Required a prepare income statements based on

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Required:a.Prepare income statements based on absorption costing for 2007 and 2008.b.Since Macally sold the same number of units in 2007 and 2008, why did net income increase in 2008?c.Discuss management's possible motivation for increasing production in 2008.d.Determine the costs of ending inventory for 2008.Comment on the risks and costs associated with theaccumulation of inventory.e.Prepare an income statement for Macally for 2008 using a variable costing format.How would yourecommend changing the bonus scheme?
40SELF-TEST #5SOLUTIONS1.e2.b3.a4.d5e6.b:$225,000(.75) + $450,000(.25) = $281,2507.a:$250,000(.70) + $150,000(.30) = $220,0008.d:Units to be produced in January= expected sales + desired end inventory - beginning inventory= 12,000 + 10,000 - 8,000= 14,000 units9.d:Accounts payable 12/31$12,000January cash purchases3,000(15,000 x .20)January credit purchases6,000(12,000 x .50)January cash payments$21,00010.e:March cash payments:Insurance ($200 x 12 months)$2,400Salary700Total$3,10011.b:A/R June 30$ 350,000+ sales400,000- collections320,000- write-offs16,000$414,00012.d:Sales$464,000Less: COGS (464,000  1.6)290,000Depreciation12,000Selling and administration110,000Net income$52,00013.a:No credit sales.14.d:All purchases are in cash; purchases = payments for inventoryBeg. inventory + purchases - COGS = ending inventoryPurchases = 150,000 - 140,000 + 290,000 =$300,000Selling and administrative110,000Total disbursements$410,000
4115.For both parts A and B, padding the budget is not a problem because this firm does not allow participation byfacility managers.a.There are two basic types of problems.First, budgets may lack information and expertise that facilitymanagers could provide.Second, the managers may be less motivated to perform up to standardsimposed upon them by others.b.When costs are defined as cash payments, managers could let their payables for purchases of materialsincrease.This would decrease cash payments in the current period but could harm the firm by increasinginterest costs in the future.Purchases would be reflected in cost of goods manufactured regardless ofwhen payments are made.There are problems with accrual accounting, such as letting fixed costs sit ininventory when absorption costing is used, but the question asked for advantages accrual accountingmay have over the cash basis.16.a.With stable prices, volume must have increased.In general when the sales forecast is incorrect, alloperating budgets will be affected.There is a variable cost component of direct materials, overhead, andsales & administration; costs will exceed these budgets.b.The budget shows revenues, not receipts or collections.Therefore, this budget does not indicate fundsavailable to pay operating costs in any particular quarter.c.With stable prices, the only row available for manipulation is sales in units, which would be given belowexpectations.d.The key point to recognize here is that the manager's bonus is based on revenue, not income.Themanager may maximize revenue while harming income, and owners.For example, he/she may neglectproduction costs while filling more orders than budgeted.

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Term
Fall
Professor
AnitaLakra
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