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Homework answers / question archive / When Waterways’ management met to review the year-end financial statements, the room was filled with excitement
When Waterways’ management met to review the year-end financial statements, the room was filled with excitement. Sales had been exceptional during the year and every department had exceeded the budget and last year’s sales totals. Several years ago Waterways had implemented a bonus system based on percentage of sales over budget, and the managers were expecting healthy cheques at the end of the year.
Yet the plant manager, Ryan Smith, was stunned into silence when he read the bottom line on the income statement for manufacturing operations. It was showing a loss! He immediately approached the CFO asking for an explanation. Ryan wondered, “Why did we go through all that trouble and inconvenience to adopt those cost-cutting measures when they had the opposite effect?” One of those measures was to move toward lean manufacturing.
The CFO retrieved the following information with respect to the top-selling line from the manufacturing operations for the last three years. Production on this line began on January 1, 2014:
| 2014 | 2015 | 2016 | ||||
| Beginning inventory of finished units | 0 | |||||
| Production in units | 76,000 | 80,000 | 60,800 | |||
| Sales in units | 66,000 | 70,000 | 80,800 | |||
| Selling price | $35 | $35 | $37 | |||
| Direct material | $4 | $4 | $5 | |||
| Direct labour | 3 | 3 | 4 | |||
| Variable manufacturing overhead | 5 | 5 | 5 | |||
| Variable selling and administration | 6 | 6 | 6 | |||
| Fixed manufacturing overhead | 608,000 | 608,000 | 608,000 | |||
| Fixed selling and administration | 140,000 | 140,000 | 140,000 |
Waterways uses the absorption-costing method and accounts for inventory using FIFO.
Using the information provided, recreate Waterways' statements for this division using condensed, three-year comparative income statements. WATERWAYS CORPORATION Absorption Costing Income Statement For the year ending December 31 2014 2015 2016
Waterways Inc.Absorption costing Income StatementFor the year ending December 31Sr.No.Particulars2014201520161Sales 2,310,000 2,450,000 2,989,60066000*3570000*3580800*372Cost of Goods soldaBeginning Inventory Jan 1 - 200,000 392,000bAdd: cost of goods manufactured 1,520,000 1,568,000 1,459,200cCost of goods available for sale (a+b) 1,520,000 1,768,000 1,851,200dLess: Ending Inventory Dec 31 (200,000) (392,000) - (c-d) 1,320,000 1,376,000 1,851,2003Gross Profit (1-2) 990,000 1,074,000 1,138,4004Selling & Admn. Expenses (536,000) (560,000) (624,800)5Operating Income/(Loss) (3-4) 454,000 514,000 513,600Sr. No.Working notes:2014201520161Direct Material 4 4 52Direct Labour 3 3 43Variable manufacturing overhead 5 5 54Fixed manufacturing overhead 8 7.6 10608000/76000608000/80000608000/608005Total (1+2+3+4) 20 19.6 246Units Produced 76,000 80,000 60,8007Cost of goods manufactured (5*6) 1,520,000 1,568,000 1,459,200Units8Opening - 10,000 20,0009Produced 76,000 80,000 60,80010Sales 66,000 70,000 80,80011Ending Inventory (8+9-10) 10,000 20,000 - 12Value (5*12) 200,000 392,000 - 13Sales Unit 66,000 70,000 80,80014Variable selling admn 6 6 615Variable selling expenses (14*15) 396,000 420,000 484,80016Fixed selling admn 140,000 140,000 140,00017Total selling & admn (16+17) 536,000 560,000 624,800
