Ystad IndustriesRoland Andersson is the manager
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Ystad Industries
Roland
Andersson is the manager of the Ekland Division of Ystad Industries. He is one
of several managers being considered for position of CEO, as the current CEO is
retiring in a year.
All
divisions use standard absorption costing. The division has the capacity to
produce 50,000 units a quater and quarterly fixed overhead amounts to $500,000.
Variable production cost is $45 per unit. Roland has been looking at the report
for the first three months of the year and is not happy with the results.
Ekland Division
Income Statement
For the Quarter Ending March 31, 2012
Production:
25,000 units
Sales (25,000
units)
$2,500,000
Cost of goods
sold
Beginning
inventory (10,000 units)
$650,000
Production costs
applied
1,625,000
Total
$2,275,000
Less ending
inventory
650,000
1,625,000
Gross profit
875,000
Selling &
general expenses
500,000
Net income
$375,000
The
sales forecast for the second quarter is 25,000 units. Roland had budgeted
second quarter production at 25,000 units but changes it to 50,000 units, which
is total capacity for a quarter. The sales forecasts for each of the last two
quarters of the year are also 25,000 units. Costs incurred in the second
quarter are the same as budgeted, based on 50,000 units of production.
Required:
Computations:
Convert the Ekland absorption
income statement to a contribution margin income statement for the first
quarter..accountingformanagement.com/income_comparison_of_variable_and_absorption_costing.htm”>Click here for an example showing
how to convert from one approach to another. This example is for guidance
only and the numbers have not bearing on the Ekland case.
Prepare absorption and
contribution margin income statements for the second quarter for Ekland.
Compute production costs per
unit for both approaches and for both years.
Discussion:
Did Roland improve his
performance for the second quarter? Indicate the information you used for
your assessment.
Can you make any suggestions for
reporting in the future?
Do you think Roland should be
seriously considered for the CEO position? Why or why not?
Discuss three shortcomings of
the absorption approach for internal decision-making.
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