Joan Hill, President of Hill Hill Pens, was looking forward to receiving the company’s second quarter income statement.
production
- 20,000
- 20,000
- 20,000
- 20,000
Actual production
- 20,000
- 14,000
The company’s plant is heavily automated, so fixed manufacturing overhead costs total $800,000 per quarter. Variable manufacturing costs are $30 per unit. The fixed manufacturing overhead cost is applied to units at the rate of $40 per unit (based on the budgeted production shown above → $800,000/20,000 units = $40 per unit). Any Production Volume Variance is closed directly to COGS for the quarter.
The company had 3,000 units in inventory at the start of the first quarter. Variable selling and administrative expenses are $5 per unit.
Required:
Prepare a variable cost (contribution format) income statement for the first two quarters. (worth 40%)Explain why the operating incomes are different. (worth 20%)
- Explain why the first quarter has a $ 0 Production Volume Variance (PVV) and the second quarter has a $240,000 PVV. Why is the $240,000 PVV added to COGS? (worth 20%)
- Given that you may need to consult with owners of small-sized business in the future, what are some of the advantages and disadvantages of preparing a variable costing method income statement for them? (worth 20%)Get
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