Case 6–19 the Case of the Plummeting Profits; Lean Production
CASE 6–19 The Case of the Plummeting Profits; Lean Production
Required:
1. What characteristic of absorption costing caused the drop in net operating income for the second quarter and what could the controller have said to explain the problem?
With absorption costing the net operating income relies on both production and sales so he was correct in his explanation, however he could have maybe explained better how since they had an under applied amount of overhead from their reduction in produced items and that by producing less that they were not able to absorb all of the fixed manufacturing costs into units of production. That is why you see this drop in net operating income for the second quarter.
2. Prepare a contribution format variable costing income statement for each quarter. First Quarter Second Quarter Sales $480,000 $600,000
Variable Expenses: Variable cost of good sold 96000 120000 Variable selling and administrative expense 60000 75000
Total Variable Expense 156000 195000 Contribution margin $324,000 $405,000 Fixed Expenses: Fixed manufacturing overhead $180,000 $180,000 Fixed selling and administrative expense 140,000 140,000
Total fixed expense $320,000 $320,000 Net operating income (loss) $4,000 $85,000
Selling and administrative expenses 200,000 Less variable portion 60,000 (12,000 units x $5.00 per unit) Total Fixed selling and administrative expenses 140,000
3. Reconcile the absorption costing and the variable costing net operating income figures for each quarter.
Reconciliation of Absorption costing and the Variable Costing Net income figures First Quarter Second Quarter
Variable costing net operating income $4,000 $85,000
Deduct: Fixed manufacturing overhead cost released from inventory during the First Quarter (4,000 units × $12 per unit) -48000
Add (deduct): Fixed manufacturing overhead cost
Required:
1. What characteristic of absorption costing caused the drop in net operating income for the second quarter and what could the controller have said to explain the problem?
With absorption costing the net operating income relies on both production and sales so he was correct in his explanation, however he could have maybe explained better how since they had an under applied amount of overhead from their reduction in produced items and that by producing less that they were not able to absorb all of the fixed manufacturing costs into units of production. That is why you see this drop in net operating income for the second quarter.
2. Prepare a contribution format variable costing income statement for each quarter. First Quarter Second Quarter Sales $480,000 $600,000
Variable Expenses: Variable cost of good sold 96000 120000 Variable selling and administrative expense 60000 75000
Total Variable Expense 156000 195000 Contribution margin $324,000 $405,000 Fixed Expenses: Fixed manufacturing overhead $180,000 $180,000 Fixed selling and administrative expense 140,000 140,000
Total fixed expense $320,000 $320,000 Net operating income (loss) $4,000 $85,000
Selling and administrative expenses 200,000 Less variable portion 60,000 (12,000 units x $5.00 per unit) Total Fixed selling and administrative expenses 140,000
3. Reconcile the absorption costing and the variable costing net operating income figures for each quarter.
Reconciliation of Absorption costing and the Variable Costing Net income figures First Quarter Second Quarter
Variable costing net operating income $4,000 $85,000
Deduct: Fixed manufacturing overhead cost released from inventory during the First Quarter (4,000 units × $12 per unit) -48000
Add (deduct): Fixed manufacturing overhead cost