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Manufacturing e operating f total other costs

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Manufacturing e Operating f Total other costs Operating income 800,000 560,000 1,360,000 $ 40,000 720,000 620,000 1,340,000 $ 260,000 900,000 1,040,000 1,940,000 $1,060,000 a $2,500 × 700; $2,500 × 800; $2,500 × 1,500 b $? × 0; $500 × 300; $500 × 300 c $500 × 1,000; $500 × 800; $500 × 1,250 d $500 × 300; $500 × 300; $500 ×50 e ($400 × 1,000) + $400,000; ($400 × 800) + $400,000; ($400 × 1,250) + $400,000 f ($600 × 700) + $140,000; ($600 × 800) + $140,000; ($600 × 1,500) + $140,000 2. Operating income under: January February March Absorption costing Variable costing Throughput costing $280,000 160,000 40,000 $260,000 260,000 260,000 $860,000 960,000 1,060,000 Throughput costing puts greater emphasis on sales as the source of operating income than does absorption or variable costing. 3. Throughput costing puts a penalty on producing without a corresponding sale in the same period. Costs other than direct materials that are variable with respect to production are expensed when incurred, whereas under variable costing they would be capitalized as an inventoriable cost. 9-8
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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 ÷ 6,000 = $240 per machine-hour Fixed manufacturing overhead allocation rate per unit = Fixed manufacturing overhead allocation rate/standard production rate = $240 ÷ 50 = $4.80 per unit 9-9
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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 2. 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 9-10
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4. The factors the CFO should consider include (a) Effect on managerial behavior.
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