Gomez Electronics, Inc
6 Pages Posted: 21 Oct 2008
Gomez Electronics produces three models of portable compact disc (CD) players. The company uses a full-cost standard-costing system for both internal and external financial reporting. However, the company's president is considering changing to a standard direct costing (i.e., variable costing) system for internal purposes. Students are asked to prepare two sets of income statements: one based on a standard full costing system, and the other based on a standard direct costing system. Each set of income statements provides information that reflects budgeted sales and budgeted production, as well as actual sales and actual production. Gomez Electronics has three production departments, all of which have excess capacity. The company has received and an offer from a large discount company to purchase a large quantity of CD players that, except for the plastic case, are similar to one of Gomez Electronics' CD players. The offer stipulates the price, the total quantity, and the delivery schedule. Students are asked to make a decision regarding whether to accept the discount company's offer. In addition, students are asked to make a recommendation regarding the adoption of a standard direct costing system for internal use.
GOMEZ ELECTRONICS, INC.
Gomez Electronics produced three models of portable compact-disc (CD) players, which it sold under its own brand name. It sold Model A for $ 47.00, Model B for $ 52.00, and Model C for $ 37.00. The company had three production departments: Department 1 performed the component assembly, Department 2 performed the chassis assembly, and Department 3 performed the final assembly, where the headphones, controls, and purchased plastic case were added to the CD player. Models A and B went through all three departments, but Model C was handled by Department 3 only. For this model, a Japanese chassis was purchased in 1,000-unit lots, and was assembled with a unique purchased case that Gomez Electronics had designed. Model C had been added to the company's product line in 1999 to take advantage of excess production capacity in Department 3 and to extend the company's product line to a less expensive CD player. Departments 1 and 2 worked two shifts, and management did not believe a third shift would be needed anytime soon. Department 3 worked a single shift, and even after the addition of Model C, operated slightly above 50% of physical capacity.
The company used a full-cost, standard costing system. Standard costs were reviewed and, if necessary, revised annually. Exhibits 1 and 2 contain information regarding standard costs, budgets, production, sales, and actual costs and expenses. Ending inventories were costed at standard cost. Although the company's president had been reasonably satisfied with the existing costing system, she was evaluating the benefits of changing to a standard, direct costing system for internal company use.
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Keywords: standard full absorption direct cost variable costing variance analysis relevant
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