MA32 Problem: Direct vs Absorption Costing – HRL Inc.

MA32 Problem: Direct vs Absorption Costing – HRL Inc.

HRL Incorporated produces a single product and uses a standard absorption costing system. Standard costs for the current year, at an expected annual sales and production level of 144,000units and at an expected selling price of $34, are as follows:Cost per UnitDirect material $6.00Direct labour 5.50Variable manufacturing overhead 3.00Fixed manufacturing overhead 7.00Standard cost of manufacturing 21.50Variable selling expenses 1.50Fixed selling expenses 4.00Full cost per unit $27.00 Actual fixed monthly expenses $84,000 for manufacturing overhead and $48,000 for selling andadministration.Production is budgeted to occur evenly throughout the year.Financial results for January are:OriginalJanuaryBudgetJanuaryActualSales (@ $34.00 per unit) $476,000$340,000Standard cost of sales 144,000215,000Gross profit at standard 332,000125,000Production variances* -- 14,000Adjusted gross profit 346,000139,000Selling and administration 69,00063,000Income (loss) before tax $277,000$76,000 * No spending or efficiency variances, only production volume/denominator variances.January sales, which were expected to be greater than normal, were in fact 4,000 units less than planned. There is no inventory on January 1.REQUIRED:(a)

Recalculate the actual net income for January using a contribution approach. Reconcilethe difference between the two statements, absorption and contribution