Author Question: A company produced a net income of 28,000 but failed to adjust for 1,600 in depreciation of ... (Read 60 times)

cookcarl · **on:** Jul 6, 2018

A company produced a net income of 28,000 but failed to adjust for 1,600 in depreciation of equipment and 1,400 in accrued wages. Explain how these errors have affected net income. What will be the corrected net income?

Question 2

Possible causes for price and efficiency variances.

You are a student preparing for a job interview with a Fortune 100 consumer products manufacturer. You are applying for a job in the finance department. This company is known for its rigorous case-based interview process. One of the students who successfully obtained a job with them upon graduation last year advised you to know your variances cold When you inquired further, she told you that she had been asked to pretend that she was investigating wage and materials variances. Per her advice, you have been studying the causes and consequences of variances. You are excited when you walk in and find that the first case deals with variance analysis. You are given the following data for May for a detergent bottling plant located in Mexico:

Please respond to the following questions as if you were in an interview situation:

Required:
1. Calculate the materials efficiency and price variance and the wage and labor efficiency variances for the month of May.
2. You are given the following context: Union organizers are targeting our detergent bottling plant in Puebla, Mexico, for a union. Can you provide a better explanation for the variances that you have calculated on the basis of this information?

LVPMS · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

Failing to make adjustments that will increase expenses will understate expenses and overstate net income. Failure to adjust for depreciation for equipment, for example, will understate not only Depreciation Expense but also Accumulated Depreciation. This in turn will overstate the book value of equipment and thus overstate total assets. The failure to adjust for accrued wages will understate not only the Wages Expense account but also Wages Payable and therefore total liabilities. The corrected net income should be 25,000.

Answer to Question 2

1.

Actual Costs
Incurred
(Actual Input Qty.
Actual Price)
(1)

Actual Input Qty.
Budgeted Price
(2) Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
Budgeted Price)
(3)
Direct
Materials:
Bottles
Pesos 2,205,000 (6,300,000 Peso 0.34)
Pesos 2,142,000 (360,000 15 Peso 0.34)
Pesos 1,836,000

Pesos 63,000 U Pesos 306,000 U
Price variance Efficiency variance

Direct
Manufacturing
Labor
Pesos 739,165 (24,500 Peso 29.30)
Pesos 717,850 (360,000 (2/60) Peso 29.30)
Pesos 351,600

Pesos 21,315 U Pesos 366,250 U
Price variance Efficiency variance

2. If union organizers are targeting our plant, it could suggest employee dissatisfaction with our wage and benefits policies. During this time of targeting, we might expect employees to work more slowly, and they may be less careful with the materials that they are using. These tactics might be seen as helpful in either organizing the union or in receiving increases in wages and/or benefits. We should expect unfavorable efficiency variances for both wages and materials. We may see an unfavorable wage variance, if we need to pay overtime due to work slowdowns. We do, in fact, see a substantial unfavorable materials quantity variance, representing a serious overuse of materials. While we may not expect each bottle to use exactly 15 oz. of materials, we do expect the shrinkage to be much less than this. Similarly, we see well over double the number of hours used relative to what we expect to make and fill this number of bottles. They are able to produce just under 15 bottles per hour, instead of the standard 30 bottles per hour. It is plausible that this waste and inefficiency are either caused by, or are reflective of, the reasons behind the attempt to organize the union at this plant.