What would be the estimated loss in income from operations if the aloe vera hand lotion production was temporarily suspended for February? d. What advice should the controller give to management?
The Effect Of Prepaid Taxes On Assets And Liabilities
Many businesses estimate tax liability and make payments throughout the year (often quarterly). When a company overestimates its tax liability, this results in the business paying a prepaid tax. Prepaid taxes will be reversed within one year but can result in prepaid assets and liabilities.
Final Accounts
Financial accounting is one of the branches of accounting in which the transactions arising in the business over a particular period are recorded.
Ledger Posting
A ledger is an account that provides information on all the transactions that have taken place during a particular period. It is also known as General Ledger. For example, your bank account statement is a general ledger that gives information about the amount paid/debited or received/ credited from your bank account over some time.
Trial Balance and Final Accounts
In accounting we start with recording transaction with journal entries then we make separate ledger account for each type of transaction. It is very necessary to check and verify that the transaction transferred to ledgers from the journal are accurately recorded or not. Trial balance helps in this. Trial balance helps to check the accuracy of posting the ledger accounts. It helps the accountant to assist in preparing final accounts. It also helps the accountant to check whether all the debits and credits of items are recorded and posted accurately. Like in a balance sheet debit and credit side should be equal, similarly in trial balance debit balance and credit balance should tally.
Adjustment Entries
At the end of every accounting period Adjustment Entries are made in order to adjust the accounts precisely replicate the expenses and revenue of the current period. It is also known as end of period adjustment. It can also be referred as financial reporting that corrects the errors made previously in the accounting period. The basic characteristics of every adjustment entry is that it affects at least one real account and one nominal account.
Products Inc., has dropped sharply because of recent competition from a similar product. The company’s
chemists are currently completing tests of various new formulas, and it is anticipated that the
manufacture of a superior product can be started on December 1, one month in the future. No changes
will be needed in the present production facilities to manufacture the new product because only the
mixture of the various materials will be changed.
The controller has been asked by the president of the company for advice on whether to continue
production during November or to suspend the manufacture of aloe vera hand lotion until December 1.
The controller has assembled the following pertinent data:
Smooth Skin Care Products Inc.
Income Statement - Aloe Vera Hand Lotion
For the Month Ended January 31
Financial Categories Dollar Amount
Sales (400,000) $ 32,200,000
Cost of goods sold $ 28,330,000
Gross profit $ 3,870,000
Selling and admin expenses $ 4,270,000
Loss from operations $ (400,000)
The production costs and selling and administrative expenses, based on production of 400,000 units in
October, are as follows:
Category Dollar Amount
Direct materials $15 per unit
Direct labor 17 per unit
Variable
Variable selling and admin. Expenses 10 per unit
Fixed manufacturing cost $1,500,000 for January
Fixed selling and admin. Expenses 270,000 for January
changes are anticipated in the fixed costs or variable costs per unit. No extra costs will be incurred in
discontinuing operations in the portion of the plant associated with aloe vera hand lotion. The inventory
of aloe vera hand lotion at the beginning and end of November is expected to be inconsequential.
Instructions
a. Prepare an estimated income statement in absorption costing form for February for aloe vera
hand lotion, assuming production continues during the month.
b. Prepare an estimated income statement in variable costing form for February for aloe vera hand
lotion, assuming production continues during the month.
c. What would be the estimated loss in income from operations if the aloe vera hand lotion
production was temporarily suspended for February?
d. What advice should the controller give to management?
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