absorption costing fixed overhead remained in the ending inventory and resulted

Absorption costing fixed overhead remained in the

This preview shows page 15 - 17 out of 49 pages.

absorption costing fixed overhead remained in the ending inventory, and resulted in a lower costof goods sold (relative to variable costing). As shown below, the difference in the two operatingincomes is exactly the same as the difference in the fixed manufacturing costs included in endingvs. beginning inventory (under absorption costing).Operating income under absorption costing$13,515,600Operating income under variable costing12,657,600Difference in operating income under absorption vs. variable costing$ 858,000Under absorption costing:Fixed mfg. costs in ending inventory (5,200 pkgs. $165 per pkg.)$ 858,000Fixed mfg. costs in beginning inventory (0 pkgs. $165 per pkg.)0Change in fixed mfg. costs between ending and beginning inventory$ 858,0004. Relative to the obvious alternative of using contribution margin (from variable costing),the absorption-costing based gross margin has some pros and cons as a performance measure forMimic’s plant manager. It takes into account both variable costs and fixed costs—costs that theplant manager should be able to control in the long-run—and therefore it is a more completemeasure than contribution margin which ignores fixed costs (and may cause the manager to payless attention to fixed costs). The downside of using absorption-costing-based gross margin is theplant manager’s temptation to use inventory levels to control the gross margin—in particular, toshore up a sagging gross margin by building up inventories. This can be offset by specifying, orlimiting, the inventory build-up that can occur, charging the plant manager a carrying cost forholding inventory, and using nonfinancial performance measures such as the ratio of ending tobeginning inventory.9-15
Background image
9-23(20–30 min.) Comparison of actual-costing methods.The numbers are simplified to ease computations. This problem avoids standard costing and its complications.1. Variable-costing income statements:20062007SalesProduction1,000 units1,400 unitsSalesProduction1,200 units1,000 unitsRevenues ($3 per unit)$3,000$3,600Variable costs:Beginning inventoryVariable cost of goods manufacturedCost of goods available for saleDeduct ending inventorya$ 0700700(200)$ 200500700(100)Variable cost of goods soldVariable operating costsVariable costsContribution marginFixed costsFixed manufacturing costsFixed operating costsTotal fixed costsOperating income5001,0007004001,5001,5001,100$ 4006001,2007004001,8001,8001,100$ 700a Unit inventoriable costs:Year 1: $700 ÷ 1,400 = $0.50 per unit; $0.50 × (1,400 – 1,000)Year 2: $500 ÷ 1,000 = $0.50 per unit; $0.50 × (400 + 1,000 – 1,200)2.Absorption-costing income statements:20062007SalesProduction1,000 units1,400 unitsSalesProduction1,200 units1,000 unitsRevenues ($3 per unit)Cost of goods sold:Beginning inventoryVariable manufacturing costsFixed manufacturing costsaCost of goods available for saleDeduct ending inventoryb$ 07007001,400(400)$3,000$ 4005007001,600(240)$3,600Cost of goods soldGross marginOperating costs:Variable operating costsFixed operating costsTotal operating costsOperating income1,0004001,0002,0001,400$ 6001,2004001,3602,2401,600$ 640aFixed manufacturing cost rate:Year 1: $700 ÷ 1,400 = $0.50 per unitYear 2: $700 ÷ 1,000 = $0.70 per unitb
Background image
Image of page 17

You've reached the end of your free preview.

Want to read all 49 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes