Question

Income Statements under Absorption Costing and Variable Costing

The demand for aloe vera hand lotion, one of numerous products manufactured by Smooth Skin Care Products 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 December 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.

The controller has been asked by the president of the company for advice on whether to continue production during November or to suspend the manufacture of aloe vera hand lotion until December 1. The controller has assembled the following pertinent data:

Smooth Skin Care Products Inc.
Income Statement—Aloe Vera Hand Lotion
For the Month Ended October 31
Sales (400,000 units) $32,000,000
Cost of goods sold 28,330,000
Gross profit $3,670,000
Selling and administrative expenses 4,270,000
Loss from operations $(600,000)
The production costs and selling and administrative expenses, based on production of 400,000 units in October, are as follows:

Direct materials $15 per unit
Direct labor 17 per unit
Variable manufacturing cost 35 per unit
Variable selling and administrative expenses 10 per unit
Fixed manufacturing cost $1,530,000 for October
Fixed selling and administrative expenses 270,000 for October
Sales for November are expected to drop about 20% 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 aloe vera hand lotion. The inventory of aloe vera hand lotion at the beginning and end of November is expected to be inconsequential.

Required:

Question Content Area
1. Prepare an estimated income statement in absorption costing form for November for aloe vera hand lotion, assuming that production continues during the month.

Smooth Skin Care Products Inc.
Estimated Income Statement—Absorption Costing—Aloe Vera Hand Lotion
For the Month Ending November 30

Sales
$Sales
32,000,000
Cost of goods sold:

Direct materials
$Direct materials

Direct labor
Direct labor

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Selling and administrative expenses:

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Question Content Area
2. Prepare an estimated income statement in variable costing form for November for aloe vera hand lotion, assuming that production continues during the month.

Smooth Skin Care Products Inc.
Estimated Income Statement—Variable Costing—Aloe Vera Hand Lotion
For the Month Ending November 30

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Variable cost of goods sold:

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Fixed costs:

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Answer 1

The estimated income statement for the month shows a loss of $840000.

How to illustrate the income statement?

The estimated income statement for the month will be:

Sales = $25,600,000

Less: Cost of goods sold

Direct materials (320000 × 15) = $4,800,000

Direct labor (320000 × 17) = $5,440,000

Variable costing (320000 × 15) = $11,200,000

Fixed manufacturing cost = $1,530,000

Total cost of goods sold = $22970000

Gross profit = $25,600,000 - $22970000 = $2,630,000

Gross profit = $2,630,000

Less:

Variable selling and administrative expense = $3200000

Fixed selling and administrative = $270000

Loss from operations = $840000

Therefore, the estimated income statement for the month shows a loss of $840000.

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