Inventory Management: The information below represents the beginning and ending
ID: 2602325 • 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:
E. Identify the inventory management method you recommend, and explain why this method will benefit the company.
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
The inventory management has to serve the company towards the minimization of the “cost to maintain inventory” and “maximize returns”.
We have to frame a inventory policy in which maximum cost is put against the revenues and the level of the inventory is kept low so that the cost of maintenance of inventory is kept under check.
In the case, the fixed allocable manufacturing overhead is $2.70 per unit against the Variable manufacturing costs of $4.90, therefore most of the fixed overhead is transferred to the next period through the “Ending Inventory”. Thus, the operating income under the absorption has increased to $148475 from that of operating income $94475 under the Variable method. So, we have to reduce the fixed manufacturing overhead to increase the income under the Variable method.
Moreover, the 25% of the finished goods inventory of the present period is the Ending Inventory, which is very high, so the production has to be managed in a way that the closing inventory would come out at a lower level.
Through lowering the inventory level, we will able to reduce the cost of maintenance of the inventory.
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