ACTG 2P12 Chapter Notes - Chapter 8: Total Absorption Costing, Finished Good

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violetmacaw957

13 Mar 2017

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Peter, benjamin, and beatrix have each been hired to manage a division of lop company. They all make the same product, but in a different location. Each has been promised a salary of ,000 plus a bonus of 25% of net income. Each begins the job with 3,000 units in beginning inventory. Fixed overhead was computed based on a production level of 10,000 units. Variable selling and administrative costs are per units sold and fixed selling and administrative costs are ,000. Sales for upcoming hear are predicted to be 15,000 units. Each division uses the fifo cost flow assumption. Benjamin decides to produce 8,000 units and beatrix decides to produce 10,000 units. At the end of the year, all three managers have sold 10,000 units at a price of each. sh: started with 3,000 in beginning inventory, sold 10,000 at . 00 per unit, controlled costs. Variable manufacturing costs ( + + )

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Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Operating results for the first three years of activity were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 800,000 $ 640,000 $ 800,000 Cost of goods sold 580,000 400,000 620,000 Gross margin 220,000 240,000 180,000 Selling and administrative expenses 190,000 180,000 190,000 Net operating income (loss) $ 30,000 $ 60,000 $ (10,000) In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfaxâs sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that inventory was excessive and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below: Year 1 Year 2 Year 3 Production in units $ 50,000 $ 60,000 40,000 Sales in units 50,000 40,000 50,000 Additional information about the company follows: The companyâs plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $2 per unit, and fixed manufacturing overhead expenses total $480,000 per year. Fixed manufacturing overhead costs are applied to units of product on the basis of each yearâs production. That is, a new fixed manufacturing overhead rate is computed each year. Variable selling and administrative expenses were $1 per unit sold in each year. Fixed selling and administrative expenses totaled $140,000 per year. The company uses a FIFO inventory flow assumption. Starfaxâs management canât understand why profits doubled during Year 2 when sales dropped by 20% and why a loss was incurred during Year 3 when sales recovered to previous levels. Required: 1. Prepare a contribution format variable costing income statement for each year. 2-a. Compute the unit product cost in each year under absorption costing. (Round your answers to 2 decimal places.) 2-b. Reconcile the variable costing and absorption costing net operating income (loss) figures for each year. 5b. If Lean Production had been used during Year 2 and Year 3, and the predetermined overhead rate is based on 50,000 units per year, what would the company's net operating income (loss) have been in each year under absorption costing? Â©2018 McG

tealtermite482

Optima Company is a high-technology organization that produces amass-storage system. The design of Optimaâs system is unique andrepresents a breakthrough in the

industry. The units Optima produces combine positive features ofboth compact and

hard disks. The company is completing its fifth year ofoperations and is preparing to

build its master budget for the coming year (2010). The budgetwill detail each quarterâs

activity and the activity for the year in total. The masterbudget will be based on the

following information:

a. Fourth-quarter sales for 2009 are 55,000 units.

b. Unit sales by quarter (for 2010) are projected asfollows:

First quarter 65,000

Second quarter 70,000

Third quarter 75,000

Fourth quarter 90,000

The selling price is $400 per unit. All sales are credit sales.Optima collects 85 percent of all sales within the quarter in whichthey are realized; the other 15 percent is

collected in the following quarter. There are no bad debts.

c. There is no beginning inventory of finished goods. Optima isplanning the following ending finished goods inventories for eachquarter:

First quarter 13,000 units

Second quarter 15,000 units

Third quarter 20,000 units

Fourth quarter 10,000 units

d. Each mass-storage unit uses five hours of direct labor andthree units of direct materials. Laborers are paid $10 per hour,and one unit of direct materials costs $80.

e. There are 65,700 units of direct materials in beginninginventory as of January 1,

2010. At the end of each quarter, Optima plans to have 30percent of the direct

materials needed for next quarterâs unit sales. Optima will endthe year with the

same level of direct materials found in this yearâs beginninginventory.

f. Optima buys direct materials on account. Half of thepurchases are paid for in the

quarter of acquisition, and the remaining half are paid for inthe following quarter.

Wages and salaries are paid on the 15th and 30th of eachmonth.

g. Fixed overhead totals $1 million each quarter. Of this total,$350,000 represents

depreciation. All other fixed expenses are paid for in cash inthe quarter incurred.

The fixed overhead rate is computed by dividing the yearâs totalfixed overhead by

the yearâs expected actual units produced.

h. Variable overhead is budgeted at $6 per direct labor hour.All variable overhead

expenses are paid for in the quarter incurred.

i. Fixed selling and administrative expenses total $250,000 perquarter, including

$50,000 depreciation.

j. Variable selling and administrative expenses are budgeted at$10 per unit sold. All

selling and administrative expenses are paid for in the quarterincurred.

k. The balance sheet as of December 31, 2009, is as follows:

Assets

Cash $ 250,000

Direct materials inventory 5,256,000

Accounts receivable 3,300,000

Plant and equipment 33,500,000

Total assets $42,306,000

Liabilities and Stockholdersâ Equity

Accounts payable $ 7,248,000*

Capital stock 27,000,000

Retained earnings 8,058,000

Total liabilities and stockholdersâ equity $42,306,000

*For purchase of direct materials only.

l. Optima will pay quarterly dividends of $300,000. At the endof the fourth quarter,

$2 million of equipment will be purchased.

Required:

Prepare a master budget for Optima Company for each quarter of2010 and for the year

in total. The following component budgets must be included:

-Direct labor budget

-Overhead budget

-Selling and administrative expenses budget

-Ending finished goods inventorybudget

-Cost of goods sold budget (Assume that there is no change inwork-in-process

inventories.)

-Cash budget

-Pro forma income statement (using absorption costing)

-Pro forma balance sheet

bluepanda857

Accept or Reject a Special Order

Moore Company manufactures and sells a single product called a Lop. Operating at capacity, the company can produce and sell 30,000 Lops per year. Costs associated with this level of production and sales are given below:

Unit Total

Direct materials $15 $450,000

Direct labour 8 240,000

Variable manufacturing overhead 3 90,000

Fixed manufacturing overhead 9 270,000

Variable selling expense 4 120,000

Fixed selling expense 6 180,000

Total cost $45 $1,350,000

The Lops normally sell for $50 each. Fixed manufacturing overhead is constant at $270,000 per year within the range of 25,000 through 30,000 Lops per year.

Required:

Assume that due to a recession, Moore Company expects to sell only 25,000 Lops through regular channels next year. A large retail chain has offered to purchase 5,000 Lops if Moore is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; so variable selling expenses would be slashed by 75%. However, Moore Company would have to purchase a special machine to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000. Moore Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.

Refer to the original data. Assume again that Moore Company expects to sell only 25,000 Lops through regular channels next year. The provincial government would like to make a one-time- only purchase of 5,000 Lops. The government would pay a fixed fee of $1.80 per Lop, and it would reimburse Moore Company for all costs of production (variable and fixed) associated with the units. Since the government would pick up the Lops with its own trucks, there would be no variable selling expenses associated with this order. If Moore Company accepts the order, by how much will profits increase or decrease for the year?

Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 Lops through regular channels next year, so accepting the government's order would require giving up regular sales of 5,000 Lops. If the government's order is accepted, by how much will profits increase or decrease from what they would be if the 5,000 Lops were sold through regular channels?

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ACTG 2P12 Chapter Notes - Chapter 8: Total Absorption Costing, Finished Good

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