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

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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
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How do I prepare an Income Statement for March 2022 by using the absorption costing method? Other info: The variable manufacturing cost per unit and total manufacturing cost per unit of the finished goods on 01 March 2022 was R21.60 and R26.20 respectively.
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
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