Case 6–19 the Case of the Plummeting Profits; Lean Production

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CASE 6–19 The Case of the Plummeting Profits; Lean Production Required:
1.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.

First QuarterSecond Quarter

Variable Expenses:
Variable cost of good sold96000120000
Variable selling and administrative expense6000075000
Total Variable Expense156000195000

Contribution margin$324,000$405,000

Fixed Expenses:
Fixed manufacturing overhead$180,000 $180,000
Fixed selling and administrative expense140,000140,000
Total fixed expense$320,000 $320,000

Net operating income (loss)$4,000$85,000

Selling and administrative expenses200,000
Less variable portion60,000
(12,000 units x $5.00 per unit)
Total Fixed selling and administrative expenses140,000

3.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
First QuarterSecond Quarter
Variable costing net operating income$4,000$85,000
Deduct: Fixed manufacturing overhead cost released from inventory during the First Quarter (4,000 units × $12 per unit) -48000 Add (deduct): Fixed manufacturing overhead cost deferred...
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