Group Exercises
7-1. As firms automate their operations with advanced manufacturing technology, cost structures are becoming more fixed and more indirect. Members of your group should each take one (or perhaps two) of these questions- prepare an answer(s)
- What implication does this trend hold for arguments favoring full absorption costing ?
- If full absorption costing continues to be used for external financial reporting, what impact will inventory build-up or inventory liquidations have on future reported earnings?
- Most firms evaluate and compensate top management on the basis of reported income. Given changes in cost structures and implementation of JIT inventory techniques, would top management have a preference for variable costing or full absorption costing? Explain.
- Your group should meet,and discuss and evaluate your answers.
7-2. Publicly held corporations are required to file financial information with the Securities and Exchange Commission- including Form 10K. This latter form contains voluminous data on the company including all financial statements. Your group should select a publicly held corporations. (Preferably manufacturing corporations. Consider a clothing manufacturer - such as Emerald Isle Knitters- the textbook example). The corporation is required to file its financial statements in absorption income format. Your group should all work together on the same corporation.
Using the Form 10K:
(Remember this is an exercise- you will have to make
estimates and assumptions. There will be no correct answers. Your group's first step should be to obtain a Form 10K. The second step should be to formulate a plan of action.)
- convert the income statement prepared in absorption income format. to the variable costing format.
- proceed on the assumption that if the work in process and finished goods inventories have increased, the corporation has produced more than it has sold.
- A method of estimating the fixed and variable portion of the cost of products sold must be formulated. Remember for a manufacturing firm- the cost of products sold includes both fixed and variable costs. Also- remember total sales dollars include variable costs,fixed costs,and profits. Some variation of the high low method could be used to estimate fixed and variable costs.
- Assume that all sales and costs relate either to the production or the sale of the firm's products. Do not get bogged down in minutiae. ( Do not list a large number of different expense categories)
- Your group prepare a summary of your findings and the lessons you learned from this exercise.
Internet Exercises
7-3. Proceed to http://business.etsu.edu/acctnote/3090/chap8/tsld002.htm for an overview of absorption costing and variable costing: There are about 13 slides -from 002- 015.
Review the material- and be prepared to discuss what you learned . Be on the alert for ideas different from those in the textbook; perform any calculations. Share your knowledge with your group.
7-4 The Rutgers Accounting Website's address is www.rutgers.edu/Accounting/raw.htm. Search under absorption costing or overhead costs- and locate the Superior Valve Division case. This case discusses absorption costing. Part of the material contained in the problem revolves around adding a product line. You can avoid the parts of the case study which revolve around this topic. Your group should review the material in the problem, discuss the relevant portions, and prepare answers to the questions asked.
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