Fixed administrative costs total fixed costs

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Fixed administrative costs Total fixed costs Operating income 105,000 35,000 215,000 140,000 $ 75,000 105,000 35,000 215,000 140,000 $ 75,000 105,000 35,000 215,000 140,000 $ 75,000 a $6 × 50,000 b ? × 0; $1.55 × 0; $1.55 × 20,000 c $1.55 × 50,000; $1.55 × 70,000; $1.55 × 30,000 d $1.55 × 0; $1.55 × 20,000; $1.55 × 0 e $.15 × 50,000 9-45
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(2) Absorption Costing April 2008 May 2008 June 2008 Revenues a Cost of goods sold Beginning inventory b $ 0 $300,000 $ 0 $300,000 $ 61,000 $300,000 Variable manufacturing costs c 77,500 108,500 46,500 Allocated fixed manufacturing costs d 105,000 105,000 105,000 Cost of goods available for sale 182,500 213,500 212,500 Deduct ending inventory e 0 (61,000) 0 Adjustment for prod. vol. var. f 0 30,000 U 0 Cost of goods sold 182,500 152,500 212,500 Gross margin 117,500 147,500 87,500 Operating costs Variable selling costs g 7,500 7,500 7,500 Fixed administrative costs 35,000 35,000 35,000 Total operating costs 42,500 42,500 42,500 Operating income $ 75,000 $105,000 $ 45,000 a $6 × 50,000 b $?× 0; $3.65× 0; $3.05 × 20,000 c $1.55 × 50,000; $1.55 × 70,000; $1.55 × 30,000 d ($105,000/50,000)×50,000; ($105,000/70,000) ×70,000; (105,000/30,000)×30,000 e $3.65 × 0; $3.05 × 20,000; $5.05 × 0 f $105,000 – $105,000; $105,000 – $105,000; $105,000 – $105,000 g $.15 × 50,000 9-46
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(3) Throughput costing April 2008 May 2008 June 2008 Revenues a Direct material cost of goods sold Beginning inventory b $ 0 $300,000 $ 0 $300,000 $ 16,000 $300,000 Direct materials in goods manufactured c Cost of goods available for sale Deduct ending inventory d Total direct material cost of goods sold 40,000 40,000 0 40,000 56,000 56,000 (16,000 ) 40,000 24,000 40,000 0 40,000 Throughput contribution 260,000 260,000 260,000 Other costs Manufacturing e Operating f Total other costs Operating income 142,500 42,500 185,000 $ 75,000 157,500 42,500 200,000 $ 60,000 127,500 42,500 170,000 $ 90,000 a $6 × 50,000 b $?× 0; $0.80× 0; $0.80 × 20,000 c $0.80 × 50,000; $0.80 × 70,000; $0.80 × 30,000 d $0.80 × 0; $0.80 × 20,000; $0.80 × 0 e ($0.75 × 50,000) + $105,000; ($0.75× 70,000) + $105,000; ($0.75 × 30,000) + $105,000 f ($0.15 × 50,000) + $35,000 9-47
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4. The benefit of using throughput costing is that net income is reduced if managers produce more units than they can sell. By treating all costs, except direct material costs, as period costs, the income statement expenses not only the cost of goods sold but also the direct labor and variable overhead costs associated with units in ending inventory. So reported income is reduced by the cost of unnecessary production. For performance evaluation purposes, variable costing is superior to absorption costing because it prevents managers from increasing income by just increasing production. In the same way, throughput costing may be considered superior to variable costing because not only is management not rewarded for producing more than can be sold, they are penalized for excess production. In this example, income is highest when management produced less than demand and therefore reduced inventory that already existed. 9-48
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