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Unformatted text preview: Using the formula in the chapter and a fixed manufacturing overhead rate of $14 (based on a denominator level of 20,000 units): Let N = Breakeven sales in units N = margin on contributi Unit produced Units N rate overhead manuf. Fixed income operating Target costs fixed Total - × + + N = $320,000 + $0 + $14(N 20,000) $30- $30N = $320,000 + $14N – $280,000 $16N = $40,000 N = 2,500 units Proof: Gross margin, 2,500 × ($30 – $14) $40,000 Production-volume variance $ Marketing and administrative costs 40,000 40,000 Operating income $ We find it helpful to put the following comparisons on the board: Variable costing breakeven = f(sales) = 10,667 tons Absorption costing breakeven = f(sales and production) = f(10,000 and 11,429) = f(2,500 and 20,000) 3. Absorption costing inventory cost: Either $140,000 or $280,000 at the end of 2008 and zero at the end of 2009. Variable costing: Zero at all times. This is a major criticism of variable costing and focuses on the issue of the definition of an asset. 4. Operating income is affected by both production and sales under absorption costing. Hence, most managers would prefer absorption costing because their performance in any given reporting period, at least in the short run, is influenced by how much production is scheduled near the end of a period. 9-29 9-30 (30–35 min.) Comparison of variable costing and absorption costing. 1. Since production volume variance is unfavorable, the budgeted fixed manufacturing overhead must be larger than the fixed manufacturing overhead allocated. = – $400,000 = $1,200,000 – Allocated Allocated = $800,000, which is 67% of $1,200,000 If 67% of the budgeted fixed costs were allocated, the plant must have been operating at 67% of denominator level in 2009. 2. The problem provides the beginning and ending inventory balances under both, variable and absorption costing. Under variable costing, all fixed costs are written off as period costs, i.e., they are not inventoried. Under absorption costing, inventories include variable and fixed costs. Therefore the difference between inventory under absorption costing and inventory under variable costing is the amount of fixed costs included in the inventory. Fixed Manuf. Absorption Variable Overhead Costing Costing in Inventory Inventories: December 31, 2008 $1,720,000 $1,200,000 $520,000 December 31, 2009 206,000 66,000 140,000 3. Note that the answer to (3) is independent of (1). The difference in operating income of $380,000 ($1,520,000 – $1,140,000) is explained by the release of $380,000 of fixed manufacturing costs when the inventories were decreased during 2009: Fixed Manuf....
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- Fall '10
- Income Statement, gross margin