Boots r us produces a variety of products for the fashion industry, cowboy type

Question

Boots r us produces a variety of products for the fashion industry, cowboy type boots are among its most popular products. The company controller spoke to the company president at a meeting last week and told her the company was doing well, but that the financial picture depended on how product costs and net operating income were calculated. The president did not realize that the company had options with regard to calculating these numbers, so she asked the controller to prepare some information and be ready to meet with her to talk more about the issue. In preparing for the meeting, the controller accumulated the following data;

Beginning inventory- 25,000

Units produced- 100,000

Units sold- 105,000

Fixed manufacturing overhead- $400,000

Direct materials per unit -$ 25.00

Direct labor per unit- $35.00

Variable manufacturing overhead per unit- $15.00

REQUIRED

- Compute the difference in net operating income between the two methods. Which costing method results in the higher net operating income?

- Assume that production was 100,000 units and sales were 70,000 units.What would be the difference in the operating income between the two methods? Which costing method shows the greater net operating income?

- Assume that production was 100,000 units and sales were 100,000 units. What would be the difference in net operating income between the two methods? 6- Which method is required by generally accepted accounting principles?

Explanation / Answer

Production 100000 & sales 105000 Opening Inventory 25000 Add: Units Produced 100000 Less : Sales 105000 Closing Stock 20000 Absorption Costing Variable costing@ 75 Opening Inventory 25000*79 1975000 1875000 Add: cost of production(100000*79) 7900000 7500000 Total cost of goods available for sale 9875000 9375000 Less : Cost of closing stock20000*79 1580000 1500000 (Fixed cost difference) Cost of goods sold 8295000 7875000 FMOH 400000 Total cost 8295000 8275000 Difference in Net Operating Income will be (8295000-8275000)= $ 20000 Variable costing method shows more Net income(Total cost is less. Opening Inventory 25000 Add: Units Produced 100000 Less : Sales 70000 Closing Stock 55000 Production 100000 & sales 70000 Opening Inventory 25000*79 1975000 1875000 Add: cost of production(100000*79) 7900000 7500000 Total cost of goods available for sale 9875000 9375000 Less : Cost of closing stock55000*79 4345000 4125000 (Fixed cost difference) Cost of goods sold 5530000 5250000 FMOH 400000 Total cost 5530000 5650000 Difference in Net Operating Income will be (5650000-5530000)= $ 120000 Absorption costing method shows more Net income Toatl cost is less Opening Inventory 25000 Add: Units Produced 100000 Less : Sales 100000 Closing Stock 25000 Production 100000 & sales 100000 Opening Inventory 25000*79 1975000 1875000 Add: cost of production(100000*79) 7900000 7500000 Total cost of goods available for sale 9875000 9375000 Less : Closing stock 25000*79 1975000 1875000 Cost of goods sold 7900000 7500000 FMOH 400000 Total cost 7900000 7900000 Difference in Net Operating Income will be NIL - sameNOI

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