accounting p7-16

accounting p7-16 - costs being the same. 5) a) With lean...

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Managerial Accounting P7-16 4)  A build up of inventory was caused because in year 2 there was an increase in production  but sales stayed the same.  This also caused some of the manufacturing overhead costs from  year 2 to be deferred to the next year.  Having that portion deferred left off 120,000 $, or 10,000  units of fixed manufacturing overhead from year 2.  Basically meaning that even though the  same number of units were sold in years 1 and 2, the net operating income of year 2 was  120,000 $ higher.  This brings up a major criticism of the absorption costing approach because  by increasing production, causing a build up of inventory profits increased despite sales and 
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Unformatted text preview: costs being the same. 5) a) With lean production, production is geared to sales. Therefore inventories would not have been able to build up in year 2. b) With lean production, the net operating income for year 2 (using absorption costing) would have been the same as year 1 (60,000 $). Because production is geared to sales under lean production, no costs would have been deferred to the next year and all 600,000 $ in manufacturing overhead would have been charged to year 2 costs. This would make net operating income the same for both years with variable and absorption costing....
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