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4 total fixed manufacturing costs 420000 385000

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4. Total fixed manufacturing costs $420,000 $385,000 Actual and budget line Unfavorable production-volume variance { Allocated line @ $7.00 55,000 60,000 Machine-hours } Favorable production- volume variance 5. Absorption costing is more likely to lead to buildups of inventory than does variable costing. Absorption costing enables managers to increase reported operating income by building up inventory which reduces the amount of fixed manufacturing overhead included in the current period’s cost of goods sold. Ways to reduce this incentive include (a) Careful budgeting and inventory planning. (b) Change the accounting system to variable costing or throughput costing. (c) Incorporate a carrying charge for carrying inventory. (d) Use a longer time period to evaluate performance than a quarter or a year. (e) Include nonfinancial as well as financial measures when evaluating management performance. 9-25
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9-29 (40 min.) Variable costing and absorption costing, the All-Fixed Company. This problem always generates active classroom discussion. 1. The treatment of fixed manufacturing overhead in absorption costing is affected primarily by what denominator level is selected as a base for allocating fixed manufacturing costs to units produced. In this case, is 10,000 tons per year, 20,000 tons, or some other denominator level the most appropriate base? We usually place the following possibilities on the board or overhead projector and then ask the students to indicate by vote how many used one denominator level versus another. Incidentally, discussion tends to move more clearly if variable-costing income statements are discussed first, because there is little disagreement as to computations under variable costing. a. Variable-Costing Income Statement: 2008 2009 Together Revenues (and contribution margin) $300,000 $300,000 $600,000 Fixed costs: Manufacturing costs $280,000 Operating costs 40,000 320,000 320,000 640,000 Operating income $ (20,000 ) $ (20,000 ) $ (40,000 ) 9-26
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b. Absorption-Costing Income Statement: The ambiguity about the 10,000- or 20,000-unit denominator level is intentional. IF YOU WISH, THE AMBIGUITY MAY BE AVOIDED BY GIVING THE STUDENTS A SPECIFIC DENOMINATOR LEVEL IN ADVANCE. Alternative 1 . Use 20,000 units as a denominator; fixed manufacturing overhead per unit is $280,000 ÷ 20,000 = $14. 2008 2009 Together Revenues $300,000 $ 300,000 $600,000 Cost of goods sold Beginning inventory 0 140,000 * 0 Allocated fixed manufacturing costs at $14 280,000 280,000 Deduct ending inventory (140,000) Adjustment for production-volume variance 0 280,000 U 280,000 U Cost of goods sold 140,000 420,000 560,000 Gross margin 160,000 (120,000) 40,000 Operating costs 40,000 40,000 80,000 Operating income $120,000 $(160,000 ) $ (40,000 ) * Inventory carried forward from 2008 and sold in 2009. Alternative 2 .Use 10,000 units as a denominator; fixed manufacturing overhead per unit is $280,000 ÷ 10,000 = $28. 2008 2009 Together Revenues $300,000 $300,000 $600,000 Cost of goods sold Beginning inventory 0 280,000 * 0 Allocated fixed manufacturing costs at $28 560,000 560,000 Deduct ending inventory (280,000) Adjustment for production-volume variance (280,000 ) F 280,000 U 0 Cost of goods sold 0 560,000 560,000 Gross margin 300,000 (260,000) 40,000 Operating costs 40,000 40,000 80,000 Operating income $260,000 $(300,000 ) $ (40,000 ) * Inventory carried forward from 2008 and sold in 2009.
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