Requirements
Requirement 1: After reviewing the quarterly and annual income statements based on actual costing, the firm’s management had considered shutting down operations for the two quarters showing losses. Bob Forest was concerned with this possibility. Why? Make a convincing argument as to why management should not base its decision to cease operations on financial statements based on actual costing.
Requirement 2: Bob Forest also prepared the quarterly and annual 2016 income statements based on normal costing and based on standard costing. Write a memo to management describing how these two costing systems differ. Discuss which of the two approaches would be more helpful in controlling operations during the year.
Requirement 3: Assuming that total under/over applied overhead is only closed at the end of the year, explain why the quarterly operating incomes under normal and standard costing do not add up to the operating income for the full year.
Requirement 4: Assuming that total under/over applied overhead is closed to cost of goods sold, all three costing methods end up with the same operating income at the end of the year. Why then do companies use different costing methods if the operating income at the end of the year is always the same?
Requirement 5: Based on the standard costing income statement, calculate the individual vari-ances for variable and fixed factory overhead. (This should include the spending and efficiency variances for variable overhead, and spending and production volume variances for fixed overhead.)
Requirement 6: Write a memo to management defining, explaining, and interpreting each of the variances you calculated in Requirement 5.
Requirement 7: Explain how the predetermined overhead rates (for either normal or standard costing) are used to assist the firm’s management for inventory-costing purposes.
