During The First Year Of Operations Greenwood Village Fridge

During The First Year Of Operations Greenwood Village Fridge Company

During the first year of operations, Greenwood Village Fridge Company manufactured 40,000 mini refrigerators, of which 36,000 were sold. Operating data for the year are summarized as follows: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,480,000 Manufacturing cost: Cost of goods manufactured including: Direct materials. . . . . . . ………………………. 3,200,000 Direct labor . . . . . ……… ………………………..1,120,000 Variable manufacturing overhead. . . . . . . 880,000 Fixed manufacturing overhead . . . . ………560,000 Fixed manufacturing overhead . . . . ………560,000 Variable Selling and administrative expenses . . . . . . . 648,000 Fixed Selling and administrative expenses …………………288,000 Required 1.Prepare the company’s income statement under absorption costing. 2.Prepare the company’s income statement under variable costing. 3.Explain any difference between the company’s income under costing from parts a and b above. 4.Grande Sonido is a merchandising company specializing in home computer speakers. The company budgets its monthly cost of goods sold to equal 70% of sales. Its inventory policy calls for ending inventory in each month to equal 20% of the next month’s budgeted cost of goods sold. All purchases are on credit, and 25% of the purchases in a month is paid for in the same month. Another 60% is paid for during the first month after purchase, and the remaining 15% is paid for in the second month after purchase. The following sales budgets are set: July, $ 350,000; August, $ 290,000; September, $ 320,000; October, $ 275,000; and November, $ 265,000. Required: Compute the following. (Hint: For part a, you can use Exhibits 7.7 and 7.8 in our textbook for guidance, but note that budgeted sales are in dollars for this assignment.) a Budgeted merchandise purchases for July, August, September, and October; b Budgeted payments on accounts payable for September and October; and c. Budgeted ending balances of accounts payable for September and October.

Paper For Above instruction

Introduction

This paper addresses multiple aspects of managerial accounting, including preparing financial statements under different costing methods and analyzing cash flow forecasts based on budgeting data. The first part involves preparing income statements for Greenwood Village Fridge Company under absorption and variable costing methods. The second part explores the differences between these two cost accounting approaches. The third part discusses the budgeting and payment schedule for Grande Sonido, a merchandising company, including calculations of purchases, accounts payable payments, and ending balances for specific months.

Part 1: Income Statement under Absorption Costing

Absorption costing, also known as full costing, allocates all manufacturing costs—both fixed and variable—to the units produced. This method complies with external financial reporting standards and provides a comprehensive view of product costs. To prepare the income statement:

- Sales are recorded at $6,480,000.

- Cost of Goods Sold (COGS) is computed by dividing total manufacturing costs into per-unit costs and multiplying by units sold, or directly subtracting the ending inventory from the total manufacturing cost. Given the data, the manufacturing costs include direct materials ($3,200,000), direct labor ($1,120,000), variable manufacturing overhead ($880,000), and fixed manufacturing overhead ($560,000). The total manufacturing cost is $5,760,000.

- The gross profit is calculated by subtracting COGS from sales.

- Operating expenses include fixed and variable selling and administrative expenses totaling $936,000.

- The net income is derived by subtracting operating expenses from gross profit.

Using the figures, the COGS under absorption costing would include all manufacturing costs associated with the units sold, and fixed manufacturing overhead is allocated to inventory and cost of goods sold based on units produced.

Part 2: Income Statement under Variable Costing

Variable costing (direct costing) considers only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in calculating the cost per unit. Fixed manufacturing overhead is treated as a period expense and deducted directly from contribution margin.

- The sales remain at $6,480,000.

- Variable Cost of Goods Sold involves only variable manufacturing costs. Total variable manufacturing costs are $4,200,000 ($3,200,000 + $1,120,000 + $880,000).

- The contribution margin is calculated by subtracting variable COGS and variable selling and administrative expenses ($648,000) from sales.

- Fixed manufacturing overhead ($560,000) along with fixed selling and administrative expenses ($288,000) are deducted to determine the net income.

The key difference is that under variable costing, fixed manufacturing overhead is expensed entirely in the period, resulting in potentially different net income figures, especially if inventory levels fluctuate.

Part 3: Differences Between Absorption and Variable Costing

The primary difference stems from the treatment of fixed manufacturing overhead. Absorption costing assigns a portion of fixed manufacturing overhead to inventory, thus deferring some of these costs until inventory is sold. Conversely, variable costing expenses all fixed manufacturing overhead in the period incurred. This leads to potential differences in net income depending on inventory levels; higher ending inventory reduces expenses under absorption costing, thus increasing net income relative to variable costing. When inventory levels are stable, these differences diminish. These distinctions are crucial for managerial decision-making, especially in analyzing profitability and production efficiency.

Part 4: Budgeted Purchases and Payments for Grande Sonido

Using the sales figures and budgeted cost of goods sold at 70% of sales, calculations are made as follows:

a) Budgeted Merchandise Purchases

For each month, the cost of goods sold (COGS) is 70% of sales:

- July: $350,000 x 70% = $245,000

- August: $290,000 x 70% = $203,000

- September: $320,000 x 70% = $224,000

- October: $275,000 x 70% = $192,500

Ending inventory policy requires ending inventory equal to 20% of the next month’s COGS:

- July: Ending inventory = 20% of August’s COGS = $203,000 x 20% = $40,600

- August: Ending inventory = 20% of September’s COGS = $224,000 x 20% = $44,800

- September: Ending inventory = 20% of October’s COGS = $192,500 x 20% = $38,500

- October: Ending inventory = 20% of November’s COGS = $265,000 x 70% x 20% = $265,000 x 0.7 x 0.2 = $37,100

Purchases are calculated as:

Purchases = COGS + Ending inventory - Beginning inventory

Assuming beginning inventory is zero for July:

- July: Purchases = $245,000 + $40,600 - $0 = $285,600

- August: Purchases = $203,000 + $44,800 - $40,600 = $207,200

- September: Purchases = $224,000 + $38,500 - $44,800 = $217,700

- October: Purchases = $192,500 + $37,100 - $38,500 = $191,100

b) Budgeted Payments on Accounts Payable

Payment schedule:

- 25% of current month’s purchases paid in the same month.

- 60% of previous month’s purchases paid in the current month.

- 15% of purchases from two months prior paid in the current month.

For September:

- 25% of September purchases: 0.25 x $217,700 = $54,425

- 60% of August purchases: 0.6 x $207,200 = $124,320

- 15% of July purchases: 0.15 x $285,600 = $42,840

Total payments in September: $54,425 + $124,320 + $42,840 = $221,585

For October:

- 25% of October purchases: 0.25 x $191,100 = $47,775

- 60% of September purchases: 0.6 x $217,700 = $130,620

- 15% of August purchases: 0.15 x $207,200 = $31,080

Total payments in October: $47,775 + $130,620 + $31,080 = $209,475

c) Budgeted Ending Balances of Accounts Payable

Ending balances of accounts payable are based on unpaid purchases:

- September ending balance = 40% of the month’s purchases (not yet paid):

Remaining 40% (100% - 25% - 35% already paid) of September’s purchases:

Remaining amount: 0.75 x $217,700 = $163,275

Similarly, for October:

Remaining 75% of October’s purchases:

Remaining amount: 0.75 x $191,100 = $143,325

These figures represent the projected ending balances of accounts payable for September and October, respectively, considering the scheduled payment plan.

Conclusion

This analysis illustrates the differences between absorption and variable costing methods, which yield varying income figures due to the treatment of fixed manufacturing overhead. Understanding these differences is vital for managerial decision-making. Furthermore, the budgeting exercise for Grande Sonido highlights the importance of precise cash flow planning based on accurate purchases and payment schedules, ensuring the company's liquidity management aligns with operational needs. Combining accurate costing with strategic budgeting enhances financial control and profitability analysis, essential for long-term business success.

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