**Educational Content: Budgeting and Costing Methods at Soar****Objective:** Prepare income statements and inventory section of the balance sheet for two years under variable and absorption costing methods.**Scenario:**The accounting team at Soar is evaluating its approach to financial reporting at year-end. The company, a producer of mylar balloons priced at $0.75 each, has used absorption costing in its standard costing system. However, recent financial results have prompted reconsideration of this approach in favor of using variable costing. The intent is to explore more consistent and clear performance reporting.**Budgeted Information for Both Years:**- **Direct Materials:** $0.10 per unit- **Direct Labor:** $0.10 per unit- **Variable Manufacturing Overhead (MOH):** $0.05 per unit- **Variable Selling Expense:** $0.05 per unit- **Fixed Manufacturing Overhead (MOH):** $18,000- **Fixed Selling and Administrative Expenses:** $28,500- **Budgeted Production Volume:** 120,000 units**Actual Activity:**| | Year 1 | Year 2 ||------------------------|--------|--------|| Units Produced | 124,000| 115,000|| Beginning FG Inventory | 2,500 | 9,500 || Units Sold | 117,000| 121,000|- No pricing or efficiency variances occurred in either year.- The company writes off fixed-MOH volume variance directly to the cost of goods sold (COGS) in the year incurred.**Required Tasks:**a. **Report Unit Cost Capitalized as Inventory:** - Calculate under both variable and absorption costing methods. - Show the ending FG Inventory section of the balance sheet for both methods for each year.b. **Income Statement Presentation:** - Create income statements for both years, using: 1. Variable Costing 2. Absorption Costingc. **Income Difference Calculation:** - Determine the income difference between the two methods for each year. - Explain any discrepancies.d. **Recommendation for Income Statement Format:** - Recommend which format Soar should adopt for internal performance evaluation. - Justify the recommendation. These exercises will enrich understanding of the implications of using different costing methods on financial reporting and management decisions.

The absorption costing includes all manufacturing cost whether fixed or variable as inventory cost. It absorbs all manufacturing costs. The variable costing approach absorbs all variable cost whether direct or indirect into inventory. Since, the multiple sub-parts are posted, only first 3 shall be answered. The production is higher than sales in year 1, so the profit under absorption costing is higher. The sales is higher in year 2 than production, so the profit under variable costing is higher.

Business

Accounting

P12.2 (LO 1, 2, 3), AP The accounting team at Soar is considering its options for reporting performance at the end of this year. Soar specializes in mylar balloons, which it sells for $0.75 each. Soar has used only absorp- ion costing within its standard costing system, but management team members feel uneasy about Soar's most ecent year's modest income (despite higher-volume sales than the previous year). They wonder if there is different way to put the financial statements together that would provide a more consistent--and perhaps onservative-presentation of performance. Some people on the accounting team have experience with variable costing, so they suggest putting ogether a side-by-side comparison of both costing systems for the past 2 years in order to compare the results. Following are the budgeted costs and budgeted production that were in place for both years, along with actual rolume information for each year. Budgeted Information for Both Years Direct materials $0.10 per unit $0.10 per unit $0.05 per unit $0.05 per unit Direct labor Variable-MOH Variable selling expense Fixed-MOH $18,000 Fived selling and adminictrative exnencer $28 500

P12.2 (LO 1, 2, 3), AP The accounting team at Soar is considering its options for reporting performance at the end of this year. Soar specializes in mylar balloons, which it sells for $0.75 each. Soar has used only absorp- ion costing within its standard costing system, but management team members feel uneasy about Soar's most ecent year's modest income (despite higher-volume sales than the previous year). They wonder if there is different way to put the financial statements together that would provide a more consistent--and perhaps onservative-presentation of performance. Some people on the accounting team have experience with variable costing, so they suggest putting ogether a side-by-side comparison of both costing systems for the past 2 years in order to compare the results. Following are the budgeted costs and budgeted production that were in place for both years, along with actual rolume information for each year. Budgeted Information for Both Years Direct materials $0.10 per unit $0.10 per unit $0.05 per unit $0.05 per unit Direct labor Variable-MOH Variable selling expense Fixed-MOH $18,000 Fived selling and adminictrative exnencer $28 500

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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