5. a. Under JIT, production is geared strictly to sales. Therefore, the com-
pany would have produced only enough units during the quarter to
meet sales needs. The computations are:
Units sold ... 15,000
Less units in inventory at the beginning of the quarter .. 7,000
Units produced during the quarter under JIT ... 8,000
Case 7-20 (continued)
Although not asked for in the problem, a move to JIT during the Second
Quarter would have reduced the company’s reported net operating in-
come even further. The net operating income for the quarter would have
been:
Sales... $600,000
Less cost of goods sold:
Beginning inventory ... $140,000
Add cost of goods manufactured
(8,000 units × $20 per unit) ... 160,000
Goods available for sale ... 300,000
Ending inventory ... 0
Cost of goods sold ... 300,000
Add underapplied overhead* ... 84,000 384,000
Gross margin ... 216,000
Less selling and administrative expenses.... 215,000
Net operating income ... $ 1,000
* Overhead rates are based on 15,000 units produced each quarter.
If only 8,000 units are produced, then the underapplied fixed
manufacturing overhead will be 7,000 units × $12 per unit =
$84,000.
b. Starting with the Third Quarter, there will be little or no difference be-
tween the incomes reported under variable costing and under absorp-
tion costing. The reason is that there will be little or no inventories on
hand and therefore no way to shift fixed manufacturing overhead
cost between periods under absorption costing.
© The McGraw-Hill Companies, Inc., 2006. All rights reserved.
Solutions Manual, Chapter 7 395
Group Exercise 7-21
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