Question :
ESSAY.
Write your answer in the space provided or a separate : 1196284
ESSAY.
Write your answer in the space provided or on a separate sheet of paper. 91)
The manager of the manufacturing division of Winnipeg Windows does not understand why income went down when sales went up. Some of the information he has selected for evaluation include:
January February
Units produced40,00030,000
Units sold 30,00040,000
Sales$600,000 $ 800,000
Beginning inventory0150,000
Cost of production600,00050,000
Ending inventory150,000
0
Operating income
70,00035,000
The division operated at normal capacity during January. Variable manufacturing cost per unit was $5, and the fixed costs were $400,000. Selling and administrative expenses were all fixed.
Required:
Explain the profit differences. How would variable costing income statements help the manager understand the division’s operating income?
92)
a. Explain the difference between the variable and absorption costing methods.
b.Which method(s) are required for external reporting? For internal reporting?
93)
Manitoba Company has two identical divisions, East and West. Their sales, production volume, and fixed manufacturing costs have been the same for the last five years. The amounts for each division were as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
Units produced 50,00055,00055,00044,00044,000
Units sold 45,00045,00050,00050,00050,000
Fixed mfg. costs $55,000$55,000$55,000$55,00$55,000
East Division uses absorption costing and West Division uses variable costing. Both use FIFO inventory methods. Variable manufacturing costs are $5 per unit. Selling and administrative expenses were identical for each division. There were no inventories at the beginning of Year 1.
Required:
Which division reports the highest income each year? Explain.
94)
Plate Company just hired its fourth production manager in three years. All three previous managers had quit because they could not get the company above the breakeven point, even though sales had increased somewhat each year. The company was operating at about 60 percent of plant capacity. The flatware industry was growing, so increased sales were not out of the question.
I. R. Dumm took the job as manager of the production division with a very attractive salary package. After interviewing for the position, he proposed a salary and bonus package that would give him a very small salary but a large bonus if he took the operating income (using absorption costing) above the breakeven point during his very first year.
Required:
What do you think Mr. Dumm had in mind for increasing the company’s operating income?
95)
Briefly discuss two methods of reducing the undesirable incentives associated with the use of absorption
costing to evaluate the performance of a plant manager.
96)
Explain how using master-budget capacity utilization for setting prices can lead to a downward demand
spiral.
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Sweetums
