B effect on external users of financial statements i

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(b) Effect on external users of financial statements. I would recommend absorption costing because it considers all the manufacturing resources (whether variable or fixed) used to produce units of output. Absorption costing has many critics. However, the dysfunctional aspects associated with absorption costing can be reduced by Careful budgeting and inventory planning. Adding a capital charge to reduce the incentives to build up inventory. Monitoring nonfinancial performance measures. 9-21 (10 min.) Absorption and variable costing. The answers are 1(a) and 2(c). Computations: 1. Absorption Costing : Revenues a Cost of goods sold: Variable manufacturing costs b Allocated fixed manufacturing costs c Gross margin $2,400,000 360,000 $4,800,000 2,760,000 2,040,000 Operating costs: Variable operating d Fixed operating Operating income 1,200,000 400,000 1,600,000 $ 440,000 a $40 × 120,000 b $20 × 120,000 c Fixed manufacturing rate = $600,000 ÷ 200,000 = $3 per output unit Fixed manufacturing costs = $3 × 120,000 d $10 × 120,000 2. Variable Costing : Revenues a Variable costs: Variable manufacturing cost of goods sold b Variable operating costs c Contribution margin Fixed costs: Fixed manufacturing costs Fixed operating costs Operating income $2,400,000 1,200,000 600,000 400,000 $4,800,000 3,600,000 1,200,000 1,000,000 $ 200,000 a $40 × 120,000 b $20 × 120,000 c $10 × 120,000 9-11
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9-22 (40 min) Absorption versus variable costing. 1. The variable manufacturing cost per unit is $55 + $45 + $120 = $220. 2009 Variable-Costing Based Operating Income Statement Revenues (8,960 × $1,200 per unit) $10,752,00 0 Variable costs Beginning inventory $ 0 Variable manufacturing costs (10,000 units × $220 per unit) 2,2 00,000 Cost of goods available for sale 2,200,000 Deduct: Ending inventory (1,040 a units × $220 per unit) ( 228,8 00 ) Variable cost of goods sold 1,971,200 Variable marketing costs (8,960 units × $75 per unit) 672 ,000 Total variable costs 2,643,2 00 Contribution margin 8,108,800 Fixed costs Fixed manufacturing costs 1,471,680 Fixed R&D 981,120 Fixed marketing 3,124,480 Total fixed costs 5,577,280 Operating income $ 2,531,520 a Beginning Inventory 0 + Production 10,000 – Sales 8,960 = Ending Inventory 1,040 units 2. 2009 Absorption-Costing Based Operating Income Statement Revenues (8,960 units × $1,200 per unit) $10,752,000 Cost of goods sold Beginning inventory $ 0 Variable manufacturing costs (10,000 units × $220 per unit) 2,200,000 Allocated fixed manufacturing costs (10,000 units × $165 per unit) 1,6 50,000 Cost of goods available for sale 3,850,000 Deduct ending inventory (1,040 units × ($220 + $165) per unit) (400,400) Deduct favorable production volume variance ( 178,32 0 ) a F Cost of goods sold 3,271,280 Gross margin 7,480,720 Operating costs Variable marketing costs (8,960 units × $75 per unit) 672,000 Fixed R&D 981,120 Fixed marketing 3,124,480 Total operating costs 4,777,600 Operating income $ 2,703,120 a PVV = Allocated $1,650,000 ($165 × 10,000) – Actual $1,471,680 = $178,320 9-12
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3. 2009 operating income under absorption costing is greater than the operating income under variable costing because in 2009 inventories increased by 1,040 units, and under absorption costing fixed overhead remained in the ending inventory, and resulted in a lower cost of goods sold (relative to variable costing). As shown below, the difference in the two operating incomes is exactly the same as the difference in the fixed manufacturing costs included in ending vs. beginning inventory (under absorption costing).
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