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ACCT303Chapter9

# 9-159-24(40 min)variable and absorption costing sales

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Unformatted text preview: 9-159-24(40 min.)Variable and absorption costing, sales, and operating-income changes.1. Headsmart’s annual fixed manufacturing costs are \$1,200,000. It allocates \$24 of fixed manufacturing costs to each unit produced. Therefore, it must be using \$1,200,000÷\$24 = 50,000 units (annually) as the denominator level to allocate fixed manufacturing costs to the units produced.We can see from Headsmart’s income statements that it disposes off any production volume variance against cost of goods sold. In 2009, 60,000 units were produced instead of the budgeted 50,000 units. This resulted in a favorable production volume variance of \$240,000 F ((60,000 – 50,000) units ×\$24 per unit), which, when written off against cost of goods sold, increased gross margin by that amount.2.The breakeven calculation, same for each year, is shown below:Calculation of breakeven volume200820092010Selling price (\$2,100,000÷50,000; \$2,100,000 ÷50,000; \$2,520,000 ÷60,000)\$42\$42\$42Variable cost per unit (all manufacturing)141414Contribution margin per unit\$28\$28\$28Total fixed costs (fixed mfg. costs + fixed selling & admin. costs)\$1,400,00\$1,400,00\$1,400,000Breakeven quantity = Total fixed costs ÷contribution margin per unit50,00050,00050,0003.Variable Costing200820092010Sales (units)50,0050,0060,00Revenues\$2,100,00\$2,100,00\$2,520,000Variable cost of goods sold Beginning inventory \$14 ×0; 0; 10,000140,000Variable manuf. costs \$14 ×50,000; 60,000; 50,000700,000840,000700,000Deduct ending inventory \$14 ×0; 10,000; 0 (140,000)Variable cost of goods sold700,00700,00840,00Contribution margin\$1,400,00\$1,400,00\$1,680,00Fixed manufacturing costs\$1,200,00\$1,200,00\$1,200,00Fixed selling and administrative expenses200,00200,00200,00Operating income\$ \$ \$ 280,000Explaining variable costing operating income9-16Contribution margin (\$28 contribution margin per unit ×sales units)\$1,400,00\$1,400,00\$1,680,00Total fixed costs1,400,001,400,001,400,00Operating income\$ \$ \$ 280,0009-174.Reconciliation of absorption/variable costing operating incomes200820092010(1) Absorption costing operating income (ACOI)\$0\$240,000\$ 40,000(2) Variable costing operating income (VCOI)280,000(3) Difference (ACOI – VCOI)\$0\$240,000\$(240,000)(4) Fixed mfg. costs in ending inventory under absorption costing (ending inventory in units ×\$24 per unit) \$0\$240,000\$ (5) Fixed mfg. costs in beginning inventory under absorption costing (beginning inventory in units ×\$24 per unit) 240,000(6) Difference = (4) – (5)\$0\$240,000\$(240,000)In the table above, row (3) shows the difference between the operating income under absorption costing and the operating income under variable costing, for each of the three years. In 2008, the difference is \$0; in 2009, absorption costing income is greater by \$240,000; and in 2010, it is less by \$240,000. Row (6) above shows the difference between the fixed costs in ending inventory and the fixed costs in beginning inventory under absorption costing, which is \$0 in 2008, \$240,000 in 2009 and -\$240,000 in 2010. Row (3) and row (6) explain and reconcile the \$240,000 in 2009 and -\$240,000 in 2010....
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9-159-24(40 min)Variable and absorption costing sales and...

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