B the sales price was lowered resulting in higher

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b. The sales price was lowered, resulting in higher total sales but a lower contribution margin per unit. Income decreased because the total increase in sales was not of sufficient volume to be greater than the total increase in variable costs. c. The income statement was prepared using absorption costing. Inventory could have decreased throughout the year, causing fixed manufacturing overhead held in beginning inventory to be expensed during the current year. d. The product mix changed. More units of the low contribution margin products and fewer units of the high contribution margin products were sold than planned. 4. Zero based budgeting: Preparing a budget from the ground up, as though the budget were being prepared for the first time. Alternative means of conducting activities and alternative budget amounts are evaluated. Also, all expenses are justified and fully explained. Every line of item must be approved.
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384 Answer: Question 1.11 – Brown Printing 1. Absorption costing (also called full costing) includes fixed manufacturing overhead cost in the cost of inventory. This method is required by GAAP and has been prepared using the traditional external reporting format (gross margin format). Under this method, the fixed manufacturing overhead was treated as a product cost. Only the portion of fixed manufacturing overhead assigned to the sold units was expensed in the current period. Variable costing includes only variable costs (direct labor, direct material, variable manufacturing cost) in the cost of inventory. Fixed manufacturing overhead is included in the income statement as a period cost. 2. a. Direct materials $15 + Direct labor $6 + Variable manufacturing overhead $4 = Unit Cost of Goods sold $25. b. Sales $900,000 Variable cost of goods sold ($25 x 10,000 units) 250,000 Variable selling 30,000 Contribution margin 620,000 Fixed manufacturing overhead 240,000 Administrative expenses 160,000 Net income $220,000 3. a. The unit cost of goods sold is calculated as follows: Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $15 + 6 + 4 + ($240,000/15,000 books) = $15 + 6 + 4 + $16 = $41. b. Sales revenue $900,000 Cost of goods sold 410,000 Gross margin 490,000 Selling expenses 30,000 Administrative expenses 160,000 Net income $300,000 4. a. Advantages of variable costing It makes better sense to expense fixed manufacturing overhead since it will be incurred each period regardless of the number of units sold or produced. No incentive to overproduce inventory because profit is strictly a function of sales volume (not production volume). Better for internal decision making since this method breaks costs out into variable and fixed components. Contribution format supports cost-volume-profit analysis and other short-run decision making.
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385 b. Limitations of absorption costing The fixed manufacturing overhead assigned to the unsold units has been absorbed on the balance sheet as part of the inventory cost.
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