$3411/5411$ Cost Accounting$/$Cost Systems Analysis

Why Cost Method Reporting Matters $-$ FACE IT$,$ Inc.

Scenario:

Jadyn, one of the two production managers at FACE It$,$ Inc was happy that he got his bonus this year but still upset that he didn't get his bonus last year. The company makes peel$-$off face masks, which are holding their own in the market. He was not holding his emotions so well, however, in his conversation with YOU, the accounting supervisor and Maya, Cost Accountant.

Jadyn: I worked my team so hard, both years. This year, we increased our yield in order to beat the production quota, while last year we worked hard to follow a lean approach to inventory. It required a lot of extra time scheduling, and still sales were exactly the same in both years. I don't understand. How can we sell the same volume of units for two straight years, incur the same costs, and one year we get a bonus and one year we don't? Please tell me what's going on$.$

Maya: Calm down! Let me try to break this down for you. Do you remember our third quarter meeting, when I spoke up about inventory, wondering where we stood and where it looked like we might land in terms of ending inventory?

Jadyn: Yes, vaguely. Why? What does that have to do with anything?

You: It has everything to do with the situation we are in$.$ If you recall, we have always used an accounting method called absorption costing. I have been trying to get our executives to agree to use a different system for bonus calculations, but so far, they aren't buying it$.$ I will gather some information to help you understand what I mean. I will schedule a meeting with you to present the information.

Your Task:

You will use the following information to help address Jadyn's concerns. Please note that costs were not different from what was budgeted in either year. Any fixed manufacturing overhead variances are written off directly to COGS. Bonuses are based on absorption operating income. $\backslash$begin$\{$tabular$\}\{|$l$|$l$|$l$|\}$

$\backslash$hline & Year $\backslash$#$1$ & Year $\backslash$#$2\backslash \backslash$

$\backslash$hline Beginning FG inventory & $5,000$ units & $0\backslash \backslash$

$\backslash$hline Budgeted production & $300,000$ units & $300,000$ units $\backslash \backslash$

$\backslash$hline Actual production & $300,000$ units & $310,000$ units $\backslash \backslash$

$\backslash$hline Actual sales volume & $305,000$ units & $305,000$ units $\backslash \backslash$

$\backslash$hline Selling price & $\backslash$$$4\mathrm{.}00$ per unit & $\backslash$$$4\mathrm{.}00$ per unit $\backslash \backslash$

$\backslash$hline Budgeted variable manufacturing costs & $\backslash$$$1\mathrm{.}80$ per unit & $\backslash$$$1\mathrm{.}80$ per unit $\backslash \backslash$

$\backslash$hline Budgeted variable selling and general costs & $\backslash$$$.50$ per unit & $\backslash$$$.50$ per unit $\backslash \backslash$

$\backslash$hline Budgeted fixed manufacturing costs & $\backslash$$$120,000$ & $\backslash$$$120,000\backslash \backslash$

$\backslash$hline Budgeted fixed selling and general costs & $\backslash$$$195,000$ & $\backslash$$$195,000\backslash \backslash$

$\backslash$hline

$\backslash$end$\{$tabular$\}$

Instructions:

Part $1$: Create Absorption Costing and Variable Costing Income Statements $($Utilize the Excel worksheet to show ALL of your work and check your calculations$)$

$1.$ Start Here $($Utilize these calculations to create the Income Statements required below$)$

a$.$ Inventory Cost Per Unit. Calculate the inventory cost per unit for each method $($absorption and variable costing$)$ using the cost details pro