Part 1 Essay Practice Question Question 1.1-Barton Industries Barton Industries processes chemicals for the pharmaceutical industry. Wiley Richardson, company president, was eager to see the operating results for the just completed fiscal year as he believed that changes that were made during the year would result in increased profit on the expected sales volume of 1 million kg. At the beginning of the year, in response to a 10% increase in production costs, the sales price had been increased 12%, and the selling and administrative departments had been given strict instructions to hold expenses at the same level as the previous year. Therefore, Richardson was dismayed to learn that net income had dropped despite achieving the planned increase in sales volume. Shown below are comparative operating income statements for Barton Industries for the last two years along with budgeted operating and financial data. This year’s cost of goods sold includes an adjustment of fixed overhead costs that were under-applied. Actual results were the same as budget, except for production volume. The company uses the first-in, first-out inventory valuation method, and has an ending inventory of 450,000 kg. this year. Barton Industries Comparative Operating Income Statements ($000 omitted) Previous Year $9,000 6,600 $2,400 1,500 $ 900
Sales revenue Cost of goods sold Gross profit Selling and administrative expense Operating income
Current Year $11,200 8,815 $ 2,385 1,500 $ 885
Barton Industries Budgeted Operating and Financial Data Previous Year $10.00/kg. 1.50/kg. 2.50/kg. 1.00/kg. 3.00/kg. $3,000,000 $1,500,000 900,000 kg. 300,000 kg.
Sales price Material cost Direct labor cost Variable overhead cost Fixed overhead cost Total fixed overhead costs Selling and administrative expense Sales volume Beginning inventory
482
Current Year $11.20/kg. 1.65/kg. 2.75/kg. 1.10/kg. 3.30/kg. $3,300,000 $1,500,000 1,000,000 kg. 600,000 kg.
