Jason House, the new plant manager of Old Stream Manufacturing Plant Number 7, has just reviewed...
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Jason House, the new plant manager of Old Stream Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements. House receives a year-end bonus of 6% of the plant's operating income before tax. The year-end income statement provided by the plant's controller was disappointing to say the least. After reviewing the numbers, House demanded that his controller go back and "work the numbers" again. House insisted that if he didn't see better operating income number the next time around he would be forced to look for a new controller. More Info Old Stream Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of $3,300,000, are classified as period expenses. House had suggested that warehousing costs be included as product costs because they are "definitely related to our product." The company produced 300,000 units during the period and sold 280,000 units. As the controller reworked the numbers he discovered that if he included warehousing costs as product costs, he could improve operating income by $220,000. He was also sure these new numbers would make House happy. Requirements 1. Show numerically how operating income would improve by $220,000 just by classifying the preceding costs as product costs instead of period expenses. Is House correct in his justification that these costs "are definitely related to our product"? 2. 3. By how much will House profit personally if the controller makes the adjustments in requirement 1? 4. What should the plant controller do? Jason House, the new plant manager of Old Stream Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements. House receives a year-end bonus of 6% of the plant's operating income before tax. The year-end income statement provided by the plant's controller was disappointing to say the least. After reviewing the numbers, House demanded that his controller go back and "work the numbers" again. House insisted that if he didn't see better operating income number the next time around he would be forced to look for a new controller. More Info Old Stream Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of $3,300,000, are classified as period expenses. House had suggested that warehousing costs be included as product costs because they are "definitely related to our product." The company produced 300,000 units during the period and sold 280,000 units. As the controller reworked the numbers he discovered that if he included warehousing costs as product costs, he could improve operating income by $220,000. He was also sure these new numbers would make House happy. Requirements 1. Show numerically how operating income would improve by $220,000 just by classifying the preceding costs as product costs instead of period expenses. Is House correct in his justification that these costs "are definitely related to our product"? 2. 3. By how much will House profit personally if the controller makes the adjustments in requirement 1? 4. What should the plant controller do?
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1 Warehousing Costs Absorbed Costs on Cost of Goods Sold Increase in ... View the full answer
Related Book For
Cost Accounting A Managerial Emphasis
ISBN: 978-0133428704
15th edition
Authors: Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan
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