Question:
(Convert variable to absorption; ethics) Georgia Shacks produces small outdoor buildings. The company began operations in 2010, producing 2,000 buildings and selling 1,500. A variable costing income statement for 2010 follows. During the year, variable production costs per unit were $800 for direct material, $300 for direct labor, and $200 for overhead.
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GEORGIA SHACKS
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Income Statement (Variable Costing)
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For the Year Ended December 31, 2010 Sales $3,750,000
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Sales
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$3,750,000
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Variable cost of goods sold
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Beginning inventory
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$ 0
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Cost of goods manufactured
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2,600,000
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Cost of goods available for sale
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$2,600,000
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Less ending inventory
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(650,000)
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(1,950,000)
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Product contribution margin
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$1,800,000
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Less variable selling and administrative expenses
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(270,000)
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Total contribution margin
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$1,530,000
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Less fixed expenses
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Fixed factory overhead
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$1,500,000
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Fixed selling and administrative expenses
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190,000
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(1,690,000)
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Income before taxes
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$ (160,000)
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The company president is upset about the net loss because he wanted to borrow funds to expand capacity.
a. Prepare a pre-tax absorption costing income statement.
b. Explain the source of the difference between the pre-tax income and loss figures under the two costing systems.
c. Would it be appropriate to present an absorption costing income statement to the local banker, considering the company president's knowledge of the net loss deter-mined under variable costing? Explain.
d. Assume that during the second year of operations, Georgia Shacks produced 2,000 buildings, sold 2,200, and experienced the same total fixed costs as in 2010. For the second year:
1. Prepare a variable costing pre-tax income statement.
2. Prepare an absorption costing pre-tax income statement.
3. Explain the difference between the incomes for the second year under the two systems.