The owners want to understand these numbers and how they can use the information to run the business. 1. Identify and describe two limitations of using absorption costing. 2. Explain why there is a difference in net income between variable costing and absorption costing. Show your calculations.
Brown Printing, a small family-owned business, began operations on March 1, manufacturing premium quality books. The owners have expertise in printing but no accounting knowledge or experience. The company’s independent accountant compiled the following data for the month of March. They have also requested an income statement.
|
Sales price |
$90 per book |
|
Number of units produced |
15,000 books |
|
Number of units sold |
10,000 books |
|
Direct materials cost |
$15 per book |
|
Direct labor cost |
$6 per book |
|
Variable manufacturing |
$4 per book |
|
Fixed manufacturing overhead |
$240,000 per month |
|
Selling cost |
$3 per book |
|
Administrative expenses |
$160,000 per month |
The owners want to understand these numbers and how they can use the information to run the business.
1. Identify and describe two limitations of using absorption costing.
2. Explain why there is a difference in net income between variable costing and absorption costing. Show your calculations.
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