Ystad Industries: Roland Anderson 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 quarter 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)
Cost of goods sold
Beginning inventory (10,000 units)
Production costs applied
Total = $2,275,000
Less ending inventory
Selling & general expenses
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.
Convert the Ekland absorption income statement to a contribution margin income statement for the first quarter. 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.
- 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.
Please see Excel (attached) for computations.
Did Roland improve his performance for the second quarter? Indicate the information you used for your assessment.
- No, by increasing production, fixed cost per unit was lowered. Why? The total fixed costs was the same but the units doubled and so the fixed amount was "spread" more thinly to the units. This resulted in some of the fixed production costs being trapped in the unsold units on the balance sheet. Notice the fixed production costs between quarter 1 and 2 in the contribution margin income statement. That is the clearest place to see the difference between the two quarters.
Can you make ...
Your tutorial is 423 words plus four schedules showing a contribution margin and traditional income statement (both absorption costing amounts), a schedule of cost per unit (fixed and variable) and the computation for cost of goods sold. Four shortcomings are mentioned. To see computations, please open the Excel spreadsheet attachment and additionally, please click in the cells to see the calculations made.