The statements to which Mr. Sharp was referring are shown below
(absorption costing basis):
year1 year2
Sales (20,000 units each year) $700,000 $700,000
cost of goods sold 460,000 400,000
Gross margin $240,000 $300,000
selling and administrative expenses $200,000 200,000
Net operating income $40,000 $100,000
The statements above show the results of the first two years of operation. In the first year, the company produced and sold 20,000 units; in the second year, the company again sold 20,000 units, but it increased production as shown below:
Year1 year2
Production in units 20,000 25,000
Sales in units 20,000 20,000
Variable production cost per unit $8 $8
Fixed overhead costs (total) $300,000 $300,000
Essex Company applies fixed manufacturing overhead costs to its only product on the basis of each year's production. Thus, a new fixed manufacturing overhead rate is computed each year.
Requirement 1:
Compute the unit product cost for each year under :
a. Absorption costing
b. Variable costing
Requirement 2:
Prepare a contribution format variable costing income statement for each year.
Requirement 3:
Reconcile the variable costing and absorption costing net operating income figures for each year.
Requirement 4:
Explain to the president why, under absorption costing, the net operating income for Year 2 was higher then the net operating income for Year1, although the same number of units was sold in each year.
Requirement 5
a. Explain how operations would have differed in year2 if the company had been using Lean Production and ending inventories had been eliminated.
b. if Lean Production had been used during Year2, what would the ompany;s net operating income have been under absorption costing? Explain the reason for any difference between this income figure and the figure reported by the company in the statements above"