4 total fixed manufacturing costs 420000 385000

Info icon This preview shows pages 25–28. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 25

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

View Full Document Right Arrow Icon
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
Image of page 26
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.
Image of page 27

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

View Full Document Right Arrow Icon
Image of page 28
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    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.

    Student Picture

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

  • Left Quote Icon

    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.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    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.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern