PortfolioAssignment2 - Acct 509 Graded Assignment 2 Fall...

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Unformatted text preview: Acct. 509 Graded Assignment 2 Fall 2014, 25 Points Garrett Carlson Given Information Kelly Co. makes and sells high tech gidgets. Operating results for the first three years of operations for this company (using absorption costing) were as follows: Sales COGS Gross Margin Selling & Administrative Operating Income 2012 $700,000.00 $492,727.00 $207,273.00 $110,000.00 $97,273.00 2013 $717,500.00 $539,136.00 $178,364.00 $111,750.00 $66,614.00 2014 $717,500.00 $525,500.00 $192,000.00 $111,750.00 $80,250.00 2012 2200 2000 2013 1950 2050 2014 2050 2050 $350.00 $350.00 $350.00 Sales & Production Production (Budget & Actual) Sales Units Selling Price Per Unit Variable Manufacturing Costs (Direct Materials, Direct Labor, VMOH) FMOH Variable Selling & Admin. Expenses Fixed Selling & Admin. Expenses $110.00 $300,000.00 $35.00 $40,000.00 Per Unit Per Year Per Unit Sold Per Year 1. Prepare a variable costing (contribution format) income statement for each year. Sales Variable Costs Variable Manufacturing Costs Variable Selling & Admin Costs Total Variable Costs Operating Margin Fixed Costs FMOH Fixed Selling & Administrative Total Fixed Costs Variable Costing Net Income 2012 $700,000.00 $220,000.00 $70,000.00 2013 $717,500.00 $225,500.00 $71,750.00 $290,000.00 $410,000.00 $300,000.00 $40,000.00 $297,250.00 $420,250.00 $300,000.00 $40,000.00 $340,000.00 $70,000.00 $340,000.00 $80,250.00 2A. Compute the fixed overhead rate per unit produced for each year under absorption costing. FMOH Units Produced FMOH/Units Produced 2012 2013 2014 $300,000.00 $300,000.00 $300,000.00 2200 1950 2050 $136.36 $153.85 $146.34 2B. Compute the total product (inventoriable) cost per unit for each year under absorption costing. FMOH/Unit Variable Cost/Unit Total Cost/Unit Production Units Units Sold Total Costs 2012 2013 2014 $136.36 $153.85 $146.34 $110.00 $110.00 $110.00 $246.36 $263.85 $256.34 2200 1950 2050 2000 2050 2050 $492,727.27 $539,136.36 $525,500.00 3. Reconcile the difference in operating income between absorption and variable costing, in each year, using the following form Absorption Costing Income Variable Costing Income Difference 2012 97,273.00 70,000.00 27,273.00 2013 66,614.00 80,250.00 -13,636.00 2014 80,250.00 80,250.00 0.00 FMOH-Ending Inventory LESS: FMOH-Beginning Inventory Difference 2012 27,272.73 0.00 27,272.73 2013 13,636.36 27,272.73 -13,636.36 2014 13,636.36 13,636.36 0.00 4. Refer to the absorption costing income statements given above. Thoroughly explain (in words, not numbers) why net operati The main explanation for the inverse relationship between units sold and net operating income has to deal with th when the fixed manufacturinng overhead costs is calculated, the total amount of fixed manufacturing costs is divid lower than what the rate would be if it was total fixed manufacturing overhead costs divided by units sold and the income. In 2013, the opposite was done, more units were sold than produced. The total fixed manufacturing over manufacturing costs divided by units sold so since rate used is higher, this raises the costs which lowers income. related with units sold. Also LIFO is used so all of the current year's (2013) products are sold first and those get the rate. Also the ending inventory in 2012 isn't included in the costs as well for 2012. Ending units are not included in lower the rate and to put more costs into the ending inventory which in turn both lower costs and raise the operati 5. Refer again to the absorption costing income statements above. Thoroughly explain (in words, not numbers) why profits inc Again this is related to the units produced for each year. More units were produced in 2014 than 2013 so the Fixe This rate is then applied to units sold, and since units sold is the same, the costs in 2013 is going to be higher than first in 2014 and also since units sold equals units produced, all the units get the higher rate. Also the cost of end obviously, they weren't sold. Again this is related to the units produced for each year. More units were produced in 2014 than 2013 so the Fixe This rate is then applied to units sold, and since units sold is the same, the costs in 2013 is going to be higher than first in 2014 and also since units sold equals units produced, all the units get the higher rate. Also the cost of end obviously, they weren't sold. 6. Absorption costing is required by generally accepted accounting principles for external reporting; however, many companies Advantages: For analysis purposes, one advantage is that variable costing allows the business to pull information from the varia income statement for the cost volume profit analysis. This information can't be retrieved directly from absorption statements. Variable Costing also does a better job at portraying fixed costs on the net profits. The total fixed cos shown unlike on absorption costing statements. Like in this example income and sales move in opposite direction absorption costing, this isn't the case in variable costing. But probably the best advantage to variable costing is th the need to over produce. In absorption costing, by producing more units than units sold, the fixed costs are abso units in inventory. These costs are not allocated to fixed costs for products sold. So as long as the average fixed co than the variable cost per unit, the average full cost per unit falls increasing profits. Variable costing eliminates th happening by writing all of the fixed costs as a periodic cost. Disadvantages: But absorption costing is more generally used now for a reason. Usually variable costing statements aren't accept laws, and can't be used to evaluate top senior management's effeciency. So reports generated externally (absorpti internally (variable) will differ. But two of the bigger reasons why variable costing isn't widely used is because it cl as variable costs and produces misleading cost figures. At the end of the year when all of the costs are known, it c separate the costs out into variable and fixed. Many times the manager will label all of these costs as variable cos distribute some of the costs into the inventory by overproducing. Lastly, under variable costing, unit costs can be don't show opportunity costs unlike absorption costing. Even though absorption costing doesn't show opportunit variable costing doesn't show opportunity costs at all. s for this company (using Inventory Begin End 2012 0 200 LIFO inventory flow assumption 2014 $717,500.00 $225,500.00 $71,750.00 $297,250.00 $420,250.00 $300,000.00 $40,000.00 $340,000.00 $80,250.00 LIFO 2013 200 100 2014 100 100 LIFO year, using the following formula: FMOH in ending inventory – FMOH in beginning inventory = difference in income. Note that a little roun not numbers) why net operating income was lower in 2013 than it was in 2012 under absorption costing, even though more units were sol ng income has to deal with the units produced each year. In 2012 more units were produced than sold and d manufacturing costs is divided by units produced then that rate is multiplied by units sold. That rate is divided by units sold and the rate is then multiplied by units sold which lowers costs and raises operating otal fixed manufacturing overhead costs were divided by units produced is higher than total fixed costs which lowers income. There was enough difference between each year that the incomes were inversely re sold first and those get the higher 2013 FMOH/unit rate applied compared to the lower 2012 FMOH/unit nding units are not included in the costs for absorption costing. Because of this, managers will overproduce to wer costs and raise the operating income which can get them higher bonuses are just make them look better.. not numbers) why profits increased in 2014 when the sales volume stayed the same as in 2013. n 2014 than 2013 so the Fixed Manufacutring Overhead Rate per Unit is higher in 2013 than 2014. 013 is going to be higher than 2014. Also again, since this company uses LIFO, the higher rate is applied er rate. Also the cost of ending inventory isn't included in the total cost of goods sold becuase n 2014 than 2013 so the Fixed Manufacutring Overhead Rate per Unit is higher in 2013 than 2014. 013 is going to be higher than 2014. Also again, since this company uses LIFO, the higher rate is applied er rate. Also the cost of ending inventory isn't included in the total cost of goods sold becuase ng; however, many companies use variable costing for internal reporting and analysis purposes. Identify and thoroughly discuss two advant ull information from the variable costing eved directly from absorption costing income et profits. The total fixed costs are actualy es move in opposite directions under ntage to variable costing is that it eliminates sold, the fixed costs are absorbed into the s long as the average fixed costs fall faster Variable costing eliminates this from ting statements aren't accepted by GAAP, tax generated externally (absorption) and 't widely used is because it classifies fixes costs all of the costs are known, it can be difficult to of these costs as variable costs which will then ble costing, unit costs can be misleading and ting doesn't show opportunity costs exactly, income. Note that a little rounding error (should be less than $1) is ok. en though more units were sold in 2013 than in 2012. thoroughly discuss two advantages and two disadvantages of using variable costing for internal purposes. ...
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