ACCT303Chapter9

# B effect on external users of financial statements i

• Notes
• 48
• 100% (1) 1 out of 1 people found this document helpful

This preview shows pages 11–14. Sign up to view the full content.

(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

This preview has intentionally blurred sections. Sign up to view the full version.

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
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).

This preview has intentionally blurred sections. Sign up to view the full version.

This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern