微信扫一扫
实时资讯全掌握
| Rein Company, a compressor manufacturer, is developing a budgeted income statement for the calendar year 2006. The president is generally satisfied with the projected net income for 2005 of $700,000 resulting in an earnings per share figure of $2.80. However, next year he would like earnings per share to increase to at least $3. Rein Company employs a standard absorption cost system. Inflation necessitates an annual revision in the standards as evidenced by an increase in production costs expected in 2006. The total standard manufacturing cost for 2005 is $72 per unit produced. Rein expects to sell 100,000 compressors at $110 each in the current year (2005). Forecasts from the sales department are favorable, and Rein Company is projecting an annual increase of 10% in unit sales in 2006 and 2007. This increase in sales will occur even though a $15 increase in unit selling price will be implemented in 2006. The selling price increase was absolutely essential to compensate for the increased production costs and operating expenses. However, management is concerned that any additional sales price increase would curtail the desired growth in volume. Standard production costs are developed for the two primary metals used in the compressor (brass and a steel alloy), the direct labor, and manufacturing overhead. The following schedule represents the 2006 standard quantities and rates for material and labor to produce one compressor.   The material content of the compressor has been reduced slightly, hopefully without a noticeable decrease in the quality of the finished product. Improved labor productivity and some increase in automation have resulted in a decrease in labor hours per unit from 4.4 to 4.0. However, the significant increases in material prices and hourly labor rates more than offset any savings from reduced input quantities. The manufacturing overhead cost per unit schedule has yet to be completed. Preliminary data is as follows:  The standard overhead rate is based upon direct labor hours and is developed by using the total overhead costs from the above schedule for the activity level closest to planned production. In developing the standards for the manufacturing costs the following two assumptions were made. The cost of brass is currently selling at $5.65/pound. However, this price is historically high and the purchasing manager expects the price to drop to the predetermined standard early in 2006. Several new employees will be hired for the production line in 2006. The employees will be generally unskilled. If basic training programs are not effective and improved labor productivity is not experienced, then the production time per unit of product will increase by 15 minutes over the 2006 standards. Rein employs a LIFO inventory system for its finished goods. Rein’s inventory policy for finished goods is to have 15% of the expected annual unit sales for the coming year in finished goods inventory at the end of the prior year. The finished goods inventory at December 31, 2005, is expected to consist of 16,500 units at a total carrying cost of $1,006,500. Operating expenses are classified as selling, which are variable, and administrative, which are all fixed. The budgeted selling expenses are expected to average 12% of sales revenue in 2006 which is consistent with the performance in 2005. The administrative expenses in 2006 are expected to be 20% higher than the predicted 2005 amount of $907,850. Management accepts the cost standards developed by the production and accounting department. However, they are concerned about the possible effect on net income if the price of brass does not decrease, and/or the labor efficiency does not improve as expected. Therefore management wants the budgeted income statement to be prepared using the standards as developed but to consider the worst possible situation for 2006. Each resulting manufacturing variance should be separately identified and added to or subtracted from budgeted cost of goods sold at standard. Rein is subject to a 45% income tax rate. Questions A. Prepare the budgeted income statement for 2006 for Rein Company as specified by management. Round all calculations to the nearest dollar. B. Review the 2006 budgeted income statement prepared for Rein Company and discuss whether the president’s objectives can be achieved. |