Golden Star Company manufactures and sells a unique product that has been quickly accepted by the consumers. The results of last month's operations are shown below (absorption costing basis):
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Sales (10,000 units @ $20)
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$200,000
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Less: cost of goods sold (10,000 units @ $14)
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140,000
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Gross margin
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60,000
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Less: selling and administrative expenses
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45,000
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Net income
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$ 15,000
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Variable selling and administrative expenses are $2 per unit. Variable manufacturing costs total $10 per unit, and fixed manufacturing overhead costs total $48,000 per month. There was no beginning inventory. The company produced 12,000 units during the month.
Required:
1- Restate Golden Star's income statement in contribution margin format, using variable costing.
2- Reconcile the variable costing and absorption costing net income figures.
3- State which costing approach is used in published financial statements, and briefly explain the usefulness of the other approach.
4- The easiest way to distinguish between relevant and irrelevant costs is by cost behavior; variable costs are relevant costs and fixed costs are irrelevant costs. Explain why you do or do not agree with this statement and support your answer with suitable example(s).