Reference no: EM132861812

Question - Joan Hill, President of Hill & Hill Pens, was looking forward to receiving the company's second quarter income statement. She knew that the sales budget of 20,000 units sold had been met during the second quarter and that this was an increase of 25% over the first quarter sales units. She was happy about the increase in sales, since Hill & Hill Pens was about to approach its bank for additional loan money for expansion purposes. She anticipated the strong second-quarter results would be a real plus in persuading the bank to extend the additional credit.

For this reason, Joan was shocked when she saw the first two quarters income statement below. Instead of increasing operating income, there was a decrease.

The company's plant is heavily automated, so fixed manufacturing overhead costs total $800,000 per quarter. Variable manufacturing costs are $30 per unit. The fixed manufacturing overhead cost is applied to units at the rate of $40 per unit (based on the budgeted production shown above → $800,000/20,000 units = $40 per unit). Any Production Volume Variance is closed directly to COGS for the quarter.

The company had 3,000 units in inventory at the start of the first quarter. Variable selling and administrative expenses are $5 per unit.

Required -

1. Create variable cost (contribution format) income statement for the first two quarters.

2. Explain why the operating incomes are different.

3. Explain why the first quarter has a $ 0 Production Volume Variance (PVV) and the second quarter has a $240,000 PVV. Why is the $240,000 PVV added to COGS?

4. Given that you may need to consult with owners of small-sized business in the future, what are some of the advantages and disadvantages of preparing a variable costing method income statement for them?