Absorption costing and reported income. The following information applies to Wor
ID: 2476291 • Letter: A
Question
Absorption costing and reported income. The following information applies to Worldwide Widget's operations for the past quarter: There were no inventories of direct materials or work-in-process. At the beginning of month 1 Worldwide Widget had 400 units in finished goods inventory at a value of $96,000 ($240 each). In month 3, Worldwide Widget embarks on a lean transformation and ended month 3 with 200 units of product in ending finished goods inventory. Prepare an Income Statement for Worldwide Widget for months 1, 2 and 3 based on generally accepted accounting principles (GAAP). Assume the company uses the FIFO method to value inventory. Which month was Worldwide Widget's best month? Explain your answer. Comment on the financial impact of lean improvements as reported under generally accepted accounting principles. Do GAAP statements accurately reflect the costs and benefits of a lean transformation?Explanation / Answer
Month 1 Month 2 Month 3 Units Cost Units Cost Units Cost Opening inventory 400 96000 400 96000 600 132000 Production 800 192000 1000 220000 400 136000 Units available for sale 1200 288000 1400 316000 1000 268000 Less: units sold 800 192000 800 184000 800 200000 Closing inventory 400 96000 600 132000 200 68000 Cost of production Direct Material at 120 per unit 96000 120000 48000 Variable conversion cost at 20 per unit 16000 20000 8000 Fixed conversion cost 80000 80000 80000 Total cost of production 192000 220000 136000 Production 800 1000 400 Cost per unit 240 220 340 = Cost / unit produced Units sold out of current production Costs have been calculated on basis of coct per unit = Sale units - opening units Units Cost Units Cost Units Cost = 800 - 400 400 96000 = 800 - 400 400 88000 = 800 - 600 200 68000 Units at end Costs have been calculated on basis of coct per unit = Units produced - units sold out of current production Units Cost Units Cost Units Cost = 800 - 400 400 96000 = 1000-400 600 132000 = 400 -200 200 68000 Cost of Goods Sold Month 1 Month 2 Month 3 = Cost of current production sold 96000 88000 68000 Add: Cost of Beginning inventory sold 96000 96000 132000 Total 192000 184000 200000 1) Income Statement Sale Value at $ 300 per unit 240000 240000 240000 Less: Cost of Goods Sold 192000 184000 200000 Gross Margin 48000 56000 40000 Less: Selling and administrattive at 30 per unit 24000 24000 24000 Less: Selling and administrattive Fixed 10000 10000 10000 Income from operations 14000 22000 6000