# Acct306 Homework Ch09 - CHAPTER 9 INVENTORY COSTING AND...

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9-1 CHAPTER 9 INVENTORY COSTING AND CAPACITY ANALYSIS 9-29 Variable costing and absorption costing, the All-Fixed Company. This problem always generates active classroom discussion. 1. The treatment of fixed manufacturing overhead in absorption costing is affected primarily by what denominator level is selected as a base for allocating fixed manufacturing costs to units produced. In this case, is 20,000 tons per year, 40,000 tons, or some other denominator level the most appropriate base? We usually place the following possibilities on the board or overhead projector and then ask the students to indicate by vote how many used one denominator level versus another. Incidentally, discussion tends to move more clearly if variable-costing income statements are discussed first, because there is little disagreement as to computations under variable costing. a. Variable-Costing Income Statement: 2010 2011 Together Revenues (and contribution margin) \$400,000 \$400,000 \$800,000 Fixed costs: Manufacturing costs \$320,000 Operating costs 60,000 380,000 380,000 760,000 Operating income \$ 20,000 \$ 20,000 \$ 40,000 b. Absorption-Costing Income Statement: The ambiguity about the 20,000- or 40,000-unit denominator level is intentional The 40,000 tone and 20,000 ton and denominator level alternatives are shown below. Alternative 1. Use 40,000 units as a denominator; fixed manufacturing overhead per unit is \$320,000 ÷ 40,000 = \$8. 2010 2011 Together Revenues \$400,000 \$ 400,000 \$800,000 Cost of goods sold Beginning inventory 0 160,000 * 0 Allocated fixed manufacturing costs at \$8 320,000 320,000 Deduct ending inventory (160,000) Adjustment for production-volume variance 0 320,000 U 320,000 U Cost of goods sold 160,000 480,000 640,000 Gross margin 240,000 (80,000) 160,000 Operating costs 60,000 60,000 120,000 Operating income \$180,000 \$(140,000) \$ 40,000 * Inventory carried forward from 2010 and sold in 2011.
9-2 Alternative 2. Use 20,000 units as a denominator; fixed manufacturing overhead per unit is \$320,000 ÷ 20,000 = \$16. 2010 2011 Together Revenues \$400,000 \$400,000 \$800,000 Cost of goods sold Beginning inventory 0 320,000 * 0 Allocated fixed manufacturing costs at \$16 640,000 640,000 Deduct ending inventory (320,000) Adjustment for production-volume variance (320,000) F 320,000 U 0 Cost of goods sold 0 640,000 640,000 Gross margin 400,000 (240,000) 160,000 Operating costs 60,000 60,000 120,000 Operating income \$340,000 \$(300,000) \$ 40,000 * Inventory carried forward from 2010 and sold in 2011. Note that operating income under variable costing follows sales and is not affected by inventory changes. Note also that students will understand the variable-costing presentation much more easily than the alternatives presented under absorption costing.