Question

ACorp 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		60,000		76,000		45,600
Sales in units		53,000		66,000		62,600
Selling price		$40		$40		$42
Direct material		$4		$4		$5
Direct labour		5		5		6
Variable manufacturing overhead		5		5		5
Variable selling and administration		6		6		6
Fixed manufacturing overhead		456,000		456,000		456,000
Fixed selling and administration		140,000		140,000		140,000

Acorp uses the absorption-costing method and accounts for inventory using FIFO.

Required 1) Using the information provided, prepare condensed, three-year comparative income statements using the variable-costing method.

               

Answer 1