Problem 8-13 absorption and variable costing; production constant,

Leander Office Products Inc. produces and sells small storage and organizational products for office use. During the first month of operations, the products sold well. Andrea Leander, the owner of the company, was surprised to see a loss for the month on her income statement. This statement was prepared by a local bookkeeping service recommended to her by her bank manager. The statement follows:


Income Statement


  Sales (45,600units)







  Variable expenses:







     Variable cost of goods sold*







     Variable selling and administrative expenses








  Contribution margin







  Fixed expenses:







     Fixed manufacturing overhead







     Fixed selling and administrative expenses








  Operating loss












   *Consists of direct materials, direct labour, and variable manufacturing overhead.


      Leander is discouraged over the loss shown for the month, particularly since she had planned to use the statement to encourage investors to purchase stock in the new company. A friend who is an accountant insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month.


     Selected cost data relating to the product and to the first month of operations follow:




  Units produced





  Units sold





  Variable costs per unit:





     Direct materials





     Direct labour





     Variable manufacturing overhead





     Variable selling and administrative expenses






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