Case 1: T J International
T J International was founded in 1969 as Trus Joist International. The firm, a manufacturer of specialty building products, has its headquarters in Boise, Idaho. The company, through its partnership in the Trus Joist MacMillan joint venture, develops and manufactures engineered lumber. This product is a high-quality substitute for structural lumber and uses lower-grade wood and materials formerly considered waste. The company also is majority owner of the Outlook Window Partnership, which is a consortium of three wood and vinyl window manufacturers.
Following is T J International’s adapted income statement and information concerning inventories from its annual report.
T J International
Sales \(618,876,000
Cost of goods sold 475,476,000
Gross profit 143,400,000
Selling and administrative expenses 102,112,000
Income from operations 41,288,000
Other expense 24,712,000
Income before income tax 16,576,000
Income taxes 7,728,000
Net income \) 8,848,000
Inventories.Inventories are valued at the lower of cost or market and include material, labor, and production overhead costs. Inventories consisted of the following:
Current Year Prior Year
Finished goods \(27,512,000 \)23,830,000
Raw materials and
work-in-progress 34,363,00033,244,000
61,875,000 57,074,000
Reduction to LIFO cost (5,263,000) (3,993,000)
\(56,612,000 \)53,081,000
The last-in, first-out (LIFO) method is used for determining the cost of lumber, veneer, Microllamlumber, TJI joists, and open web joists. Approximately 35 percent of total inventories at the end of the current year were valued using the LIFO method. The first-in, first-out (FIFO) method is used to determine the cost of all other inventories.
Instructions
(a) How much would income before taxes have been if FIFO costing had been used to value all inventories?
(b) If the income tax rate is 46.6%, what would income tax have been if FIFO costing had been used to value all inventories ? In your opinion, is this difference in net income between the two methods material? Explain.
(c) Does the use of a different costing system for different types of inventory mean that there is a different physical flow of goods among the different types of inventory? Explain.
