Bob Abue, the manager of Serious Standard Products, is trying to decide what production schedule...

Question:

Bob Abue, the manager of Serious Standard Products, is trying to decide what production schedule to set for the last quarter of the year. Serious had planned to sell 100,000 units during the year but current projections indicate sales will be only 78,000 units in total. By September 30, the following activity had been reported:

Units
Inventory, January 1 0
Production 72,000
Sales (60,000)
Inventory, September 30 12,000

Serious can rent warehouse space to store up to 30,000 units. The company must maintain a minimum inventory level of at least 1,500 units. Mr. Abue is aware that production must be at least 6,000 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 45,000 units per quarter. Due to the nature of operations, fixed overhead is a major element of product cost.

Required:

Assume that Serious is using variable costing.

1. How many units should be scheduled for production during the last quarter of the year?

Use the following formula for required production in the fourth quarter:

Required production = Expected sales + Desired ending inventory - Beginning inventory

2. Will the number of units scheduled for production affect reported profit for the year? Explain.

Assume that Serious is using absorption costing and that Mr. Abue is given an annual bonus based on reported profit.

3. If Mr. Abue wants to maximize Serious' reported profit for the year, how many units should be scheduled for production in the fourth quarter?

Use the same formula as above.

4. Identify the ethical issues involved in the decision Mr. Abue must make about fourth-quarter production.

Variable Costing:

When preparing for the the variable costing income statement, there is a need to to separate variable costs from fixed costs. The, the total variable cost shall be deducted from the total revenues to get the contribution margin. All fixed manufacturing cost are considered as expense at the time products are manufactured when using variable costing.

Answer and Explanation:

1. How many units should be scheduled for production during the last quarter of the year?

Planned Sales(78,000-60000) 18,000
Ending Inventory 1,500
Beginning Inventory -12,000
Production 7,500


2. Will the number of units scheduled for production affect reported profit for the year? Explain.

Yes, because it will increase the labor and variable factory overhead as caused by the additional units to be produced. In case additional costs are employed, the total manufacturing cost will increase, portion of which will be retained in the ending inventory.

3. If Mr. Abue wants to maximize Serious' reported profit for the year, how many units should be scheduled for production in the fourth quarter?

Planned Sales(100,000-60000) 40,000
Ending Inventory 1,500
Beginning Inventory -12,000
Production 19,500


4. Identify the ethical issues involved in the decision Mr. Abue must make about fourth-quarter production.

Although the company and estimated that annual sales will only be up to 78,000 units, the decision of increasing it to 100,000 may be ethical because such decision was drove by the fact the he is given bonus on the net income of the company. He is moving towards that decision to have a gain for himself, while ignoring selling capacity of the firm.


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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