per unit. No extra costs will be incurred in discontinuing operations in the portion of the plant associated with solvent. The inventory of solvent at the beginning and end of May is expected to be inconsequential.
Required:
1. Prepare an estimated income statement in absorption costing form for May for solvent, assuming that production continues during the month.
Heyward Industries Inc.
Estimated Income Statement—Absorption Costing—Solvent
For the Month Ending May 31, 2015
$
Cost of goods sold:
$
$
Selling and administrative expenses:
$
$
2. Prepare an estimated income statement in variable costing form for May for solvent, assuming that production continues during the month.
Heyward Industries Inc.
Estimated Income Statement—Variable Costing—Solvent
For the Month Ending May 31, 2015
$
Variable cost of goods sold:
$
$
$
Fixed costs:
$
$
3. What would be the estimated loss in income from operations if the solvent production were temporarily suspended for May?
$_________________
4. Production of solvent should be [continued or discontinued]. Temporary suspension of production would result in an operating loss of [$39,225 or $106,500] compared with an operating loss of [$39,225 or $106,500] if production is continued. The result would be a savings of [$39,225 or $67,275].
Hide1. Prepare an estimated income statement in absorption costing form for May for solvent, assuming that production continues during the month.
Heyward Industries Inc.
Estimated Income Statement—Absorption Costing—Solvent
For the Month Ending May 31, 2015
$
Cost of goods sold:
$
$
Selling and administrative expenses:
$
$
Explanation / Answer
1. Income statement for Absorption Costing System Unit Rate/Unit Amount Sales (a) 2,925 108 315,900 (3900* 75%) Less:- variable cost Direct material 2,925 40 117,000 Direct labour 2,925 18 52,650 Variable manufacturing Cost 2,925 15 43,875 Variable Selling and Adm Cost 2,925 12 35,100 Variable Fixed Cost (b) 248,625 Contribution (C ) 67,275 Less:- Fixed Cost Fixed Manufacutring Exp 70,000 Fixed Selling and Adm Exp 36,500 Fixed cost (d) 106,500 Cost of Goods Sold (c+d)=e 355,125 Net Profit/(loss)= f = a-e (39,225) 2. Income statement for Variable Costing System Unit Rate/Unit Amount Sales (a) 2,925 108 315,900 (3900* 75%) Less:- variable cost Direct material 2,925 40 117,000 Direct labour 2,925 18 52,650 Variable manufacturing Cost 2,925 15 43,875 Variable Selling and Adm Cost 2,925 12 35,100 Variable Fixed Cost (b) 248,625 Contribution (C ) 67,275 Less:- Fixed Cost Fixed Manufacutring Exp 70,000 Fixed Selling and Adm Exp 36,500 Fixed cost (d) 106,500 Cost of Goods Sold (c+d)=e 355,125 Net Profit/(loss)= f = a-e (39,225) 3. If the firm discountiue the solvent in may, then firm will the loss the contribution of $ 67275. 4. The temparory suspension will result in loss on $ 106500 as operating loss.