Variable costing zero at all times this is a major

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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
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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. 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 Release of fixed manuf. costs $380,000 The above schedule in this requirement is a formal presentation of the equation: = ($1,140,000 – $1,520,000) = ($140,000 – $520,000) – $380,000 = – $380,000 Alternatively, the presence of fixed manufacturing overhead costs in each income statement can be analyzed: Absorption costing, 9-30
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Fixed manuf. costs in cost of goods sold ($5,860,000 − $4,680,000) $1,180,000 Production-volume variance 400,000 1,580,000 Variable costing, fixed manuf. costs charged to expense (1,200,000 ) Difference in operating income explained $ 380,000 4. Under absorption costing, operating income is a function of both sales and production (i.e., change in inventory levels). During 2009, Hinkle experienced a severe decline in inventory levels: sales were probably higher than anticipated, production was probably lower than planned (at 67% of denominator level), resulting in much of the 2009 beginning inventory passing through cost of goods sold in 2009. This means that under absorption costing, large amounts of inventoried fixed costs have flowed through 2009 cost of goods sold, resulting in a smaller operating income than in 2008, despite an increase in sales volume.
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