M5: Watson Activity Watson, Inc. is a manufacturing firm. Its owner, Tom Watson,

Question

M5: Watson Activity Watson, Inc. is a manufacturing firm. Its owner, Tom Watson, was worried about the firm's third quarter results because demand for its product has been decreasing. However, he was pleasantly surprised to see that profit had actually increased in the third quarter. Still, he has a nagging feeling that he's missing something important. Watson, Inc. Income Statements 2017 92 10,000 Q3 Sales volume Sales revenue Cost of goods sold Gross margin Selling and administrative expenses Net operating income Q4 8,000 10,000 $520,000 $416,000 $520,000 350,000 240,000 590,000 70,000 176,000 (70,000) 98,000 110,000 $60,000 $78,000 180,000) 110,000 Production Levels Q4 1,000 92 Q3 Actual production (units) Cost information Variable manufacturing cost Variable selling and administrative cost Fixed manufacturing overhead Fixed selling and administrative cost Other Information 15,000 12,000 $10.00 per unit $6.00 per unit $300,000 per atr $50,000 per aut .The company's selling price and cost structure have been stable for the last year .The company applies overhead based on actual production .The company uses LIFO for inventory costing · Beginning Inventory at the start of Q2-0 Units / $0 .The company introduced Lean Production at the beginning of the fourth quarter, resulting in zero ending inventory. The results for Q4 using absorption costing are shown above

Explanation / Answer

1)Absorption costing method is used for inventory in case of gross margin method.under absorption costing ,Fixed manufacturing overhead is considered as product cost.

2)

3)

300000/15000

=$20

300000/12000

=$ 25

300000/1000

=$ 300

[15000*10]+300000

150000+300000

450000

[12000*10]+300000

120000+300000

420000

[1000*10]+300000

10000+300000

310000

450000/15000= $ 30

310000/1000

=$ 310

**Total production cost =[unit produced*variable manufacturing cost per unit]+fixed manufacturing overhead

4)under LIFO,method units acquired last are sold first ,so ending inventory in every quarter are left out of initial balance (initial quarter balance)

[5000*30]from quarter 2 +[4000*35] from quarter 3 =150000+140000

=290000

Cost of ending inventory depends on manufacturing cost each quarter as under LIFO ending inventory are left out of units manufactured first.so cost of ending inventory depends on production level in each quarter.

2 3 4 Sales revenue 520000 416000 520000 less:variable expense variable manufacturing cost 100000   [10000*10] 80000    [8000*10] 100000 variable selling and administrative cost 60000     [10000*6] 48000    [8000*6] 60000 Total variable expense (160000) (128000) (160000) contribution margin 360000 288000 360000 less:Fixed cost Fixed manufacturing overhead 300000 300000 300000 Fixed selling and administrative cost 50000 50000 50000 Total fixed cost (350000) (350000) (350000) Net operating income 10000 (62000) 10000

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