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'These statements can't be right' said Ben Yoder, president of Rayco, Inc. 'Our sales in the second quarter were up by 25% over the first quarter, yet these income statements show a precipitous drop in net operating income for the second quarter. Those accounting people have fouled something up.'
Mr. Yoder was referring to the following statements (absorption costing basis).
"These statements can't be right" said Ben Yoder, president of Rayco, Inc. "Our sales in the second quarter were up by 25% over the first quarter, yet these income statements show a precipitous drop in net operating income for the second quarter. Those accounting people have fouled something up. " Mr. Yoder was referring to the following statements (absorption costing basis):
For the First Two Quarters
First Quarter Second Quarter
Sales................ 480,000 600,000
Cost of goods sold 240,000 372,000
Gross Margin 240,000 228,000
Selling and administrative expenses 200,000 215,000
Net Operating Income $40,000 $13,000
After studying the statements briefly, he called in the controller to see if the mistake in the 2nd quarter could be located before the figures were released to the press. The controller stated, I'm sorry to say that those figures are correct, Ben. I agree that sales went up during the 2nd quarter, but the problem is in the production. You see, we budgeted to produce 15,000 unites each quarter, but a strike on the west coast among some of our suppliers forced us to cut production in the second quarter back to only 9,000 units. That's what caused the drop in net operating income."
Mr. Yoder was confused by the controller's explanation. He replied, "This doesn't make sense. I ask you to explain why net operating income dropped when sales went up and you talk about production! So what if we had to cut back production? We still were able to increase sales by 25%. If sales go up, then net operating income should go up. If your statements can't show a simple thing like that, then its time for some changes in your department!"
Budgeted production and ...
The solution discusses lean production and absorption costing for Rayco, Inc.