For Prof. Nicholas Only

Module 5

Critical Thinking: (60 points) Choose one of the following two assignments to complete this week. Do not do both assignments. Identify your assignment choice in the title of your submission. When you are ready to submit, click the Module 5 Critical Thinking header on the Assignments page to upload the document.

Note that while there are two options for the Critical Thinking assignment, there is only one rubric. Review the rubric to confirm you are meeting the assignment requirements.

Assignment Choice #1: Cost of Production Paint More, LLC, has organized a new division to manufacture and sell specialty paint. The division’s monthly costs are shown below:

Manufacturing costs:

Variable costs per unit:

Direct materials $12

Variable manufacturing overhead $1

Fixed manufacturing overhead costs (total) $100,000

Selling and administrative costs:

Variable 7% of sales

Fixed (total) $31,000

Because the production is highly automated, the company includes its labor costs in its fixed manufacturing overhead. The gallons of paint sell for $68 each. During September, the first month of operations, the following activity was recorded:

Units produced 5,000

Units sold 4,000

Instructions:

Submit an Excel document with each tab labeled by item number that demonstrates the following:

1. Compute the unit product cost under: a. Absorption costing b. Variable costing

2. Prepare an absorption costing income statement for September 3. Prepare a contribution format income statement for September using variable costing

Provide your answers in a clearly organized Excel spreadsheet. Check spelling and formatting for readability. Document your sources. Where applicable, written comments must be in accordance with the Requirements. Be sure to review the Module 5 Critical Thinking grading rubric, which may be accessed through the Course Information page.

Assignment Choice #2: Behavioral Considerations under Absorption versus Variable Costing Stellar Packaging Products Company notes the following results for 2016 for variable versus absorption costing. The company’s base volume is 4,000,000.

Stellar Packaging Products

Budgeted Income Statement Variable Costing

units

Absorption Costing units

For the year 2016 3,800,000

3,800,000

Revenues $ 4,750,000 Revenues $ 4,750,000

Variable Costs:

Cost of Goods Sold: Material $ 950,000 Material $ 950,000

Labor $ 950,000 Labor $ 950,000

Variable Overhead $ 570,000 Variable Overhead $ 570,000

Total Variable Costs $ 2,470,000 Fixed Overhead $ 1,900,000

Contribution Margin $ 2,280,000 Production Volume

Variance $ 200,000

Fixed manufacturing Costs $ 2,000,000 Total Manufacturing Costs $ 4,570,000

Fixed non-manufacturing Costs $ 100,000 Gross Margin $ 180,000

Operating Income $ 180,000 Fixed non-manufacturing Costs $ 100,000

Operating Income $ 80,000

The company presently uses absorption costing to provide additional compensation and incentivize managers to achieve their production goals. The compensation formula is 10% of operating income.

Instructions:

Calculate the amount of the difference of additional compensation between the two income statement methods. If the decline in volume continues and Stellar makes 3.6 million units in 2017, should the company switch to variable costing as the basis of compensation? Why or why not? What might be the reaction of the production managers if this occurs?

Your paper should meet the following requirements:

 2-3 pages in length

 Formatted in accordance with the APA Requirements.

 Document your sources

Portfolio Milestone

For your selected product, begin your estimate of

cost for that item. Submit the following information to your instructor.

Submit the following: 1. Forecast the variable cost per unit. 2. Forecast manufacturing costs and selling and administrative expenses as either variable or fixed.