Tennessee Tool Corporation (TTC) manufactures small electric hand tools in Memphis, Tennessee. The firm uses a standard

Question:

Tennessee Tool Corporation (TTC) manufactures small electric hand tools in Memphis, Tennessee. The firm uses a standard absorption-costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding TTC’s planned and actual operations for 20x0 follow:
— Planned Actual Activity Activity Beginning finished-goods inventory in units.............. 35,000 35,000 Sales UnltSs x. cee eee en Retin a riveree aeer 140,000 125,000 PrOGUCTONGUMUMITS sae cretacer tin tee or tree ecm sere 140,000 130,000 Budgeted Costs Per Unit Total Actual Costs DirectimatenalPeens crate sites eee camtntn netetne een eee $12.00$ 1,680,000 $Misplaced &$ 50.00 $7, 000, 000$ 6,620,000 The budgeted per-unit cost figures were based on TTC producing and selling 140,000 units in 20x0. TTC uses a predetermined overhead rate for applying manufacturing overhead to its product. A total manufacturing-overhead rate of $9 p e r u n i t w a s e m p l o y e d f o r a b s o r p t i o n - c o s t i n g p u r p o s e s i n 20 x 0. A n y o v e r a p p l i e d o r u n d e r a p p l i e d m a n u f a c t u r i n g o v e r h e a d i s c l o s e d t o t h e C o s t o f G o o d s S o l d a c c o u n t a t t h e e n d o f t h e y e a r . T h e 20 x 0 b e g i n n i n g f i n i s h e d - g o o d s i n v e n t o r y f o r a b s o r p t i o n - c o s t i n g p u r p o s e s w a s v a l u e d a t t h e p r i o r y e a r^{'} s b u d g e t e d u n i t m a n u f a c t u r i n g c o s t, w h i c h w a s t h e s a m e a s t h e 20 x 0 b u d g e t e d u n i t m a n u f a c t u r i n g c o s t . T h e r e a r e n o w o r k - i n - p r o c e s s i n v e n t o r i e s a t e i t h e r t h e b e g i n n i n g o r t h e e n d o f t h e y e a r . T h e p l a n n e d a n d a c t u a l u n i t s e l l i n g p r i c e f o r 20 x 0 w a s$ 75 per unit.
Required Was TTC’s 20x0 income higher under absorption costing or variable costing? Why? Compute the following amounts.

a. The value of TTC’s 20x0 ending finished-goods inventory under absorption costing.

b. The value of TTC’s 20x0 ending finished-goods inventory under variable costing.

c. The difference between TTC’s 20x0 reported income calculated under absorption costing and calculated under variable costing.

d. Suppose that TTC had introduced a JIT production and inventory-management system at the beginning of 20x0.
1. What would likely be different about the scenario as described in the problem?
2. Would reported income under variable and absorption costing differ by the magnitude you found in requirement (c)? Explain.

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