Absorption and Variable Costing Income Statements

During the first month of operations ended July 31, YoSan Inc. manufactured 10,900 flat panel televisions, of which 10,100 were sold. Operating data for the month are summarized as follows:

Required:

1. Prepare an income statement based on the absorption costing concept.

2. Prepare an income statement based on the variable costing concept.

Variable Costing Income Statement

On July 31, 2016, the end of the first month of operations, Holton Company prepared the following income statement, based on the absorption costing concept:

a. Prepare a variable costing income statement, assuming that the fixed manufacturing costs were $44,000 and the variable selling and administrative expenses were $31,000. In your computations, round unit costs to two decimal places and round final answers to the nearest dollar.

b. Reconcile the absorption costing income from operations of $292,000 with the variable costing income from operations determined in (a).

Absorption Costing Income Statement

On June 30, 2016, the end of the first month of operations, Smithey Manufacturing Co. prepared the following income statement, based on the variable costing concept:

a. Prepare an absorption costing income statement. In your computations, round unit costs to two decimal places and round final answers to the nearest dollar.

b. Reconcile the variable costing income from operations of $216,500 with the absorption costing income from operations determined in (a).

Absorption and Variable Costing Income Statements

During the first month of operations ended July 31, YoSan Inc. manufactured 9,700 flat panel televisions, of which 9,000 were sold. Operating data for the month are summarized as follows:

Required:

1. Prepare an income statement based on the absorption costing concept.​ ​

Sales _______

Cost of goods sold:

Cost of goods manufactured ____________

Inventory, July 31 _____________

Total cost of goods sold ____________

Gross profit______________

Selling and administravice expenses __________

Income from operations _______________

2. Prepare an income statement based on the variable costing concept.

Sales ___________-

Variable cost of goods sold:

Variable cost of goods manufactured ___________

Inventory, July 31___________

Total variable cost of goods sold ____________

Manufacturing margin _____________

Variable selling and administrative expenses ________________

Contribution margin _____________

Fixed costs:

Fixed manufacturing costs _____________

Fixed selling and administrative expenses ____________

Total fixed costs _________________

Income from operations ______________

Mini Case – Cash budget and Short-term financial planning Middleton Manufacturing

You have recently been hired by Middleton Manufacturing to work in the newly established treasury department. Middleton Manufacturing is a small company with disorganized systems and the finance area needs work.

The company currently has a beginning cash balance of $100,000 and plans to buy new machinery during the fourth quarter for $500,000, paying cash. The company maintains a minimum cash balance of $100,000 and invests any excess cash in a money market account.   The company borrows short-term from CIBC, paying 1.5 percent interest per quarter on all short-term borrowing, and receives 1% per quarter from any balances in its money market account. The company pays $110,000 of interest each quarter for its long-term debt.

All sales and purchases are made on credit. Credit sales for each of the next four quarters:

Q1 : $1,360,000 .... Q2 : $1,440,000 .... Q3 : $1,500,000 .... Q4 : $1,600,000

The forecasted credit sales for Q1 of next year is $1,420,000. Middleton currently has an average collection period of 45 days and beginning accounts receivable of $500,000. Twenty percent of the beginning balance of accounts receivable balance is from a company that has just entered bankruptcy. This account receivable will not be collected.

Purchases are done one quarter in advance and represent 50% of the next quarter’s sales (cost of inventory sold is 50% of sales). Suppliers are paid after 30 days. Wages, taxes, and other costs average 30 percent of gross sales and are paid in cash in same quarter when they occur.

Required: You have been asked to prepare a cash budget and short-term financial plan for the company under the current policies.

III. A common utility function used to illustrate economic examples is the Cobb-Douglas function where U(X, Y)= XαYβ, where α and β are decimal exponents that sum to 1.0 (for example, 0.3 and 0.7).

a. For this utility function, the MRS is given by MRS = MUX=MUY = αY/βX. Use this fact together with the utility-maximizing condition (and that α+ β =1) to show that this person will spend the fraction of his other income on good X and the fraction of income on good Y— that is, show PXX/I = α, PYY/I = β.

b. Use the results from part a to show that total spending on good X will not change as the price of X changes so long as income stays constant.

c. Use the results from part a to show that a change in the price of Y will not affect the quantity of X purchased.

d. Show that with this utility function, a doubling of income with no change in prices of goods will cause a precise doubling of purchases of both X and Y.

6a)Government outlays may be financed through ________ and _________.

b)

c)Inventory investment includes all except an increase in which of the following?

d)Government purchases include all except which of the following?

e)

Exercise

Assume your Company sells to merchandisers in three different states—Oregon, Texas and Colorado The following profit analysis by state was prepared by the company:

                                                                        Oregon                       Texas                        Colorado

Revenue                                                         4,500,000                    4,000,000                   4,000,000

Cost of Goods Sold                                        2,500,000                      2,000,000                  2,000,000

Gross profit                                                     2,000,000                      2,000,000                  2,000,000

Selling Expenses                                               500,000                         700,000                      700,000

Net profit                                                         1,500,000                      1,300,000                  1,300,000

Following are the fixed portion within the costs provided above:

Fixed manufacturing Costs                             300,000                         500,000                        1,000,000

Fixed Selling and Admin Costs                      300,000                         200,000                           400,000

Now, Management believes it could increase state sales by 20%, without increasing any of the fixed costs, by spending an additional $50,000 per state on advertising. No change in inventories.  

1. Prepare a contribution margin statement by state to determine how much each state operating profit would be for the additional $50000 advertising.

2. Which state will provide the greatest profit return for a $50000 increase in advertising?

3. Why?

Sweets R Us Pty Ltd. is a large confectionary company that manufactures a range of standard sweet products and some specialty products for the Australian market. Most of the company’s production is in standard chocolate goods and they offer personalised packaging for promotional or fundraising purposes. They also provide uniquely moulded and decorated chocolate items for special events such as grand finals. You have been allocated the role of assessing the controls in the Purchases, Accounts Payable and Payments system, and have obtained the following details:

Raw material ordering process

1. To maintain and control product quality a limited number of trusted suppliers are used.
2. The production manager oversees raw material inventory. Orders are placed based on current production orders and quantities of raw material currently on hand with next day delivery where possible.
3. No formal purchase order system is used.

Raw material warehousing procedures

1. The warehouse personnel are trusted, long-term employees.
2. One of the warehousing staff ensures that all goods received, primarily raw materials, are in good order and signs the couriers’ delivery dockets in acknowledgment of materials received.
3. Movement of in and out of the warehouse is not recorded, but the production manager monitors stock levels and movements daily.

Note: Finished goods are warehoused in a separate secured area that only the production manager and his assistant have access to.

1. Identifies and explains t (5) control weaknesses associated with the purchases and accounts payable outlined above.
2. Identifies and explains the account balance assertions for raw material inventory and accounts payable that are most impacted by control weaknesses.
3. Recommends and justifies a control improvement for each of the weaknesses identified in requirement one.