In: Accounting
Mr. Andrews is the CEO of Victoria Ltd. He is quite unhappy as he figured that the profits for the last three years were declining despite increasing sales. He approached you to seek advice on the cost accounting numbers and income statement prepared by his accountant. He supplies you the following information:
Particulars |
2017 |
2018 |
2019 |
Sales (at $20 per unit) |
$1,000,000 |
1,100,000 |
$1,200,000 |
Less: Cost of goods sold |
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Opening stock |
50,000 |
200,000 |
250,000 |
Add: Cost of production |
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Variable |
260,000 |
240,000 |
160,000 |
Fixed (allocated) |
390,000 |
360,000 |
240,000 |
Less: Closing stock |
200,000 |
250,000 |
50,000 |
Cost of goods sold (before adjusting for |
500,000 |
550,000 |
600,000 |
production volume variance) |
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Adjustment for production volume variance |
(30,000) |
0 |
120,000 |
Actual Cost of goods sold (after adjustment |
470,000 |
550,000 |
720,000 |
for production volume variance) |
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Gross profit |
530,000 |
550,000 |
480,000 |
Less: Selling expenses (semi-variable) |
490,000 |
530,000 |
570,000 |
Operating profit / (loss) |
40,000 |
20,000 |
(90,000) |
Actual production for the last three years was as follows. 2017: 65,000 units, 2018: 60,000
units, and 2019: 40,000 units. The opening stock as of 1st January 2017 was 5,000 units. Fixed manufacturing overheads were allocated to production based on budgeted activity of 60,000 units every year. Actual fixed overheads for each of the three years was $360,000 (per annum).
Required: