Absorption costing and reported income.

The following information applies to Worldwide Widgets operations for the past quarter:

Month 1 Month 2 Month 3

Sales volume (widgets) 800 800 800

Sales price per widget 300 300 300

SG&A expenses per widget 30 30 30

Production volume (widgets) 800 1,000 400

Direct material cost per widget 120 120 120

Variable conversion cost per widget 20 20 20

Fixed conversion costs (per month) 80,000 80,000 80,000

SG&A expenses (total per month, fixed) 10,000 10,000 10,000

There were no inventories of direct materials or work-in-process.

At the beginning of month 1 Worldwide Widget had 400 units in finished goods inventory at a value of $96,000 ($240 each). In month 3, Worldwide Widget embarks on a lean transformation and ended month 3 with 200 units of product in ending finished goods inventory.

1. Prepare an Income Statement for Worldwide Widget for months 1, 2 and 3 based on generally accepted accounting principles (GAAP). Assume the company uses the FIFO method to value inventory.

2. Which month was Worldwide Widgets best month? Explain your answer.

3. Comment on the financial impact of lean improvements as reported under generally accepted accounting principles. Do GAAP statements accurately reflect the costs and benefits of a lean transformation?