TechnoSide, Inc., manufactures and sells a unique electronic part. Operating results for the first three years of activity were as follows (absorption costing basis):

The following questions must be answered:

QUESTION 1

Write an essay about the following topics:

Ø  Explain and discuss the differences between absorption costing and variable costing methods.

Ø  Compare and contrast between Traditional Costing, Activity Based Costing and Standard Costing.

QUESTION 2

Solve the practical problem shown on page 4.

 

Instructions:

·       Students can form a group of two members (Use the link provided in the Blackboard).

·       Each group should have a one leader, who is able to manage the group and to ensure that each member must contribute in the project.

·       Only one copy of the answer should be submitted by the group leader on behalf of the group.

·      

Use the structure for your essay of question1 as follows:

·      

Introduction

This section contains a summary about the entire report. It provides a brief summary and introduction of what is included in the report in relation to the selected standards and the selected companies.

 

·       Body

This section is divided into several subsections according to the selected companies & standards. It also contains a brief information about the companies including background on their industry and their business operation. In addition, a thourough information about the selected standards including (the standard’s definition and disclisure requirements). In this section, an explaination should be provided whether the standard’s disclosure have been partially or fully adopted by the company, with clear justifications behind partial disclosure, if available information are provided

·       Conclusions

The conclusion brings together the main points of the report. It refers back to the key findings which leaves the reader with a final thought and sense of full understanding by clarifying the ideas brought up in the report. It may also adress the student(s’) opinion and thoughts a concluding point. In the conclusion section, new topics or ideas that were not addressed in the main body should not be introduced.

References :

List all references that you have used to obtain data and information from various resources (e.g. books, articles, internet websites, company’s records & reports or any publications, etc.).

Example: 

1.   Books

Schiffman, L.G. & Kanauk, L.E (2007). Consumer Behavior, New Jersey, Prentice Hall Co. Quotah , M. and El aasi, S. (2008) How to write a Report. Jeddah, Jarir Co.

2.   Articles

Monacelli, T. (2001) New International Monetary Arrangements and the exchange Rate. International Journal of Finance & Economics, Vol 6 (4) PP. 389 – 400

3.   Electronic Sources (WWW document)

Monacelli, T. (2001) New International Monetary Arrangement and the Exchange Rate. International Journal of Finance & Economics, Vol 6 (4) PP 389 – 400.

[online]. Available from: http:// Proquest. Umi.com/pg dweb

Question 2:

TechnoSide, Inc., manufactures and sells a unique electronic part. Operating results for the first three years of activity were as follows (absorption costing basis):

 

 

Year 1

Year 2

Year 3

Sales

$               1,500,000

$               1,200,000

$                1,500,000

Cost of goods
sold

$               1,200,000

$                   840,000

$                1,230,000

Gross margin

$                   300,000

$                   360,000

$                   270,000

Selling and
administrative expenses

$                   255,000

$                   225,000

$                   300,000

Net operating income (loss)

$                     45,000

$                   135,000

$                   (30,000)

 

 

Sales dropped by 20% during Year 2 due to the entry of several foreign competitors into the market. TechnoSide had expected sales to remain constant at 100,000 units for  the year; production was set at 100,000 units in order to build a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that spurts in demand were unlikely and that the inventory was excessive. To work off the excessive inventories, TechnoSide cut back production during Year 3, as shown below:

 

 

Year 1

Year 2

Year 3

Production in units

100,000

120,000

80,000

Sales in units

100,000

80,000

100,000

 

 

 

Additional information about the company follows:

 

1.     The company’s plant is highly automated. Variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) total only $4 per unit, and fixed manufacturing overhead costs total $500,000 per year.

2.     Fixed manufacturing overhead costs are applied to units of product on the basis of each year’s production (units produced). That is, a new fixed overhead rate is computed each year.

3.     Variable selling and administrative expenses are $2 per unit sold. Fixed selling and administrative expenses total $90,000 per year.

 

TechnoSide’s management can’t understand why profits tripled during Year 2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels.

Required:

1.     Compute the unit product cost in each year under:

a)      Absorption costing (Show how much of this cost is variable and how much is fixed)

b)     Variable costing

2.     Prepare a contribution format variable costing income statement for each year.

3.     Refer to the absorption costing income statements, reconcile the variable costing and absorption costing net operating incomes for each year.

4.     Refer again to the absorption costing income statements, explain why net operating income was higher in Year 2 than it was in Year 1 under the absorption approach, in light of the fact that fewer units were sold in Year 2 than in Year 1.

5.     Refer again to the absorption costing income statements, explain why the company suffered a loss in Year 3 but reported a profit in Year 1, although the same number of units was sold in each year.

6.     Assume that the company must obtain additional financing. As a member of top management, which of the income statements above would you prefer to take with you to negotiate with the creditor? Why?

 

 

Note: You can use Microsoft Excel software to prepare income statement and other calculations.