Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: Variable costs per unit: Manufacturing: 20 Direct materials 12 Direct labor 4 Variable manufacturing overhead 2 Variable selling and administrative Fixed Costs per year 960,000 Fixed manufacturing overhead 240,000 Fixed selling and administrative expense During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $58 per unit. Required: Compute the company’s break-even point in unit sales. Assume the company uses variable costing: Compute the unit product cost for Year 1, Year 2, and Year 3. Prepare an income statement for Year 1, Year 2, and Year 3. Assume the company uses absorption costing: Compute the unit product cost for Year 1, Year 2, and Year 3. Prepare an income statement for Year 1, Year 2, and Year 3. 4. Compare the net operating incomes that you computed in requirements 2 and 3 to the breakeven point in unit sales that you computed in requirement 1. Which net operating income figures (variable costing or absorption costing) seem counterintuitive? Why?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:
|
Variable costs per unit: |
|
|
Manufacturing: |
20 |
|
Direct materials |
12 |
|
Direct labor |
4 |
|
Variable manufacturing |
2 |
|
Variable selling and administrative |
|
|
Fixed Costs per year |
960,000 |
|
Fixed manufacturing overhead |
240,000 |
|
Fixed selling and administrative expense |
|
During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $58 per unit.
Required:
- Compute the company’s break-even point in unit sales.
- Assume the company uses variable costing:
- Compute the unit product cost for Year 1, Year 2, and Year 3.
- Prepare an income statement for Year 1, Year 2, and Year 3.
- Assume the company uses absorption costing:
- Compute the unit product cost for Year 1, Year 2, and Year 3.
- Prepare an income statement for Year 1, Year 2, and Year 3.
4. Compare the net operating incomes that you computed in requirements 2 and 3 to the breakeven point in unit sales that you computed in requirement 1. Which net operating income figures (variable costing or absorption costing) seem counterintuitive? Why?
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