When Waterways’ management met to review the year-end financial statements, the

Question

When Waterways’ management met to review the year-end financial statements, the room was filled with excitement. Sales had been exceptional during the year and every department had exceeded the budget and last year’s sales totals. Several years ago Waterways had implemented a bonus system based on percentage of sales over budget, and the managers were expecting healthy cheques at the end of the year.

Yet the plant manager, Ryan Smith, was stunned into silence when he read the bottom line on the income statement for manufacturing operations. It was showing a loss! He immediately approached the CFO asking for an explanation. Ryan wondered, “Why did we go through all that trouble and inconvenience to adopt those cost-cutting measures when they had the opposite effect?” One of those measures was to move toward lean manufacturing.

The CFO retrieved the following information with respect to the top-selling line from the manufacturing operations for the last three years. Production on this line began on January 1, 2014:

Waterways uses the absorption-costing method and accounts for inventory using FIFO.

QUESTION B: Using the information provided, prepare condensed, three-year comparative income statements using the variable-costing method (SEE ATTACHED TEMPLATE)

QUESTION C: Reconcile the variable-costing income with the absorption-costing income calculated in part (a1) (See attached answer for (a1) and the template below. I did answer (a1) on my own as given below).

2014 2015 2016 Beginning inventory of finished units 0 Production in units 72,000 73,800 59,040 Sales in units 62,000 63,800 79,040 Selling price $29 $29 $31 Direct material $3 $3 $4 Direct labour 5 5 6 Variable manufacturing overhead 4 4 4 Variable selling and administration 5 5 5 Fixed manufacturing overhead 590,400 590,400 590,400 Fixed selling and administration 120,000 120,000 120,000 WATERWAYS CORPORATION Variable Costing Income Statement For the years ending December 31 2014 2015 2016 Variable Costs Cost of Goods Sold Beginning Inventory Add O. Cost of Goods Manufactured Cost of Goods Available for Sale : | Ending Inventory Less Selling and Administration Total Variable Costs Contribution Margin Less Fixed Costs Operating Income / (Loss)

Explanation / Answer

B) Waterways Corporation

Variable Costing Income Statement

For the years ending December 31 (Amounts in $)

Under Variable costing, only variable manufacturing cost is considered as a part of product costs and all fixed cost is considered as period costs.

C) Deferred Fixed Manufacturing Overhead is equal to that amount of overhead which is included in Ending Inventoy under Absorption costing and released Fixed Manufacturing Overhead is equal to that amount which is included in Beginning Inventory under Absorption costing.

Reconciliation of Variable Costing Income with Absorption costing Income (Amts in $)

Particulars 2014 2015 2016 Sales (A) 1,798,000 1,850,200 2,450,240 Variable Costs Cost of Goods Sold: Beginnig Inventory, January 1 0 120,000 240,000 Add: Cost of goods manufactured (only variable) 864,000 885,600 826,560 Cost of Goods Available for Sale 864,000 1,005,600 1,066,560 Less: Ending Inventory (120,000) (240,000) 0 744,000 765,600 1,066,560 Selling and Administration 310,000 319,000 395,200 Total Variable Costs (B) 1,054,000 1,084,600 1,461,760 Contribution Margin (A-B) 744,000 765,600 988,480 Less: Fixed Costs ($590,400+$120,000) (710,400) (710,400) (710,400) Operating Income/(Loss) 33,600 55,200 278,080

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