The Tomlinson Company manufactures trendy, high-quality, moderately priced watches. As Tomlinson's senior financial analyst, you are asked to recommend a method of inventory costing. The CF0 will use your recommendation to prepare Tomlinson's 2017 income statement. The following data are for the year ended December 31,2017 : Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to cost of goods sold. 1\. Prepare income statements under variable and absorption costing for the year ended December 31 2017 2\. What is Tomlinson's operating income as percentage of revenues under each costing method? 3\. Explain the difference in operating income between the two methods. 4\. Which costing method would you recommend to the CF0? Why?
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Critics of absorption costing have increasingly emphasized its potential for leading to undesirable incentives for managers. Give an example.
Which of the following statements is not true regarding the use of variable and absorption costing for performance measurement? a. The net income reported under the absorption method is less reliable for use in performance evaluations because the cost of the product includes fixed costs, which means the level of inventory affects net income. b. The net income reported under the contribution income statement is more reliable for use in performance evaluations because the product cost does not include fixed costs. c. Variable costing isolates contribution margins to aid in decision making. d. The Internal Revenue Service allows either absorption or variable costing as long as the method is not changed from year to year, while U.S. GAAP only allows absorption costing.
Candyland uses standard costing to produce a particularly popular type of candy. Candyland's president, Jack McCay, was unhappy after reviewing the income statements for the first three years of business. He said, "I was told by our accountants - and in fact, I have memorized- that our breakeven volume is 25,000 units. I was happy that we reached that sales goal in each of our first two years. But here's the strange thing: In our first year, we sold 25,000 units and indeed we broke even. Then in our second year we sold the same volume and had a significant, positive operating income. I didn't complain, of course \(\ldots\) but here's the bad part. In our third year, we sold \(10 \%\) more candy, but our operating income dropped by nearly \(90 \%\) from what it was in the second year! We didn't change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances \(\ldots\) so what's going on?!" 1\. What denominator level is Candyland using to allocate fixed manufacturing costs to the candy? How is Candyland disposing of any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly. 2\. How did Candyland's accountants arrive at the breakeven volume of 25,000 units? 3\. Prepare a variable costing-based income statement for each year. Explain the variation in variable costing operating income for each year based on contribution margin per unit and sales volume. 4\. Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to Jack McCay the positive operating income in 2017 and the drop in operating income in 2018
In 2018 , only 876,000 Mealman meals were produced and sold to the hospitals. Wright suspects that hospital controllers had systematically inflated their 2018 meal estimates. 1\. Recall that Mealman uses the master-budget capacity utilization to allocate fixed costs and to price meals. What was the effect of production- volume variance on Mealman's operating income in \(2018 ?\) 2\. Why might hospital controllers deliberately overestimate their future meal counts? 3\. What other evidence should Meals To Go's president seek to investigate Wright's concerns? 4\. Suggest two specific steps that Wright might take to reduce hospital controllers' incentives to inflate their estimated meal counts.
Describe the downward demand spiral and its implications for pricing decisions.
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