Candyland uses standard costing to produce a particularly popular type of candy. Candyland's president, Jack McCay, was unhappy after reviewing the income statements for the first three years of business. He said, "I was told by our accountants-and in fact, I have memorized-that our breakeven volume is 25,000 units. I was happy that we reached that sales goal in each of our first two years. But here's the strange thing: In our first year, we sold 25,000 units and indeed we broke even. Then in our second year we sold the same volume and had a significant, positive operating income. I didn't complain, of course .. but here's the bad part. In our third year, we sold 10% more candy, but our operating income dropped by nearly 90% from what it was in the second year! We didn't change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances . so what's going on?!" Home Insert Page Layout Formulas Data Review View D. 1 Absorption Costing 2016 2017 2018 3 Sales (units) 4 Revenues 5 Cost of goods sold: Beginning inventory Production 25,000 $2,000,000 $2,000,000 $2,200,000 25,000 27,500 182,500 1,825,000 2,007,500 1,825,000 1,825,000 2,007,500 2,007,500 (182,500) Available for sale Deduct ending inventory Adjustment for production-volume variance Cost of goods sold 12 Gross margin 13 Selling and administrative expenses (all fixed) 14 Operating income 10 (150,000) 1,825,000 1,675,000 2,007,500 11 175,000 325,000 192,500 175,000 175,000 175,000 0$ 150,000 $ 17,500 15 16 Beginning inventory 17 Production (units) 18 Sales (units) 19 Ending inventory 20 Variable manufacturing cost per unit 21 Fixed manufacturing overhead costs 22 Fixed manuf. costs allocated per unit produced $ 2,500 25,000 25,000 25,000 27,500 27,500 25,000 2,500 13 $ $1,500,000 $1,500,000 $1,500,000 13 $ 13 60 $ 60 | $ 60
Candyland uses standard costing to produce a particularly popular type of candy. Candyland's president, Jack McCay, was unhappy after reviewing the income statements for the first three years of business. He said, "I was told by our accountants-and in fact, I have memorized-that our breakeven volume is 25,000 units. I was happy that we reached that sales goal in each of our first two years. But here's the strange thing: In our first year, we sold 25,000 units and indeed we broke even. Then in our second year we sold the same volume and had a significant, positive operating income. I didn't complain, of course .. but here's the bad part. In our third year, we sold 10% more candy, but our operating income dropped by nearly 90% from what it was in the second year! We didn't change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances . so what's going on?!" Home Insert Page Layout Formulas Data Review View D. 1 Absorption Costing 2016 2017 2018 3 Sales (units) 4 Revenues 5 Cost of goods sold: Beginning inventory Production 25,000 $2,000,000 $2,000,000 $2,200,000 25,000 27,500 182,500 1,825,000 2,007,500 1,825,000 1,825,000 2,007,500 2,007,500 (182,500) Available for sale Deduct ending inventory Adjustment for production-volume variance Cost of goods sold 12 Gross margin 13 Selling and administrative expenses (all fixed) 14 Operating income 10 (150,000) 1,825,000 1,675,000 2,007,500 11 175,000 325,000 192,500 175,000 175,000 175,000 0$ 150,000 $ 17,500 15 16 Beginning inventory 17 Production (units) 18 Sales (units) 19 Ending inventory 20 Variable manufacturing cost per unit 21 Fixed manufacturing overhead costs 22 Fixed manuf. costs allocated per unit produced $ 2,500 25,000 25,000 25,000 27,500 27,500 25,000 2,500 13 $ $1,500,000 $1,500,000 $1,500,000 13 $ 13 60 $ 60 | $ 60
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter16: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 35P
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Concept explainers
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Topic Video
Question
Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to Jack McCay the positive operating income in 2017 and the drop in operating income in 2018.
Transcribed Image Text:Candyland uses standard
costing to produce a particularly popular type of candy. Candyland's president, Jack McCay, was unhappy
after reviewing the income statements for the first three years of business. He said, "I was told by our
accountants-and in fact, I have memorized-that our breakeven volume is 25,000 units. I was happy that
we reached that sales goal in each of our first two years. But here's the strange thing: In our first year, we
sold 25,000 units and indeed we broke even. Then in our second year we sold the same volume and had a
significant, positive operating income. I didn't complain, of course .. but here's the bad part. In our third
year, we sold 10% more candy, but our operating income dropped by nearly 90% from what it was in the
second year! We didn't change our selling price or cost structure over the past three years and have no
price, efficiency, or spending variances . so what's going on?!"
Home
Insert
Page Layout
Formulas
Data
Review
View
D.
1 Absorption Costing
2016
2017
2018
3 Sales (units)
4 Revenues
5 Cost of goods sold:
Beginning inventory
Production
25,000
$2,000,000 $2,000,000 $2,200,000
25,000
27,500
182,500
1,825,000 2,007,500 1,825,000
1,825,000 2,007,500 2,007,500
(182,500)
Available for sale
Deduct ending inventory
Adjustment for production-volume variance
Cost of goods sold
12 Gross margin
13 Selling and administrative expenses (all fixed)
14 Operating income
10
(150,000)
1,825,000 1,675,000 2,007,500
11
175,000
325,000
192,500
175,000
175,000
175,000
0$ 150,000 $ 17,500
15
16 Beginning inventory
17 Production (units)
18 Sales (units)
19 Ending inventory
20 Variable manufacturing cost per unit
21 Fixed manufacturing overhead costs
22 Fixed manuf. costs allocated per unit produced $
2,500
25,000
25,000
25,000
27,500
27,500
25,000
2,500
13 $
$1,500,000 $1,500,000 $1,500,000
13 $
13
60 $
60 | $
60
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