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ACCTG414 Study Guide - Final Guide: Net Income, Deferral

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School
University of Alberta
Department
Accounting
Course
ACCTG414
Professor
Jocelyn King

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Document Summary

Here is an example of how absorption costing can allow management an opportunity to engage in earnings management. Expense deferral, inc. estimates that it will need to produce 1,000,000 units for the fiscal year ending. December 31, 2011 if it is to fulfill budgeted sales and end the year with its targeted ending inventory of 100,000 units. Variable costs of production are per unit. General and administrative expenses are ,000 per year. The company needs to achieve a net income of ,800,000 in order to meet analysts forecasted earnings. Cost per unit = variable + . 5m/1m fixed = . 50. The president of expense deferral, inc. , recognizes that, through building up inventory levels, he can defer a portion of the factory costs in closing inventory. Accordingly, he instructs the manufacturing division to make 2,000,000 units in 2011 rather than the 1,000,000 that are estimated to meet sales demand and normal inventory requirements.

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Related Questions

Trez Company began operations this year. During this first year, the company produced 100,000 units and sold 80,000 units. The absorption costing income statement for this year follows.

Sales (80,000 units × $40 per unit) $ 3,200,000
Cost of goods sold
Beginning inventory $ 0
Cost of goods manufactured (100,000 units × $20 per unit) 2,000,000
Cost of good available for sale 2,000,000
Ending inventory (20,000 × $20) 400,000
Cost of goods sold 1,600,000
Gross margin 1,600,000
Selling and administrative expenses 610,000
Net income $ 990,000


Additional Information

Selling and administrative expenses consist of $450,000 in annual fixed expenses and $2 per unit in variable selling and administrative expenses.

The company's product cost of $20 per unit is computed as follows.

Direct materials $ 3 per unit
Direct labor $ 9 per unit
Variable overhead $ 2 per unit
Fixed overhead ($600,000 / 100,000 units) $ 6 per unit


Required:
1. Prepare an income statement for the company under variable costing.

TREZ Company
Variable Costing Income Statement
Sales
Plus: Cost of goods sold
Net income (loss)

During Heaton Company’s first two years of operations, thecompany reported absorption costing net operating income asfollows:

Year 1 Year 2
Sales (@ $63 perunit) $ 945,000 $ 1,575,000
Cost of goods sold(@ $39 per unit) 585,000 975,000
Gross margin 360,000 600,000
Selling andadministrative expenses* 273,000 303,000
Net operatingincome $ 87,000 $ 297,000

* $3 per unit variable; $228,000fixed each year.

The company’s $39 unit productcost is computed as follows:

Directmaterials $ 6
Direct labor 11
Variablemanufacturing overhead 5
Fixed manufacturingoverhead ($285,000 ÷ 20,000 units) 17
Absorption costingunit product cost $ 39

Forty percent of fixed manufacturing overhead consists of wagesand salaries; the remainder consists
of depreciation charges on production equipment and buildings.

Production and cost data for thetwo years are:

Year 1 Year 2
Units produced 20,000 20,000
Units sold 15,000 25,000

Required:
1.

Prepare a variable costing contribution format income statementfor each year.

2.

Reconcile the absorption costing and the variable costing netoperating income figures for each year. (Losses anddeductions should be indicated with a minus sign.)

During Heaton Company’s first two years of operations, thecompany reported absorption costing net operating income asfollows:

Year 1 Year 2
Sales (@ $63 perunit) $ 945,000 $ 1,575,000
Cost of goods sold(@ $39 per unit) 585,000 975,000
Gross margin 360,000 600,000
Selling andadministrative expenses* 298,000 328,000
Net operatingincome $ 62,000 $ 272,000

* $3 per unit variable; $253,000fixed each year.

The company’s $39 unit productcost is computed as follows:

Directmaterials $ 6
Direct labor 12
Variablemanufacturing overhead 4
Fixed manufacturingoverhead ($340,000 ÷ 20,000 units) 17
Absorption costingunit product cost $ 39

Forty percent of fixed manufacturing overhead consists of wagesand salaries; the remainder consists
of depreciation charges on production equipment and buildings.

Production and cost data for thetwo years are:

Year 1 Year 2
Units produced 20,000 20,000
Units sold 15,000 25,000

Required:
1.

Prepare a variable costing contribution format income statementfor each year.

2.

Reconcile the absorption costing and the variable costing netoperating income figures for each year.(Losses should beindicated by a minus sign.)