# 4 the factors the cfo should consider include a

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4. The factors the CFO should consider include (a) Effect on managerial behavior. (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.
9-14 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
9-15 9-22 (40 min) Absorption versus variable costing. 1. The variable manufacturing cost per unit is \$30 + \$25 + \$60 = \$115. 2014 Variable-Costing Based Income Statement Revenues (17,500 × \$450 per unit) \$7,875,000 Variable costs Beginning inventory \$ 0 Variable manufacturing costs (18,000 units × \$115 per unit) 2,070,000 Cost of goods available for sale 2,070,000 Deduct: Ending inventory (500 units × \$115 per unit) (57,500 ) Variable cost of goods sold 2,012,500 Variable marketing costs (17,500 units × \$45 per unit) 787,500 Total variable costs 2,800,000 Contribution margin 5,075,500 Fixed costs Fixed manufacturing costs 1,200,000 Fixed administrative costs 965,450 Fixed marketing 1,366,400 Total fixed costs 3,531,850 Operating income \$1,543,150 2. Fixed manufacturing overhead rate = \$1,200,000 / 20,000 units = \$60 per unit 2014 Absorption-Costing Based Income Statement Revenues (17,500 units × \$450 per unit) \$7,875,500 Cost of goods sold Beginning inventory \$ 0 Variable manufacturing costs (18,000 units × \$115 per unit) 2,070,000 Allocated fixed manufacturing costs (18,000 units × \$60 per unit) 1,080,000 Cost of goods available for sale 3,150,000 Deduct ending inventory [500 units × (\$115 + \$60) per unit] (87,500) Add unfavorable production volume variance 120,000 a U Cost of goods sold 3,182,500 Gross margin 4,692,500 Operating costs Variable marketing costs (17,500 units × \$45 per unit) 787,500 Fixed administrative costs 965,450 Fixed marketing 1,366,400 Total operating costs 3,119,350 Operating income \$1,573,150 a PVV = \$1,200,000 budgeted fixed mfg. costs – \$1,080,000 allocated fixed mfg. costs = \$120,000 U
9-16 3. 2014 operating income under absorption costing is greater than the operating income under variable costing because in 2014 inventory increased by 500 units. As a result, under absorption costing, a portion of the fixed overhead remained in the ending inventory and led to 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