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    Case 6-19 McGraw-Hill

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    Kathleen Wellman Herber
    The document discusses variable costing vs absorption costing methods for internal reporting. It provides income statements for a company using both methods for the first two quarters. Variable costing matches expenses with revenues in the period they are earned, while absorption costing allocates fixed overhead to inventory. The document reconciles the net incomes between the two methods and identifies advantages and disadvantages of variable costing. It also assumes the company introduces lean production in the second quarter, eliminating ending inventory, and discusses the impact on net income reporting going forward.

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    Download as DOCX, PDF, TXT or read online from Scribd

    Case 6-19 McGraw-Hill

    Uploaded by

    Kathleen Wellman Herber
    574 views3 pages
    The document discusses variable costing vs absorption costing methods for internal reporting. It provides income statements for a company using both methods for the first two quarters. Variable costing matches expenses with revenues in the period they are earned, while absorption costing allocates fixed overhead to inventory. The document reconciles the net incomes between the two methods and identifies advantages and disadvantages of variable costing. It also assumes the company introduces lean production in the second quarter, eliminating ending inventory, and discusses the impact on net income reporting going forward.

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    Managerial Accounting MBA

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    The document discusses variable costing vs absorption costing methods for internal reporting. It provides income statements for a company using both methods for the first two quarters. Variable costing matches expenses with revenues in the period they are earned, while absorption costing allocates fixed overhead to inventory. The document reconciles the net incomes between the two methods and identifies advantages and disadvantages of variable costing. It also assumes the company introduces lean production in the second quarter, eliminating ending inventory, and discusses the impact on net income reporting going forward.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    574 views3 pages

    Case 6-19 McGraw-Hill

    Uploaded by

    Kathleen Wellman Herber
    The document discusses variable costing vs absorption costing methods for internal reporting. It provides income statements for a company using both methods for the first two quarters. Variable costing matches expenses with revenues in the period they are earned, while absorption costing allocates fixed overhead to inventory. The document reconciles the net incomes between the two methods and identifies advantages and disadvantages of variable costing. It also assumes the company introduces lean production in the second quarter, eliminating ending inventory, and discusses the impact on net income reporting going forward.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
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    Kathleen Herber CASE 619 The Case of the Plummeting Profits; Lean Production Required: 1 What characteristic of absorption

    costing caused the drop in net operating income for the second . quarter and what could the controller have said to explain the problem? With absorption costing the net operating income relies on both production and sales so he was correct in his explanation, however he could have maybe explained better how since they had an under applied amount of overhead from their reduction in produced items and that by producing less that they were not able to absorb all of the fixed manufacturing costs into units of production. That is why you see this drop in net operating income for the second quarter. 2 Prepare a contribution format variable costing income statement for each quarter. .

    First Quarter Sales Variable Expenses: Variable cost of good sold Variable selling and administrative expense Total Variable Expense Contribution margin Fixed Expenses: Fixed manufacturing overhead Fixed selling and administrative expense Total fixed expense Net operating income (loss) $480,000 96000 60000 156000 $324,000

    Second Quarter $600,000 120000 75000 195000 $405,000

    $180,000 140,000 $320,000 $4,000

    $180,000 140,000 $320,000 $85,000

    Selling and administrative expenses Less variable portion (12,000 units x $5.00 per unit) Total Fixed selling and administrative expenses

    200,000 60,000 140,000

    3 Reconcile the absorption costing and the variable costing net operating income figures for each

    . quarter.

    Reconciliation of Absorption costing and the Variable Costing Net income figures First Quarter Second Quarter Variable costing net operating income $4,000 $85,000 Deduct: Fixed manufacturing overhead cost released from inventory during the First Quarter (4,000 units $12 per unit) -48000 Add (deduct): Fixed manufacturing overhead cost deferred in inventory from the First Quarter to the Second Quarter (7,000 units $12 per unit) 84000 -84000 Add: Fixed manufacturing overhead cost deferred in inventory from the Second Quarter to the future (1,000 units $12 per unit) 12000 Absorption costing net operating income $40,000 $13,000

    4 Identify and discuss the advantages and disadvantages of using the variable costing method for . internal reporting purposes. There are several advantages to using the variable costing method: ~Make is easier to estimate the profitability of products. ~Profit is unchanged by changes in inventories. ~Profit and sales move in the same direction. Some of the disadvantages using the variable costing method: ~Not able to use as an external report, you may run the risk of an auditor not excepting the financial statement. ~It may be difficult to determine what are fixed costs as apposed to variable costs. 5 Assume that the company had introduced Lean Production at the beginning of the second quarter, . resulting in zero ending inventory. (Sales and production during the first quarter remain the same.) a. How many units would have been produced during the second quarter under Lean Production? If we utilized the JIT Production theory, producing only enough units to meet the demands of sales the equation would be as follows: Units Sold. 15,000 Less units in Inventory at the beg of qtr.. Units produced in second qtr. for JIT 7,000 8,000

    b. Starting with the third quarter, would you expect any difference between the net operating income reported under absorption costing and under variable costing? Explain why there would or would not be any difference. Starting with the third quarter there would be little or no difference between the net operating income reported under absorption costing and variable costing because there would be a lack of inventories. This would make it impossible to incorporate the fixed manufacturing overhead cost between the periods.

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