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# CPAPrepChapter9 - CHAPTER 9 INVENTORY COSTING AND CAPACITY...

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CHAPTER 9 INVENTORY COSTING AND CAPACITY ANALYSIS 9-7 Under absorption costing, heavy reductions of inventory during the accounting period might combine with low production and a large production volume variance. This combination could result in lower operating income even if the unit sales level rises. 9-20 (40 min) Variable versus absorption costing. 1. Income Statement for the Zwatch Company, Variable Costing for the Year Ended December 31, 2009 Revenues: \$22 × 345,400 \$7,598,800 Variable costs Beginning inventory: \$5.10 × 85,000 \$ 433,500 Variable manufacturing costs: \$5.10 × 294,900 1,503,990 Cost of goods available for sale 1,937,490 Deduct ending inventory: \$5.10 × 34,500 (175,950 ) Variable cost of goods sold 1,761,540 Variable operating costs: \$1.10 × 345,400 379,940 Adjustment for variances 0 Total variable costs 2,141,480 Contribution margin 5,457,320 Fixed costs Fixed manufacturing overhead costs 1,440,000 Fixed operating costs 1,080,000 Total fixed costs 2,520,000 Operating income \$2,937,320 Absorption Costing Data Fixed manufacturing overhead allocation rate = Fixed manufacturing overhead/Denominator level machine-hours = \$1,440,000 n 6,000 = \$240 per machine- hour Fixed manufacturing overhead allocation rate per unit = Fixed manufacturing overhead allocation rate/standard production rate = \$240 n 50 = \$4.80 per unit 1

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Income Statement for the Zwatch Company, Absorption Costing for the Year Ended December 31, 2009 Revenues: \$22 × 345,400 \$7,598,800 Cost of goods sold Beginning inventory (\$5.10 + \$4.80) × 85,000 \$ 841,500 Variable manuf. costs: \$5.10 × 294,900 1,503,990 Allocated fixed manuf. costs: \$4.80 × 294,900 1,415,520 Cost of goods available for sale \$3,761,010 Deduct ending inventory: (\$5.10 + \$4.80) × 34,500 (341,550) Adjust for manuf. variances (\$4.80 × 5,100) a 24,480 U Cost of goods sold 3,443,940 Gross margin 4,154,860 Operating costs Variable operating costs: \$1.10 × 345,400 \$ 379,940 Fixed operating costs 1,080,000 Total operating costs 1,459,940 Operating income \$2,694,920 a Production volume variance = [(6,000 hours × 50) – 294,900] × \$4.80 = (300,000 – 294,900) × \$4.80 = \$24,480 Zwatch’s operating margins as a percentage of revenues are Under variable costing: Revenues \$7,598,800 Operating income 2,937,320 Operating income as percentage of revenues 38.7% Under absorption costing: Revenues \$7,598,800 Operating income 2,694,920 Operating income as percentage of revenues 35.5% 3. Operating income using variable costing is about 9% higher than operating income calculated using absorption costing. Variable costing operating income – Absorption costing operating income = \$2,937,320 – \$2,694,920 = \$242,400 Fixed manufacturing costs in beginning inventory under absorption costing – Fixed manufacturing costs in ending inventory under absorption costing = (\$4.80 × 85,000) – (\$4.80 × 34,500) = \$242,400 2
4. The factors the CFO should consider include (a) Effect on managerial behavior. (b) Effect on external users of financial statements.

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CPAPrepChapter9 - CHAPTER 9 INVENTORY COSTING AND CAPACITY...

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