Refer again to the absorption costing income statements. Explain why net operating income was higher in Year2 than it was in Year 1 under the absorption approach, in light of the fact that fewer units were sold in Year 2 that in Year 1 Starfax, Inc., manufactures a small part that is widely used in various electronic products such as homecomputers. Operating results for the first three years of activity were as follows (absorptioncosting basis):Year 2$ 800,000 $ 640,000 $800,000400,000Year 1Year 3SalesCost of goods sold580,000620,000Gross marginSelling and administrative expenses220,000190,000240,000180,000180,000190,000Net operating income (loss)$ 30,000 $ 60,000 $(10,000)In the latter part of Year 2, a competitor went out of business and in the process dumped a large numberof units on the market. As a result, Starfax's sales dropped by 20% during Year 2 even though productionincreased during the year. Management had expected sales to remain constant at 50,000 units; theincreased production was designed to provide the company with a buffer of protection against unexpectedspurts in demand. By the start of Year 3, management could see that inventory was excessive and thatspurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production duringYear 3, as shown below:Year 2Year 150,00050,00060,00040,000Year 340,00050,000Production in unitsSales in unitsAdditional information about the company follows:a. The company's plant is highly automated. Variable manufacturing expenses (direct materials, directlabor, and variable manufacturing overhead) total only $2 per unit, and fixed manufacturing overheadexpenses total $480,000 per year.b. Fixed manufacturing overhead costs are applied to units of product on the basis of each year'sproduction. That is, a new fixed manufacturing overhead rate is computed each year.c. Variable selling and administrative expenses were $1 per unit sold in each year. Fixed selling andadministrative expenses totaled $140,000 per year.d. The company uses a FIFO inventory flow assumption.Starfax's management can't understand why profits doubled during Year 2 when sales dropped by 20% andwhy a loss was incurred during Year 3 when sales recovered to previous levels. net income(loss) under variable costing30,000 -100,00030,000fixed manufacturing overhead cost160,000 -160,000released in year2 and released in year3fixed manufacturing overhead cost120,000released in year3 and released in futurenet income(loss) under absorption costing30,00060,000-10,000

Absorption Costing :- In this system of costing the variable as…

Answered: Starfax, Inc., manufactures a small…

Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Operating results for the first three years of activity were as follows (absorption

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Q: The level of inventory of a manufactured product has increased by 7,616 units during a period. The…

A: Decrease in operating income if variable costing is used = Increase in level of inventory x fixed…

Q: Some financial information for each of three companies is reflected below in columns A, B, and C.…

A: Variable costs are costs that vary with the change in the level of output whereas fixed costs are…

Q: The level of inventory of a manufactured product has increased by 7,819 units during a period. The…

A: Variable costing and absorption costing To calculate operating income two different methods used are…

Q: Obj. 5, 6 EX 20-22 Variable costing income statement and contribution margin analysis for a service…

A: Income statement: It tells the profitability of the firm. All the revenues and expenses are recorded…

Q: SIM Company has computed the following unit costs for the year just ended: Direct material used…

Q: During Heaton Company's first two years of operations, it reported absorption costing net operating…

A: The net operating income shows the difference between revenues and operating expenses. The…

Q: Date January 1 (beginning inventory) January 24 February 8 March 16 June 11 Purchases Sales Number…

A: Inventory:The raw material used for the manufacturing of the good and the goods that can be sold in…

Q: $671,000 496,540 $174.460 $429,000 253,110 $175,890

A: Answer : Weighted average contribution margin ratio : Weighted average contribution margin ratio =…

Q: Multiple-Product Break-Even and Target Profit

A: 1. Sales mix of ceiling fans to table fans = 30000:60000 = 1:2 2. Calculation of Breakeven point…

Q: Circetrax, Inc. has provided the following financial information for the year: Finished Goods…

A: Under the absorption costing, fixed manufacturing overhead is considered as a product cost and…

Q: Koontz Company manufactures two models of industrial components-a Basic model and an Advanced Model.…

A: ACTIVITY BASED COSTING- It is a method which assign overhead and indirect costs to related products…

Q: Income under absorption costing will be higher than the income under variable costing when the costs…

A: The question is asking under what circumstances the income calculated using absorption costing will…

Q: The level of inventory of a manufactured product has increased by 9,022 units during a period. The…

A: The objective of the question is to determine the effect on operating income if absorption costing…

Q: Absorption and Variable Costing Income Statements During the first month of operations ended July…

A: The income statement can be prepared using various methods as absorption and variable costing. The…

Q: Income under absorption costing will be lower than the income under variable costing when the costs…

A: The objective of the question is to determine under which circumstances the income under absorption…

Q: The contribution margin income statementa. reports expenses based on cost behavior pattern rather…

A: Hi student Since there are multiple questions, we will answer only first question.

Q: Que. No. 1a. When production is greater than sales which method’s net operating income will be…

A: Absorption Costing A managerial accounting technique is absorption costing. The absorption costing…

Q: The level of inventory of a manufactured product has increased by 8,232 units during a period. The…

A: Using variable costing, the fixed manufacturing costs are expensed during the period they are…

Q: Jorgansen Lighting, Incorporated, manufactures heavy-duty street lighting systems for…

A: The net income under variable costing differs from absorption costing due to fixed costs deferred in…

Q: Cool Sky reports the following costing data on its product for its first year of operations. During…

A: Income statement is one of the financial statements that shows profitability, total revenue and…

Q: The level of inventory of a manufactured product has increased by 8,417 units during a period. The…

A: Under variable costing, the fixed costs are to be treated as full cost incurred but under absorption…

Q: Income under absorption costing will be higher than the income under variable costing when the costs…

A: The question is asking under which conditions the income calculated using absorption costing will be…

Question

Refer again to the absorption costing income statements. Explain why net operating income was higher in Year2 than it was in Year 1 under the absorption approach, in light of the fact that fewer units were sold in Year 2 that in Year 1

Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home
computers. Operating results for the first three years of activity were as follows (absorption
costing basis):
Year 2
$ 800,000 $ 640,000 $800,000
400,000
Year 1
Year 3
Sales
Cost of goods sold
580,000
620,000
Gross margin
Selling and administrative expenses
220,000
190,000
240,000
180,000
180,000
190,000
Net operating income (loss)
$ 30,000 $ 60,000 $(10,000)
In the latter part of Year 2, a competitor went out of business and in the process dumped a large number
of units on the market. As a result, Starfax's sales dropped by 20% during Year 2 even though production
increased during the year. Management had expected sales to remain constant at 50,000 units; the
increased production was designed to provide the company with a buffer of protection against unexpected
spurts in demand. By the start of Year 3, management could see that inventory was excessive and that
spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during
Year 3, as shown below:
Year 2
Year 1
50,000
50,000
60,000
40,000
Year 3
40,000
50,000
Production in units
Sales in units
Additional information about the company follows:
a. The company's plant is highly automated. Variable manufacturing expenses (direct materials, direct
labor, and variable manufacturing overhead) total only $2 per unit, and fixed manufacturing overhead
expenses total $480,000 per year.
b. Fixed manufacturing overhead costs are applied to units of product on the basis of each year's
production. That is, a new fixed manufacturing overhead rate is computed each year.
c. Variable selling and administrative expenses were $1 per unit sold in each year. Fixed selling and
administrative expenses totaled $140,000 per year.
d. The company uses a FIFO inventory flow assumption.
Starfax's management can't understand why profits doubled during Year 2 when sales dropped by 20% and
why a loss was incurred during Year 3 when sales recovered to previous levels.

net income(loss) under variable costing
30,000 -100,000
30,000
fixed manufacturing overhead cost
160,000 -160,000
released in year2 and released in year3
fixed manufacturing overhead cost
120,000
released in year3 and released in future
net income(loss) under absorption costing
30,000
60,000
-10,000

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

Which will cause the gross profit of last period to vary with the current period: 1. change in sales mix. 2. change in quantity sold. 3. change in units produced. 4. change in production costs. 5. change in unit selling prices 6. change in variable period costs A. 2, 4 and 5 B. 1, 2, 4 and 5 C. 1, 2, 3, 4 and 5 D. 1, 2, 4, 5 and 6
The level of inventory of a manufactured product has increased by 7,949 units during a period. The following data are also available: Variable Fixed Unit manufacturing costs of the period $12.00 $5.00 Unit operating expenses of the period 4.00 4.00 The effect on operating income if variable costing is used rather than absorption costing would be a(n) a.$71,541 decrease b.$39,745 increase c.$39,745 decrease d.$71,541 increase
During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows: Sales (@ $62 per unit) Year 1 $ 1,178,000 Gross margin 513,000 Selling and administrative 303,000 expenses* Net operating $ income Cost of goods sold (@$35 665,000 1,015,000 per unit) Year 2 210,000 $ 1,798,000 783,000 333,000 $ 450,000 *$3 per unit variable; $246,000 fixed each year. The company's $35 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($360,000 ÷ 24,000 units) Absorption costing unit product cost $9 9 2 15 $ 35
Michie Company's management accountant prepared the following income statement relating to its second year of operations using the absorption costing format: Michie Company Income Statement (Absorption Costing) Year Ended December 31, Year 2 Sales Cost of goods sold: Beginning inventory Variable and fixed manufacturing costs Cost of goods available for sale Less ending inventory Total cost of goods sold Gross margin Less operating costs: Variable selling and administrative costs Fixed selling and administrative costs Net income (50,000 x $ 20.00) (10,000 $ 10.00*) (45,000 x $ 10.00*) (55,000 $10.00) (5,000 * $ 10.00) $ 1,000,000 $ 100,000 450,000 550,000 50,000 (500,000) $ 500,000 (50,000 x $ 2.00) $ 100,000 150,000 Variable manufacturing costs of $8.00 plus fixed manufacturing costs of $2.00. (250,000) $ 250,000
(a) Prepare a profit statement for each of the two months of November and December 2007 using: (i) (ii) (b) Prepare a reconciliation of the differences in net profit reported under the two systems for each of the two months. QUESTION 5 Total absorption costing Marginal costing Jamlee Investment Ltd is planning to make 120,000 units per period of a new product. The following standards have been set: Direct Material A Direct Material B Direct Labour: Production Per Unit 1.2 kgs at K11 per kg 4.7 kg at K6 per Kg Operation 1 Operation 2 Operation 3 Overheads are absorbed at the rate of k30 per labour hour. All direct operatives are paid at the rate of K8 per hour. Actual results for the period were: 42 minutes 37 minutes 11 minutes 126,000 units Direct Labour Material A Material B Required (a) Calculate the standard cost for one unit (b) Calculate the labour rate variance and labour efficiency variances. (c) Calculate the material price and usage variances. (d) Explain the terms…
1. Assume that the company uses absorption costing A) compute the unit product cost B) prepare an income statement for a year(do not leave empty spaces;input a 0 whatever it is required) 2. Assume the company uses variable costing A) compute the unit product cost B) prepare an income statmement(input 0 on empty spaces)
The level of inventory of a manufactured product has increased by 7,741 units during a period. The following data are also available: Fixed Unit manufacturing costs of the period $7.00 Unit operating expenses of the period 4.00 1.00 The effect on operating income if variable costing is used rather than absorption costing would be a[n) O $61.920 decrease Ob. 161.928 increase O$54.187 increase d. 554.107 decrease Variable $10.00
The level of inventory of a manufactured product has increased by 7,859 units during a period. The following data are also available: Variable Fixed Unit manufacturing costs of the period $11.00 $8.00 Unit operating expenses of the period 4.00 2.00 The effect on operating income if variable costing is used rather than absorption costing would be a(n) Oa. $78,590 increase Ob. $62,872 increase Oc. $78,590 decrease Od. $62,872 decrease
The cost of the ending inventory under absorption costing is higher than the cost of ending inventory under varibale costing by 1. an amount equal to the fixed overhead cost per unit. 2. an amount computed by multiplying the units in the ending inventory by the fixed costs per unit. 3. an amount equal to the difference in the income amounts under both costing methods. 4. the amount equal to the fixed overhead cost charged to expense during the period.
Please help with the attached question