Operating income under absorption costing 2703120

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Operating income under absorption costing $2,703,120 Operating income under variable costing 2,531,520 Difference in operating income under absorption vs. variable costing $ 171,600 Under absorption costing: Fixed mfg. costs in ending inventory (1,040 units × $165 per unit) $ 171,600 Fixed mfg. costs in beginning inventory (0 units × $165 per unit) 0 Change in fixed mfg. costs between ending and beginning inventory $ 171,600 4. Relative to the obvious alternative of using contribution margin (from variable costing), the absorption-costing based gross margin has some pros and cons as a performance measure for Electron’s supervisors. It takes into account both variable costs and fixed costs—costs that the supervisors should be able to control in the long-run—and therefore it is a more complete measure than contribution margin which ignores fixed costs (and may cause the supervisors to pay less attention to fixed costs). The downside of using absorption-costing-based gross margin is the supervisor’s temptation to use inventory levels to control the gross margin—in particular, to shore up a sagging gross margin by building up inventories. This can be offset by specifying, or limiting, the inventory build-up that can occur, charging the supervisor a carrying cost for holding inventory, and using nonfinancial performance measures such as the ratio of ending to beginning inventory. 9-13
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9-23 (20–30 min.) Comparison of actual-costing methods. The numbers are simplified to ease computations. This problem avoids standard costing and its complications. 1. Variable-costing income statements: 2008 2009 Sales Production 1,000 units 1,400 units Sales Production 1,200 units 1,000 units Revenues ($3 per unit) $3,000 $3,600 Variable costs: Beginning inventory Variable cost of goods manufactured Cost of goods available for sale Deduct ending inventory a $ 0 700 700 (200 ) $ 200 500 700 (100 ) Variable cost of goods sold Variable operating costs Variable costs Contribution margin Fixed costs Fixed manufacturing costs Fixed operating costs Total fixed costs Operating income 500 1,000 700 400 1,500 1,500 1,100 $ 400 600 1,200 700 400 1,800 1,800 1,100 $ 700 a Unit inventoriable costs: Year 1: $700 ÷ 1,400 = $0.50 per unit; $0.50 × (1,400 – 1,000) Year 2: $500 ÷ 1,000 = $0.50 per unit; $0.50 × (400 + 1,000 – 1,200) 2. Absorption-costing income statements: 2008 2009 Sales Production 1,000 units 1,400 units Sales Production 1,200 units 1,000 units Revenues ($3 per unit) Cost of goods sold: Beginning inventory Variable manufacturing costs Fixed manufacturing costs a Cost of goods available for sale Deduct ending inventory b $ 0 700 700 1,400 (400 ) $3,000 $ 400 500 700 1,600 (240 ) $3,600 Cost of goods sold Gross margin Operating costs: Variable operating costs Fixed operating costs Total operating costs Operating income 1,000 400 1,000 2,000 1,400 $ 600 1,200 400 1,360 2,240 1,600 $ 640 a Fixed manufacturing cost rate: Year 1: $700 ÷ 1,400 = $0.50 per unit Year 2: $700 ÷ 1,000 = $0.70 per unit b Unit inventoriable costs: Year 1: $1,400 ÷ 1,400 = $1.00 per unit; $1.00 × (1400 – 1000) Year 2: $1,200 ÷ 1,000 = $1.20 per unit $1.20 × (400 + 1,000 – 1,200) 9-14
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3. 2008 2009 Variable Costing: Operating income $400 $700 Ending inventory 200 100 Absorption Costing: Operating income $600 $640 Ending inventory 400 240 Fixed manuf. overhead • in beginning inventory 0 200 • in ending inventory 200 140 = Year 1: $600 – $400 = $0.50 × 400 $0 $200 = $200 Year 2: $640 – $700 = ($0.70 × 200) – ($0.50 × 400)
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