Dana Baird was manager of a new Medical Supplies Division. She had just finished her second year and had been visiting with the company’s vice president of operations. In the first year, the operating income for the division had shown a substantial increase over the prior year. Her second year saw an even greater increase. The vice president was extremely pleased and promised Dana a $5,000 bonus if the division showed a similar increase in profits for the upcoming year. Dana was elated. She was completely confident that the goal could be met. Sales contracts were already well ahead of last year’s performance, and she knew that there would be no increases in costs. At the end of the third year, Dana received the following data regarding operations for the first three years: *The predetermined fixed overhead rate is based on expected actual units of production and expected fixed overhead. Expected production each year was 10,000 units. Any under-or overapplied fixed overhead is closed to Cost of Goods Sold. *Assumes a LIFO inventory flow. Upon examining the operating data, Dana was pleased. Sales had increased by 20 percent over the previous year, and costs had remained stable. However, when she saw the yearly income statements, she was dismayed and perplexed. Instead of seeing a significant increase in income for the third year, she saw a small decrease. Surely, the Accounting Department had made an error. Required: 1. Explain to Dana why she lost her $5,000 bonus. 2. Prepare variable-costing income statements for each of the three years. Reconcile the differences between the absorption-costing and variable-costing incomes. 3. If you were the vice president of Dana’s company, which income statement (variable-costing or absorption-costing) would you prefer to use for evaluating Dana’s performance? Why?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter 18, Problem 34P
Textbook Problem

Dana Baird was manager of a new Medical Supplies Division. She had just finished her second year and had been visiting with the company’s vice president of operations. In the first year, the operating income for the division had shown a substantial increase over the prior year. Her second year saw an even greater increase. The vice president was extremely pleased and promised Dana a $5,000 bonus if the division showed a similar increase in profits for the upcoming year. Dana was elated. She was completely confident that the goal could be met. Sales contracts were already well ahead of last year’s performance, and she knew that there would be no increases in costs.

At the end of the third year, Dana received the following data regarding operations for the first three years:

Chapter 18, Problem 34P, Dana Baird was manager of a new Medical Supplies Division. She had just finished her second year and , example  1

*The predetermined fixed overhead rate is based on expected actual units of production and expected fixed overhead. Expected production each year was 10,000 units. Any under-or overapplied fixed overhead is closed to Cost of Goods Sold.

Chapter 18, Problem 34P, Dana Baird was manager of a new Medical Supplies Division. She had just finished her second year and , example  2

*Assumes a LIFO inventory flow.

Upon examining the operating data, Dana was pleased. Sales had increased by 20 percent over the previous year, and costs had remained stable. However, when she saw the yearly income statements, she was dismayed and perplexed. Instead of seeing a significant increase in income for the third year, she saw a small decrease. Surely, the Accounting Department had made an error.

Required:

  1. 1. Explain to Dana why she lost her $5,000 bonus.
  2. 2. Prepare variable-costing income statements for each of the three years. Reconcile the differences between the absorption-costing and variable-costing incomes.
  3. 3. If you were the vice president of Dana’s company, which income statement (variable-costing or absorption-costing) would you prefer to use for evaluating Dana’s performance? Why?

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Chapter 18 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Ch. 18 - How does absorption costing differ from variable...Ch. 18 - What are some advantages and disadvantages of...Ch. 18 - Why do some firms measure customer profitability?...Ch. 18 - What variances do managers use in trying to...Ch. 18 - Describe the product life cycle. How do unit-level...Ch. 18 - Ventana Window and Wall Treatments Company...Ch. 18 - Kaune Food Products Company manufactures canned...Ch. 18 - Pattison Products, Inc., began operations in...Ch. 18 - Refer to Cornerstone Exercise 18.3. Required: 1....Ch. 18 - Saginaw Company is a garden products wholesale...Ch. 18 - Iliff, Inc., produces and sells two types of...Ch. 18 - Iliff, Inc., produces and sells two types of...Ch. 18 - Refer to Cornerstone Exercise 18.6. Required: 1....Ch. 18 - Budgeted unit sales for the entire countertop oven...Ch. 18 - Janet Gordon and Phil Hopkins graduated several...Ch. 18 - Amy Chang wants to start a business supplying...Ch. 18 - Foster Hancock is an accountant just ready to open...Ch. 18 - Arthur Quillen Construction Company is a general...Ch. 18 - Many different businesses employ markup on cost to...Ch. 18 - Flaherty, Inc., has just completed its first year...Ch. 18 - During its first year of operations, Snobegon,...Ch. 18 - Carina Franks operates a catering company in...Ch. 18 - Otero Fibers, Inc., specializes in the manufacture...Ch. 18 - Data for Torleson Company are as follows:...Ch. 18 - Eastman, Inc., manufactures and sells three...Ch. 18 - Which of the following markets is characterized by...Ch. 18 - The following information pertains to three...Ch. 18 - Thebes Company had the following information: What...Ch. 18 - Banwood Company has the following information for...Ch. 18 - Jasmine Companys expected sales were 2,000 units...Ch. 18 - Jorell, Inc., manufactures and distributes a...Ch. 18 - Snyder Company produced 90,000 units during its...Ch. 18 - The following information pertains to Vladamir,...Ch. 18 - Jellison Company had the following operating data...Ch. 18 - San Mateo Optics, Inc., specializes in...Ch. 18 - Haysbert Company provides management services for...Ch. 18 - Sulert, Inc., produces and sells gel-filled ice...Ch. 18 - Gasconia Company produces three models of a...Ch. 18 - Dana Baird was manager of a new Medical Supplies...Ch. 18 - Bill Fremont, division controller and CMA, was...Ch. 18 - Dantrell Palmer has just been appointed manager of...Ch. 18 - Alydar, Inc., manufactures and sells automotive...Ch. 18 - Porter Insurance Company has three lines of...Ch. 18 - Porter Insurance Company has three lines of...Ch. 18 - Olin Company manufactures and distributes...Ch. 18 - Shannon, Inc., has two divisions. One produces and...Ch. 18 - Pittsburgh-Walsh Company (PWC) is a manufacturing...

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