Question

In 2017, BSA Manufacturing, LLC produce and sold 50,000 units of "x" in their first year of operation. The following information is provided regarding the company's first year in operation. Total Sales (50,000-$80) Units Produced and sold Direct material Direct Labor Variable Overhead Fixed Overhead Selling and Admin: Variable Selling and Admin Fixed Selling and Admin 4,000,000 50,000 35 $Per Unit 10 $ Per Unit 5 $Per Unit 8 $Per Unit 2 $Per Unit 10 $ Per Unit 1. Calculate the product cost per unit for Variable Costing and Absorption Costing 2. Prepare an Income Statement utilizing Variable Costing and Absorption Costing 3. The production managers of BSA Manufacturing, LLC would like to increase the units produced from 50,000 to 80,000 units of "x". This increased inventory is not needed in the current year and could be produced in the following year. The Production manager indicates that this is a quality business decision and it is in the best interest of the business. a. Calculate the new product cost per unit under Variable Costing and Absorption Costing. b. Prepare an income statement utilizing Variable Costing and Absorption Costing assuming 80,000 units were produced and only 50,000 units were sold. Know that BSA manufacturing utilized Absorption Costing. c. Calculate, reconcile and explain the differences in Net Income d. Please explain if the decision to increase production is in the best interest of the company and why?

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Answer 1

Answer with full working is given below

Q.No.1 Product Cost Variable Costing Absorption Costing Direct Material Direct Labor Variable manufacturing cost Fixed manufacturing cost Total Product Cost CO Q.No.2 BSA Manufacturing LLC Income Statement- Variable Costing Production units Sales Selling price per unit 50,000 50,000 $80 $4,000,000 $1,750,000 $500,000 $250,000 Sales Less: Cost of Goods Sold Direct Material Direct Labor Variable Manufacturing Cost Cost of Goods Sold Variable Selling and distribution expenses Contribution Margin Less: Fixed Cost Fixed Manufacturing overhead Fixed Selling and Administration expenses $2,500,000 $100,000 $1,400,000 $400,000 $500,000 Operating Income $500,000 BSA Manufacturing LLC Income Statement-Absorption Costing Production units Sales Selling price per unit 50,000 50,000 $80 $4,000,000 Sales Less: Cost of Goods Sold Direct Material Direct Labor Variable Manufacturing Cost Fixed Manufacturing Cost Cost of Goods Sold Gross Profit Less: Operating expenses Variable Selling and distribution expenses Fixed Selling and Administration expenses $1,750,000 $500,000 $250,000 $400,000 $2,900,000 $1,100,000 $100,000 $500,000 Operating Income $500,000 Q.No.3 a Product Cost Variable Costing Absorption Costing Direct Material Direct Labor Variable manufacturing cost Fixed manufacturing cost* Total Product Cost Fixed Cost is $400,000 apportioned over 80,000 units Q.No.3 b BSA Manufacturing LLC Income Statement- Variable Costing Production units Sales units Closing Stock units Selling price per unit 80,000 50,000 30,000 $80 $4,000,000 $2,800,000 $800,000 $400,000 $4,000,000 $1,500,000 Sales Less : Cost of Goods Sold Direct Material Direct Labor Variable Manufacturing Cost Cost of Goods available for sale Less: Closing stock (30,000 units x $50) Cost of Goods Sold Variable Selling and distribution expenses Contribution Margin Less: Fixed Cost Fixed Manufacturing overhead Fixed Selling and Administration expenses Operating Income $2,500,000 $100,000 $1,400,000 $400,000 $500,000 $500,000 BSA Manufacturing LLC Income Statement-Absorption Costing Production units Sales Closing Stock Selling price per unit 80,000 50,000 30,000 $80 $4,000,000 Sales Less: Cost of Goods Sold Direct Material Direct Labor Variable Manufacturing Cost Fixed Manufacturing Cost Cost of Goods available for sale Less: Closing stock ( 30,000 units x $55) Cost of Goods sold Gross Profit Less: Operating expenses Variable Selling and distribution expenses Fixed Selling and Administration expenses Operating Income $2,800,000 $800,000 $400,000 $400,000 $4,400,000 $1,650,000 $2,750,000 $1,250,000 $100,000 $500,000 $650,000 Q.No.3c Reconciliation of Profit Variable Costing and Absorption Costing April 2017 Profit as per Absorption Costing $650,000 Difference in closing stock Closing stock as per Absorption costing $1,650,000 Closing stock as per Variable costing $1,500,000 Difference -$150,000 Profit as per Variable costing $500,000 In Absorption costing Closing stock will have portion of fixed overhead in it Hence profit will be higher to the extent of $150,000 Q.No.3 d The decision to increase production will increase the profit by $150,000 for the current period But in the next period $150,000 will have adverse impact on profit since closing stock of this period will become opening stock Overall Absorption Costing gives benefit of higher income in one period To Keep higher income under Absorption costing firm has to be keep raising inventory levels Hence it is not advisable to keep increasing inventories to report higher incomes