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ADM 2341 Lecture Notes - Lecture 8: Decision-Making, Cash Flow, Lean Manufacturing

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ambercat292
9 May 2016
School
University of Ottawa
Department
Administration
Course
ADM 2341
Professor
Lamia Chourou

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Document Summary

Direct materials, direct labour, manufacturing overhead (product cost) Net operating income of absorption is higher than variable (1st year) Net operating income of absorption is lower than variable (2nd year) Relation between product and sales: production > sales, production < sales, production = sales. Effect on inventory: inventory increases, inventory decreases, no change. Relation between variable and absorption income: absorption > variable, absorption < variable, absorption = variable. Variable costing income only affected by changes in unit sales. Not affected by the number of units produced. When sales go up, go up net operating income goes up and vice versa. Absorption costing income is influenced by changes in unit sales and units of production. Net operating income increased simply by producing more units even if those units are not sold. Opponents of absorption costing argue that shifting b/w fixed manufacturing overhead costs b/w periods can lead to faulty decisions.

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Related Questions

Crossbow Corp. produces a single product. Data concerning June's operations follow: Units in beginning inventory 0 Units produced 6,000 Units sold 5,000 Variable costs per unit: Manufacturing $ 7 Selling and administrative $ 3 Fixed costs in total: Manufacturing $12,000 Selling and administrative $ 3,000 For the year in question, net operating income under variable costing will be: higher than net operating income under absorption costing. lower than net operating income under absorption costing. the same as net operating income under absorption costing. The relation between absorption costing and variable costing net operating income cannot be determined.

Harris Corporation produces a single product. Last year, Harrismanufactured 27,970 units and sold 22,200 units. Production costsfor the year were as follows:

Fixed manufacturingoverhead $335,640
Variablemanufacturing overhead $240,542
Direct labor $131,459
Directmaterials $234,948

Sales were $1,043,400, for the year, variable selling andadministrative expenses were $113,220, and fixed selling andadministrative expenses were $198,587. There was no beginninginventory. Assume that direct labor is a variable cost.

Under variable costing, thecompany's net operating income for the year would be:

A $34,043 lower than under absorption costing

B $34,043 higher than under absorption costing

C $69,240 higher than under absorption costing

D $69,240 lower than under absorption costing

EXERCISE 6-12 Variable Costing Income Statement; Reconciliation (L06-2, L06-3] Whitman Company has just completed its first year of operations. The company's absorption cost- ing income statement for the year appears below: Whitman Company Income Statement Sales (35,000 units X $25 per unit) .... Cost of goods sold (35,000 units x $16 per unit) ...... Gross margin ............ Selling and administrative expenses .......... Net operating income....... ... $875,000 560,000 315,000 280,000 $ 35,000 The company's selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 per unit product cost given above is computed as follows: Direct materials ........... Direct labor .............. Variable manufacturing overhead ........ Fixed manufacturing overhead ($160,000 = 40,000 units) ... Absorption costing unit product cost .... BISON Required: 1. Redo the company's income statement in the contribution format using variable costing. 2. Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above.