Sun Shine Orange Grove (SSOG) is a family-owned business that grows oranges for the production of orange juice. SSOG manufactures pulp-free and high-pulp orange juice. The oranges are harvested, brought to the juicing plant, and sorted by type and grade for further processing into orange juice and cider. SSOG feels it has placed itself in a unique niche market catering to people who insist on organic foods and beverages. SSOG has only a few competitors. Most large orange juice manufactures do not want to supply this relatively small market.
Sun Shine Orange Grove has been in business for many years as an orange juice manufacturer. But the organic orange drink business, SSOG, has only been in operation for the last 3 years. SSOG is run as a completely separate business. Therefore, the orange drinks can be certified as organic, and profitability is tracked for the organic manufacturing business.
SSOG has been operating based on an actual cost reporting system. It does not have a formal costing system.
You were recently hired as the cost accountant for Sun Shine Orange Grove. You have been asked by the owners to put together a costing system for the orange drink manufacturing process and an operating budget for 2006. The purpose of this is to track the actual cost against an established budget and costing system, which will allow for performance tracking.
Evaluate the operating performance for SSOG for 2003 through 2005 by completing two income statements for each year: an absorption costing income statement and a variable costing income statement. The CVP income statement format must be used for the preperation of the variable costing.
Write a memo on your findings.
Include in your answer these steps:
? Calculate the absorption rate for the fixed costs.
Note: This must be done before calculating the variable costing income statement.
? Calculate the total absorption of fixed and variable costs.
? Discuss how production affected the absorption of fixed costs for each year.
? Discuss how production affected the absorption of fixed costs for the budget for 2005.
? Discuss how a change to throughput costing would change the income statement.
The Income Statements are not to be prepared breaking down each product(Orange Juice and Orange Drink) they are to be prepared with the combined figures.