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 productions costs per unit were $800 for direct materials, $300 for direct labor, and $200 for overhead.
Variable CostingIncome Statement for Georgia shacks
Sales $3,750,000
Variable cost of good sold
Beginning Inventory $0
Cost of Goods Manufactured $2,600,000
COGS for sale $2,600,000
Less Ending Inventory (650,000)
Product Contribution Margin $1,800,000
Less Variable Selling and Administrative Expense (270,000)
Total Contribution Margin 1,530,000
Less Fixed Expenses
Fixed Factory Overhead 1,500,000
Fixed Selling and Administrative 190,000
Income before taxes (160,000)
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 ti present an absorption costing income statement to the local banker, considering the company president knowledge of the net loss determined 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 income for the second year under the two systems.