5. As a result of a more intense effort by sales people, sales are increased by 10%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $18,000 is scrapped and written off as a loss, thereby lowering net operating income. 7. At the beginning of the year, the company uses $178,000 of cash (received on accounts receivable) to repurchase some of its common stock.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
The contribution format income statement for Huerra Company for last year is given below:
| Total | Unit | |
|---|---|---|
| Sales | $ 1,008,000 | $ 50.40 |
| Variable expenses | 604,800 | 30.24 |
| Contribution margin | 403,200 | 20.16 |
| Fixed expenses | 323,200 | 16.16 |
| Net operating income | 80,000 | 4.00 |
| Income taxes @ 40% | 32,000 | 1.60 |
| Net income | $ 48,000 | $ 2.40 |
The company had average operating assets of $499,000 during the year.
Required:
5. As a result of a more intense effort by sales people, sales are increased by 10%; operating assets remain unchanged.
6. At the beginning of the year, obsolete inventory carried on the books at a cost of $18,000 is scrapped and written off as a loss, thereby lowering net operating income.
7. At the beginning of the year, the company uses $178,000 of cash (received on accounts receivable) to repurchase some of its common stock.
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