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If Lean production has been in use during 2020 and 2021, and the pre-determined overhead absorption rate is based on 40,000 units per year, compute the company’s net operating income/(loss) for each year under absorption costing. Explain the reason for any differences between these income figures and those reported using variable costing. Justify your explanation with a brief computation.

If Lean production has been in use during 2020 and 2021, and the pre-determined overhead absorption rate is based on 40,000 units per year, compute the company’s net operating income/(loss) for each year under absorption costing. Explain the reason for any differences between these income figures and those reported using variable costing. Justify your explanation with a brief computation.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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If Lean production has been in use during 2020 and 2021, and the pre-determined overhead absorption rate is based on 40,000 units per year, compute the company’s net operating income/(loss) for each year under absorption costing. Explain the reason for any differences between these income figures and those reported using variable costing. Justify your explanation with a brief computation.

Alpha Electronics Cop (AEC) manufactures and sells a unique intermediate component part that is widely used in various household electronic products. Operating results for the latest three financial years were as follows: Table 1 2019 2020 2021 Sales $1,000,000 S800,000 $1,000,000 Cost of goods sold 760,000 512.000 788,500 Gross margin Selling and administrative expenses 240,000 288,000 211,500 198.000 $90.000 230.000 230,000 Net operating income / (loss) $10.000 $(18.500) As the industry matures, the company is facing stiff competition from several regional players. Sales dropped 20% during 2020, against an original expectation of 40,000 units. Production for 2020 was budgeted at 50,000 units so as to build a sufficient buffer to prevent any stock- out situation from unexpected demand surge. The excess stocks from 2020 was carried over into 2021, and accordingly the budgeted production for 2021 was cut. 2019 2020 2021 Production in units 40,000 50,000 32,000 Sales in units 40,000 32,000 40,000 There are the following additional information about the AEC: Fixed manufacturing overhead costs Fixed selling and administrative costs Variable costs per unit: Manufacturing cost Selling and administrative cost $600,000 per annum $70,000 per annum $4 $4 The fixed manufacturing overhead costs are applied to units of production on the basis of actual production for the year. The company uses the FIFO inventory flow assumption. There were no opening inventories for 2019.
Transcribed Image Text:Alpha Electronics Cop (AEC) manufactures and sells a unique intermediate component part that is widely used in various household electronic products. Operating results for the latest three financial years were as follows: Table 1 2019 2020 2021 Sales $1,000,000 S800,000 $1,000,000 Cost of goods sold 760,000 512.000 788,500 Gross margin Selling and administrative expenses 240,000 288,000 211,500 198.000 $90.000 230.000 230,000 Net operating income / (loss) $10.000 $(18.500) As the industry matures, the company is facing stiff competition from several regional players. Sales dropped 20% during 2020, against an original expectation of 40,000 units. Production for 2020 was budgeted at 50,000 units so as to build a sufficient buffer to prevent any stock- out situation from unexpected demand surge. The excess stocks from 2020 was carried over into 2021, and accordingly the budgeted production for 2021 was cut. 2019 2020 2021 Production in units 40,000 50,000 32,000 Sales in units 40,000 32,000 40,000 There are the following additional information about the AEC: Fixed manufacturing overhead costs Fixed selling and administrative costs Variable costs per unit: Manufacturing cost Selling and administrative cost $600,000 per annum $70,000 per annum $4 $4 The fixed manufacturing overhead costs are applied to units of production on the basis of actual production for the year. The company uses the FIFO inventory flow assumption. There were no opening inventories for 2019.
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