Absorption_Costing

Absorption Costing Unit Product Cost | | Direct Material | $ 48.00 | | Inventory | $ 2.00 | | Fixed Manufacturing Overhead | $ 30.00 | | |   | | Total Absorption Costing Unit Product Cost | $80.00 | | | | | | | | | | | | | Variable Costing Unit Product Cost | | Direct Material | $ 48.00 | | Variable Manufacturing Overhead | $ 2.00 | | | | | |   | | Total Variable Costing Unit Product Cost | $50.00 | | | | | | | | | | | | | Absorption Costing Income Statement | | Sales | $1,500,000.00 | | Cost of Goods Sold | $ 800,000.00 | | Gross Margin | $ 700,000.00 | | Selling and Administration Expense | $650,000.00 | | Net Operating Income (Loss) |   |   |   |   | $50,000.00 | | | | | | | Variable Costing Income Statement | | Sales | $ 1,500,000.00 | | Variable Expense: | | | Variable Cost of Goods Sold | $ 500,000.00 | | Variable Selling and Administration | $ 180,000.00 | | Total Variable Expense: | $ 680,000.00 | | Contribution Margin | $ 820,000.00 | | Fixed Expense: | | | Fixed Manufacturing Overhead | $ 360,000.00 | | Fixed Selling and Administration | $ 470,000.00 | | Total Fixed Expense: | $ 830,000.00 | | Net Operating Income (Loss) | ($10,000) | | | | | | | | | | | | | Reconciliation of Variable and Absorption Costing Net Income | | Variable Costing Net Operating Income | $ (10,000.00) | | Fixed Manufacturing Overhead Cost (2000 units x $30) | $ 60,000.00 | | Absorption Costing Net Operating Income | $ 50,000.00 | Assume that the company must obtain additional financing in order to continue operations.  As a member of top management, would you prefer to rely n the statement in (b) above or in (3) above when meeting with a group of prospective investors' Our text discusses the ease of following variable incomes statements due to the fact that all things follow the same pattern, ("...when sales go up net operating sales go up and when sales go down operating income goes down" (Noreen, et. al., 2011). Though the fact is that absorption income statements are used for both financial reporting externally as well as for tax purposes. For this reason I would think any prospective investors would be well versed in absorption income statements and are sure to be observant of fluctuations that may arise in manufacturing cost if inventories rise and fall in subsequent months reported on absorption statements. I would therefore use the absorption income statement since it is used externally on a consistent basis | | Noreen, E., Brewer, P., & Garrison, R. (2011). Managerial Accounting for Managers 2nd Edition. McGraw-Hill Companies Inc. New York