3.
In this scenario, the manager of ELF produces 220,000 bulbs and sells 200,000 of them, and
the production volume variance is prorated.
Given the absence of ending work in process
inventory or beginning inventory of any kind, the fraction of the production volume variance that
is absorbed into the cost of goods sold is given by 200,000/220,000 or 10/11.
The operating
income under various denominator levels is then given by the following modification of the
solution to requirement 3 of 9-37:
Theoretical
Practical
Normal
Master Budget
Revenue
$1,800,000
$1,800,000
$1,800,000
$1,800,000
Less: Cost of goods
sold
750,000
900,000
1,300,000
1,500,000
Prorated production-
volume variance
a
659,091
U
509,091
U
109,091
U
(90,909
) F
Gross margin
390,909
390,909
390,909
390,909
Variable selling
b
50,000
50,000
50,000
50,000
Fixed selling
250,000
250,000
250,000
250,000
Operating income
$
90,909
$
90,909
$
90,909
$
90,909
a
(10/11) × 725,000, × 560,000, × 120,000, × 100,000
b
200,000
×
0.25
Under the proration approach, operating income is $90,909 regardless of the denominator
initially used.
Thus, in contrast to the case where the production volume variance is written off
to cost of goods sold, there is no temptation under the proration approach for the manager to play
games with the choice of denominator level.
9-42