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[solution] » Graduate level accounting question. Must be done in 2.5 hours and must show work. 3rd question


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Graduate level accounting question. Must be done in 2.5 hours and must show work. 3rd question


(20 points) Esther recently started a new company to produce and sell her exciting new product.

 

Esther prepared the following income statements using variable costing for the first two

 

quarters of operation:

 

Qtr 1

 

Qtr 2

 

Sales ($25 per unit)

 

$250,000

 

$250,000

 

Variable cost of goods sold

 

120,000

 

120,000

 

Variable selling & admin.

 

20,000

 

20,000

 

Contribution margin

 

$ 110,000

 

$110,000

 

Fixed manufacturing overhead

 

70,000

 

70,000

 

Fixed Selling and Admin.

 

30,000

 

30,000

 

Operating income (loss)

 

$ 10,000

 

$ 10,000

 

Budgeted production

 

12,000

 

9,000

 

Actual production

 

12,000

 

9,000

 

Units sold

 

10,000

 

10,000

 

Beginning inventory

 

0

 

2,000

 

Additional cost information follows. Cost data remain the same for both quarters.

 

Manufacturing costs:

 

Selling & administrative costs:

 

Direct materials

 

$8.00/unit

 

Variable selling & admin.$2.00 per unit

 

Direct labor

 

$2.50/unit

 

Fixed selling & admin. $30,000 per qtr.

 

Variable mfg overhead

 

$1.50/unit

 

Total Var man. cost

 

$12.00 per unit

 

Fixed Man. OH

 

$70,000 per qtr.

 

a. Under absorption costing, when managers are evaluated based on (absorption costing)

 

segment profits these managers have incentives to overproduce. Thoroughly explain

 

why. b. Prepare an income statement for each of quarters 1 and 2 using absorption costing.

 

Assume a LIFO cost flow assumption. c. Explain why, in words, there is a difference between the absorption costing income

 

values (you computed these in your response to question 3b) and the reported variable

 

costing income values given at the beginning of the problem. Give a separate

 

explanation for each quarter?s difference.

 


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Sep 21, 2019

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