Consider the following information: Q1 Q2 Q3 Beginning inventory (units) 0 300 300 Actual units produced 1,000 800 1,250 Budgeted units to be produced 1,000 1,000 1,000 Units sold 700 800 1,500 Manufacturing costs per unit produced $900 $900 $900 Marketing costs per unit sold $600 $600 $600 Fixed manufacturing costs $400,000 $400,000 $400,000 Fixed marketing costs $140,000 $140,000 $140,000 Selling price per unit $2,500 $2,500 $2,500 There are no price, efficiency, or spending variances, and any production-volume variance is directly written off to cost of goods in the quarter in which it occurs.
a) Prepare income statements for Q1, Q2, and Q3 using variable costing and absorption costing.
b) Explain the differences in operating income between the two costing systems for each quarter. Be specific!
2.a) Under which inventory costing method would managers have an incentive to build excess inventory? Be sure to justify your answer.
b) What can a manager do to reduce the incentive to build excess inventory? Be specific!
3.a) What role does the choice of capacity level impact income reported under variable costing? Be specific!
b) What role does the choice of capacity level impact income reported under full absorption costing? Be specific!
4. A firm expects to sell 10,000 units of its product annually. It estimates that it costs $200 to place an order and that each unit costs $7 annually to carry in inventory. It takes 7 days to receive an order once it is placed, and the store is open 365 days per year.
a) How many units should the firm order at a time if it wants to minimize the sum of ordering and carrying costs?