The income statements above report net operating income for the first two years of operation. During the first year, the company produced and sold 40,000 units. During the second year, the company also sold 40,000 units, but it increased production as shown below.

“This is illogical,” said Mike Rafferty, president of XYZ Company. “Unit sales this year were the same as last year, but our bottom line profits have more than doubled. Who made the accounting mistake�”the people or the computer?”

The income statements to which Mr. Rafferty was referring are shown below (based on the absorption costing method):

XYZ Company Income Statement – Absorption Method
Year 1 Year 2
Sales (40,000 units each year) $1,253,000 $1,253,000
Cost of goods sold 840,000 720,000
Gross margin 413,000 533,000
Selling and administrative expense 335,000 335,000
Net operating income $78,000 $198,000

XYZ Production Data
Year 1 Year 2
Production in units 40,000 50,000
Sales in units 40,000 40,000
Variable manufacturing cost per unit produced $6 $6
Variable selling and administrative expense per unit sold $1 $1
Fixed manufacturing overhead costs (total) $600,000 $600,000

The income statements above report net operating income for the first two years of operation. During the first year, the company produced and sold 40,000 units. During the second year, the company also sold 40,000 units, but it increased production as shown below:

XYZ Company applies fixed manufacturing overhead costs to its product on the basis of each year’s production and so a new fixed manufacturing overhead rate is computed each year.

Explain how activity-based costing may or may not be useful for XYZ in preparing variable and absorption-based income statements.

Calculate your order
275 words
Total price: $0.00

Top-quality papers guaranteed

54

100% original papers

We sell only unique pieces of writing completed according to your demands.

54

Confidential service

We use security encryption to keep your personal data protected.

54

Money-back guarantee

We can give your money back if something goes wrong with your order.

Enjoy the free features we offer to everyone

  1. Title page

    Get a free title page formatted according to the specifics of your particular style.

  2. Custom formatting

    Request us to use APA, MLA, Harvard, Chicago, or any other style for your essay.

  3. Bibliography page

    Don’t pay extra for a list of references that perfectly fits your academic needs.

  4. 24/7 support assistance

    Ask us a question anytime you need to—we don’t charge extra for supporting you!

Calculate how much your essay costs

Type of paper
Academic level
Deadline
550 words

How to place an order

  • Choose the number of pages, your academic level, and deadline
  • Push the orange button
  • Give instructions for your paper
  • Pay with PayPal or a credit card
  • Track the progress of your order
  • Approve and enjoy your custom paper

Ask experts to write you a cheap essay of excellent quality

Place an order

Order your essay today and save 7% with the discount code DISSERT7