CASE 6–19 The Case of the Plummeting Profits; Lean Production Required:
What characteristic of absorption costing caused the drop in net operating income for the second quarter and what could the controller have said to explain the problem? With absorption costing the net operating income relies on both production and sales so he was correct in his explanation, however he could have maybe explained better how since they had an under applied amount of overhead from their reduction in produced items and that by producing less that they were not able to absorb all of the fixed manufacturing costs into units of production. That is why you see this drop in net operating income for the second quarter. 2.
Prepare a contribution format variable costing income statement for each quarter.
Variable cost of good sold
Variable selling and administrative expense
Total Variable Expense
Fixed manufacturing overhead
Fixed selling and administrative expense
Total fixed expense
Net operating income (loss)
Selling and administrative expenses
Less variable portion
(12,000 units x $5.00 per unit)
Total Fixed selling and administrative expenses
Reconcile the absorption costing and the variable costing net operating income figures for each quarter. Reconciliation of Absorption costing and the Variable Costing Net income figures
Variable costing net operating income
Deduct: Fixed manufacturing overhead cost released from inventory during the First Quarter (4,000 units × $12 per unit)
Add (deduct): Fixed manufacturing overhead cost deferred...
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