Author Question: The Accounts Receivable T account shows the following 250, debit 1,250, debit 300, credit 250, ... (Read 187 times)

krzymel · **on:** Jul 6, 2018

The Accounts Receivable T account shows the following 250, debit 1,250, debit 300, credit 250, credit What is the balance of the account?
a. 1,500, debit
b. 550, credit
c. 950, debit
d. 950, credit
e. 2,050, debit

Question 2

(40 min) Variable versus absorption costing.

The Zwatch Company manufactures trendy, high-quality, moderately priced watches. As Zwatch's senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Zwatch's 2014 income statement. The following data are for the year ended December 31, 2014:

Required:
Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs.
1. Prepare income statements under variable and absorption costing for the year ended December 31, 2014.
2. What is Zwatch's operating income as percentage of revenues under each costing method?
3. Explain the difference in operating income between the two methods.
4. Which costing method would you recommend to the CFO? Why?

ilianabrrr · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

C

Answer to Question 2

1.

Beginning Inventory + 2014 Production = 2014 Sales + Ending Inventory

85,000 units + 2014 Production = 345,400 units + 34,500 units

2014 Production = 294,900 units

Income Statement for the Zwatch Company, Variable Costing
for the Year Ended December 31, 2014

Revenues: 22 345,400 7,598,800
Variable costs
Beginning inventory: 5.10 85,000 433,500
Variable manufacturing costs: 5.10 294,900 1,503,990
Cost of goods available for sale 1,937,490
Deduct ending inventory: 5.10 34,500 (175,950)
Variable cost of goods sold 1,761,540
Variable operating costs: 1.10 345,400 379,940
Adjustment for variances 0
Total variable costs 2,141,480
Contribution margin 5,457,320
Fixed costs
Fixed manufacturing overhead costs 1,440,000
Fixed operating costs 1,080,000
Total fixed costs 2,520,000
Operating income 2,937,320

Absorption Costing Data

Fixed manufacturing overhead allocation rate =
Fixed manufacturing overhead/Denominator level machine-hours = 1,440,000 6,000
= 240 per machine-hour

Fixed manufacturing overhead allocation rate per unit =
Fixed manufacturing overhead allocation rate/standard production rate = 240 50
= 4.80 per unit

Income Statement for the Zwatch Company, Absorption Costing
for the Year Ended December 31, 2014

Revenues: 22 345,400 7,598,800
Cost of goods sold
Beginning inventory (5.10 + 4.80) 85,000 841,500
Variable manuf. costs: 5.10 294,900 1,503,990
Allocated fixed manuf. costs: 4.80 294,900 1,415,520
Cost of goods available for sale 3,761,010
Deduct ending inventory: (5.10 + 4.80) 34,500 (341,550)
Adjust for manuf. variances (4.80 5,100)a 24,480 U
Cost of goods sold 3,443,940
Gross margin 4,154,860
Operating costs
Variable operating costs: 1.10 345,400 379,940
Fixed operating costs 1,080,000
Total operating costs 1,459,940
Operating income 2,694,920

a Production volume variance = (6,000 hours 50) 294,900 4.80
= (300,000 294,900) 4.80
= 24,480

2. Zwatch's operating margins as a percentage of revenues are

Under variable costing:
Revenues 7,598,800
Operating income 2,937,320
Operating income as percentage of revenues 38.7

Under absorption costing:
Revenues 7,598,800
Operating income 2,694,920
Operating income as percentage of revenues 35.5

3. Operating income using variable costing is about 9 percent higher than operating income calculated using absorption costing.

Variable costing operating income Absorption costing operating income =
2,937,320 2,694,920 = 242,400

Fixed manufacturing costs in beginning inventory under absorption costing
Fixed manufacturing costs in ending inventory under absorption costing
= (4.80 85,000) (4.80 34,500) = 242,400

4. The factors the CFO should consider include
(a) Effect on managerial behavior.
(b) Effect on external users of financial statements.

I would recommend absorption costing because it considers all the manufacturing resources (whether variable or fixed) used to produce units of output. Absorption costing has many critics. However, the dysfunctional aspects associated with absorption costing can be reduced by
Careful budgeting and inventory planning.
Adding a capital charge to reduce the incentives to build up inventory.
Monitoring nonfinancial performance measures.