Happy Valley Prison, is a Federal Correctional Institution,housing low-security inmates. One way for inmates to earn âspecialprivilegesâ is for them to work in the prisonâs license platemanufacturing facility.
Happy Valley uses standard costing, and allocates overhead basedon the number of plates produced. Happy Valley uses absorptioncosting and weighted average. Any estimation error is closed tocost of goods sold at the end of each month.
At the start of March, Happy Valley has no WIP, and finishedgood inventory of 2000 plates. Each plate in beginning inventoryhas $2 of variable cost and $1 of fixed overhead.
During March, Happy Valley expects to produce 1000 plates andhas expected costs of $2000 (variable costs) and $1300 (fixedoverhead). All of these expectations are met, except that Marchâsfixed overhead costs are actually $1900. At the end of March, HappyValley has 1500 units in finished goods inventory and no WIP.
A) What will be the value of Happy Valleyâs finishedgoods inventory at the end of March? What would be the value ifHappy Valley used variable costing instead?
B) How much will be recorded as cost of goods sold onHappy Valleyâs income statement for March? How much would berecorded if Happy Valley used variable costinginstead?
C) John is in charge of production, and gets todetermine the actual number of plates produced in June. He mustannounce this in advance (so that planned production will equalactual production), and he has no control over any other numbers.Would it be easier to John to increase Juneâs gross margin perplate sold under absorption costing system or under a variablecosting system? Briefly explain.
D) Mary is in charge of sales, and can determine theactual number of plates sold in June (by accelerating sales fromJuly or deferring sales to July). Would it be easier for Mary toincrease Juneâs gross margin per plate sold under an absorptioncosting system or under a variable costing system? Brieflyexplain.
Happy Valley Prison, is a Federal Correctional Institution,housing low-security inmates. One way for inmates to earn âspecialprivilegesâ is for them to work in the prisonâs license platemanufacturing facility.
Happy Valley uses standard costing, and allocates overhead basedon the number of plates produced. Happy Valley uses absorptioncosting and weighted average. Any estimation error is closed tocost of goods sold at the end of each month.
At the start of March, Happy Valley has no WIP, and finishedgood inventory of 2000 plates. Each plate in beginning inventoryhas $2 of variable cost and $1 of fixed overhead.
During March, Happy Valley expects to produce 1000 plates andhas expected costs of $2000 (variable costs) and $1300 (fixedoverhead). All of these expectations are met, except that Marchâsfixed overhead costs are actually $1900. At the end of March, HappyValley has 1500 units in finished goods inventory and no WIP.
A) What will be the value of Happy Valleyâs finishedgoods inventory at the end of March? What would be the value ifHappy Valley used variable costing instead?
B) How much will be recorded as cost of goods sold onHappy Valleyâs income statement for March? How much would berecorded if Happy Valley used variable costinginstead?
C) John is in charge of production, and gets todetermine the actual number of plates produced in June. He mustannounce this in advance (so that planned production will equalactual production), and he has no control over any other numbers.Would it be easier to John to increase Juneâs gross margin perplate sold under absorption costing system or under a variablecosting system? Briefly explain.
D) Mary is in charge of sales, and can determine theactual number of plates sold in June (by accelerating sales fromJuly or deferring sales to July). Would it be easier for Mary toincrease Juneâs gross margin per plate sold under an absorptioncosting system or under a variable costing system? Brieflyexplain.
