Question #1
Consider the following information:
Q1 Q2 Q3
Beginning inventory (units) 0 200 200
Budgeted units to be produced 50,000 50,000 50,000
Actual units produced 49,500 50,200 50,400
Units sold 49,300 50,200 50,500
Variable manufacturing costs per unit produced $80 $80 $80
Variable selling costs per unit sold $30 $30 $30
Fixed manufacturing costs $3,000,000 $3,000,000 $3,000,000
Fixed selling costs $1,200,000 $1,200,000 $1,200,000
Selling price per unit $250 $250 $250
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!
Question #2
a) Under which inventory costing method would managers have an incentive to build excess inventory? What is it about that method that provides the incentive? Be sure to justify your answer.
b) What steps can a manager take to reduce the incentive to build excess inventory? Be specific!
Question #3
a) How does the choice of the denominator level capacity impact income reported under variable costing? Be specific!
b) How does the choice of the denominator level capacity impact income reported under full absorption costing? Be specific!
Question #4
A firm expects to sell 65,000 units of its product annually. It estimates that it costs $250 to place an order and that each unit costs $1.30 annually to carry in inventory. It takes 1 week to receive an order once it is placed.
a) How many units should the firm order at a time if it wants to minimize the sum of ordering and carrying costs?
b) How many orders will it place in a year?
c) What will its average inventory level be during the year?
d) What is its reorder point?
Question #5
If a firm is considering implementing a JIT inventory system, list and describe the accounting issues that the firm should consider when making this decision.