Income Statements under Absorption Costing and Variable CostingThe 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 LotionFor the Month Ended October 31Sales (400,000 units)$32,000,000Cost of goods sold28,330,000Gross profit$3,670,000Selling and administrative expenses4,270,000Loss from operations$(600,000)The production costs and selling and administrative expenses, based on production of 400,000 units in October, are as follows:Direct materials$15per unitDirect labor17per unitVariable manufacturing cost35per unitVariable selling and administrative expenses10per unitFixed manufacturing cost$1,530,000for OctoberFixed selling and administrative expenses270,000for OctoberSales 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: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 LotionFor the Month Ending November 30  $Cost of goods sold:  $              $Selling and administrative expenses:  $       $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 LotionFor the Month Ending November 30  $Variable cost of goods sold:  $          $     $Fixed costs:  $       $3. What would be the estimated loss in income from operations if the aloe vera hand lotion production were temporarily suspended for November?$4. What advice should the controller give to management?Production of A.V. lotion should be  .

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Asked Jan 29, 2020
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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:
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

 

 

$
Cost of goods sold:

 

 


$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$
Selling and administrative expenses:

 

 


$

 

 

 

 

 

 

 

$
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

 

 

$
Variable cost of goods sold:

 

 


$

 

 

 

 

 

 

 

 

 

 

$

 

 

 

 

 

$
Fixed costs:

 

 


$

 

 

 

 

 

 

 

$
3. What would be the estimated loss in income from operations if the aloe vera hand lotion production were temporarily suspended for November?
$
4. What advice should the controller give to management?
Production of A.V. lotion should be

 

.

 

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Expert Answer

Step 1

Absorption Costing

Absorption costing is compulsory under Generally Accepted Accounting Principles (GAAP) for financial statements circulated to the external users. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Fixed factory overhead and variable factory overhead included as a part of factory overhead.

 

Variable Costing

 

Variable costing is the method that is used by the management (managers) for decision making purposes. The cost of goods manufactured includes direct materials, direct labor, and variable factory overhead. Fixed factory overhead is treated as period (fixed) expense.

Step 2

1.

The income statement according to the absorption costing concept for the SS Incorporation is prepared as shown below:

Accounting homework question answer, step 2, image 1
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Step 3

Working not...

Accounting homework question answer, step 3, image 1
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