Inventory Management: The information below represents the beginning and ending
ID: 2602320 • Letter: I
Question
Inventory Management: The information below represents the beginning and ending inventory amounts along with the production and sales for the month in umbrella units.
Beginning Inventory: 0 Umbrellas
Production: 80,000 Umbrellas
Sales: 60,000 Umbrellas
Ending Inventory: 20,000 Umbrellas
Using the information provided above and the costs and sales information provided in Section I, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section II:
Prepare a variable costing income statement. Done:
Hampshire Company
Variable Costing Income Statement
Units
$
Sales
60,000
$12.50
$750,000.00
Variable Cost of Goods Sold:
Beginning Inventory
$
Direct Materials
80,000
$3.00
$240,000.00
Direct Labor
80,000
$1.50
$120,000.00
Manufacturing Overhead
80,000
$0.40
$32,000.00
Total Variable Costs
$392,000.00
Cost of Good Available for Sale
80000
$4.90
$392,000.00
Deduct Ending Inventory
20,000
$4.90
$98,000.00
Variable Costs of Goods Sold
$294,000.00
Variable Selling Costs
60,000
$1.10
$66,000.00
$66,000.00
Contribution Margin
$390,000.00
Fixed Costs:
Fixed Manufacturing Costs
$216,000
Fixed Administrative Costs
$79,525
Operating Income
$94,475.00
Prepare an absorption costing income statement. Done:
Hampshire Company
Absorption Costing Income Statement
Units
$
Sales
60,000
$12.50
$750,000.00
Variable Cost of Goods Sold:
Beginning Inventory
$0
Direct Materials
80,000
$3.00
$240,000.00
Direct Labor
80,000
$1.50
$120,000.00
Manufacturing Overhead
80,000
$0.40
$32,000.00
Total Variable Costs
$392,000.00
Allocated Fixed Manufacturing Costs
80,000
$2.70
$216,000.00
Cost of Good Available for Sale
$608,000.00
Deduct Ending Inventory
20,000
$7.60
$152,000.00
Costs of Goods Sold
$456,000.00
Gross Margin
$294,000.00
Fixed Costs:
Variable Selling Costs
60,000
$1.10
$66,000
Fixed Administrative Costs
$79,525
Operating Income
$148,475.00
Inventory management serves to minimize the cost to maintain inventory and maximize returns. In this section, the company’s financial data will be reviewed in order to determine the optimal inventory management system.
PLEASE HELP ANSWER:
A. Determine an optimal cost allocation method based on the relevant costs.
Hampshire Company
Variable Costing Income Statement
Units
$
Sales
60,000
$12.50
$750,000.00
Variable Cost of Goods Sold:
Beginning Inventory
$
Direct Materials
80,000
$3.00
$240,000.00
Direct Labor
80,000
$1.50
$120,000.00
Manufacturing Overhead
80,000
$0.40
$32,000.00
Total Variable Costs
$392,000.00
Cost of Good Available for Sale
80000
$4.90
$392,000.00
Deduct Ending Inventory
20,000
$4.90
$98,000.00
Variable Costs of Goods Sold
$294,000.00
Variable Selling Costs
60,000
$1.10
$66,000.00
$66,000.00
Contribution Margin
$390,000.00
Fixed Costs:
Fixed Manufacturing Costs
$216,000
Fixed Administrative Costs
$79,525
Operating Income
$94,475.00
Explanation / Answer
Reconcile the differnce between Absorption costing and Variable costing Variable costing net operating income $ 94,475.00 Add: Manufacturing Overhead cost deferred in inventory=($2.75*20000) $ 54,000.00 Absorption costing net operating income $ 148,475.00 Beginning Inventory Nil Production 80000 Sales 60000 Closing Inventory 20000 Optimal cost allocation method based on relevant cost: Absorption costing method is best optimal cost allocation method based on relevant cost because in this method no need to bifurcate between fixed and variable cost of manufacturing. Net Income under absorption costing system is higher than under variable costing because fixed manfacturing overhead cost deferred in inventory under absorption costing .
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