Question

When Waterways’ management met to review the year-end financial statements, the room was filled with excitement. Sales had been exceptional during the year and every department had exceeded the budget and last year’s sales totals. Several years ago Waterways had implemented a bonus system based on percentage of sales over budget, and the managers were expecting healthy cheques at the end of the year.

Yet the plant manager, Ryan Smith, was stunned into silence when he read the bottom line on the income statement for manufacturing operations. It was showing a loss! He immediately approached the CFO asking for an explanation. Ryan wondered, “Why did we go through all that trouble and inconvenience to adopt those cost-cutting measures when they had the opposite effect?” One of those measures was to move toward lean manufacturing.

The CFO retrieved the following information with respect to the top-selling line from the manufacturing operations for the last three years. Production on this line began on January 1, 2014:

		2014		2015		2016
Beginning inventory of finished units		0
Production in units		76,000		80,000		60,800
Sales in units		66,000		70,000		80,800
Selling price		$35		$35		$37
Direct material		$4		$4		$5
Direct labour		3		3		4
Variable manufacturing overhead		5		5		5
Variable selling and administration		6		6		6
Fixed manufacturing overhead		608,000		608,000		608,000
Fixed selling and administration		140,000		140,000		140,000

Waterways uses the absorption-costing method and accounts for inventory using FIFO.

Assume that Waterways uses a normal-costing method. The company had budgeted 76,000 units of production for each of the three years.

Calculate the volume variance for each year indicating if it is favourable or unfavourable.

		2014			2015			2016
Volume variances		$	NeitherFavourableUnfavourable		$	NeitherUnfavourableFavourable		$	FavourableNeitherUnfavourable

Answer 1

Waterways Inc.
Absorption costing Income Statement
For the year ending December 31
Sr.No.	Particulars	2014	2015	2016
1	Sales	2,310,000	2,450,000	2,989,600
		66000*35	70000*35	80800*37
2	Cost of Goods sold
a	Beginning Inventory Jan 1	-	200,000	392,000
b	Add: cost of goods manufactured	1,520,000	1,568,000	1,459,200
c	Cost of goods available for sale (a+b)	1,520,000	1,768,000	1,851,200
d	Less: Ending Inventory Dec 31	(200,000)	(392,000)	-
	(c-d)	1,320,000	1,376,000	1,851,200
3	Gross Profit (1-2)	990,000	1,074,000	1,138,400
4	Selling & Admn. Expenses	(536,000)	(560,000)	(624,800)
5	Operating Income/(Loss) (3-4)	454,000	514,000	513,600
Sr. No.	Working notes:	2014	2015	2016
1	Direct Material	4	4	5
2	Direct Labour	3	3	4
3	Variable manufacturing overhead	5	5	5
4	Fixed manufacturing overhead	8	7.6	10
		608000/76000	608000/80000	608000/60800
5	Total (1+2+3+4)	20	19.6	24
6	Units Produced	76,000	80,000	60,800
7	Cost of goods manufactured (5*6)	1,520,000	1,568,000	1,459,200
	Units
8	Opening	-	10,000	20,000
9	Produced	76,000	80,000	60,800
10	Sales	66,000	70,000	80,800
11	Ending Inventory (8+9-10)	10,000	20,000	-
12	Value (5*12)	200,000	392,000	-
13	Sales Unit	66,000	70,000	80,800
14	Variable selling admn	6	6	6
15	Variable selling expenses (14*15)	396,000	420,000	484,800
16	Fixed selling admn	140,000	140,000	140,000
17	Total selling & admn (16+17)	536,000	560,000	624,800

***********************************************************************************************************************************Please Upvote......Its really usefull to us...If any querry comment below...I will resolve ASAP....Thank You....