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6316 .III '45 E} G) v2.cengagenow.com [I] Mastery Problem: Variable Costing for Management Analysis Absorption vs. Variable Operating income is one of the most important
6316 .III '45\" E} G) v2.cengagenow.com [I] Mastery Problem: Variable Costing for Management Analysis Absorption vs. Variable Operating income is one of the most important items reported by a company. Depending on the decision-making needs of management, operating income can be determined using absorption costing or variable costing. Select whether the following characteristics are most often associated with absorption costing or variable costing. Required under generally accepted accounting principles V (GAAP) Absorpt Costing Often used for internal use in decision making Cost of goods manufactured includes only variable v manufacturing costs Used in reports prepared for external users ' Fixed factory overhead costs are not part of cost of goods 7 manufactured Both xed and variable factory costs are included in cost of goods sold and inventory Absorption Statement Absorption costing does not distinguish between variable and xed costs. All manufacturing costs are included in the cost of goods sold. Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31 Sales $1,360,000 Cost of goods sold: Cost or goods manufactured $300,000 Ending Inventory (120,000) Total cost of goods sold (680,000) Gross prot $630,000 Selling and administrative expenses (303,000) Operating income $377,000 Variable Statement Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin. Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31 Sales 51,360,000 Variable cost of goods sold: Variable cost of goods manufactured $560,000 Ending inventory (84,000) Total variable cost of goods sold (476,000) Manufacturing margin 5804.000 Variable selling and administrative expenses (235,000) Contribution margin $646,000 < + E) Financial Statements Charles found some sample income statements and balance sheets on the Internet, and asked which of them might be most appropriate for a manufacturing business like his. Review income statements A and B, and balance sheets C and D. Determine which income statement and balance sheet would be most appropriate for a manufacturing business like Able Baker Charlie Company. Income Statement A Sample Company A Income Statement For the Year Ended December 31, 20Y8 Sales $42,000 Finished goods inventory, January 1, 20Y8 $5,250 Cost of goods manufactured 5,400 Cost of finished goods available for sale $11,650 Finished goods inventory, December 31, 20Y8 (400) Cost of goods sold (11,250) Gross profit $30,750 Operating expenses: Selling expenses $6,400 Administrative expenses 5,250 Total operating expenses (11,650) Net income $19,100 Income Statement B Sample Company B Income Statement For the Year Ended December 31, 20Y8 Sales $42,000 Beginning inventory $5,250 Net purchases 6,400 Inventory available for sale $11,650 Ending inventory (400) Cost of goods sold (11,250) Gross profit $30,750 Operating expenses: Selling expenses $6,400 Administrative expenses 5,250 Total operating expenses (11,650) Net income $19,100 Balance Sheet C Sample Company C Balance Sheet December 31, 20Y8 Assets Cash $20,800 Accounts receivable (net) 10,000 Inventory 6,000 Supplies 2,100 Land 17,000 Total assets $55,900 Liabilities Accounts payable $17,800 Stockholders' Equity Common stock $19,000 Retained earnings 19,100 Total stockholders' equity 38,100 Total liabilities and stockholders' equity $55,900 Balance Sheet D Sample Company D Balance Sheet December 31. 20Y8 Next Assignment Score: 0.0% Email Instructor Save and Exit Submit Assignment for Grading 2Mastery Problem: Introduction to Managerial Accounting Able Baker Charlie Company Charles Maxwell is starting a cheesecake bakery, Able Baker Charlie Company, to produce and sell different flavored cheesecakes to restaurants and the general public. He has just begun his study of accounting, and is a bit confused about the many types of reports he has read about and how they will help him run his business. He asks you to help him clarify what the differences between managerial accounting and financial accounting are. He's also wondering how to set up his inventory, how to classify the costs of his business, and how to fill in some missing information. Managerial vs. Financial Select whether the following characteristics are most often associated with managerial accounting or financial accounting. Primarily used for internal decision making Generally Accepted Accounting Principles (GAAP) must be used Managerial Accounting Financial Accounting Prepared statements usually pertain to the company as a whole rath. than individual departments or products Information provided will often be subjective, such as estimated future results Often prepared on an as-needed basis rather than at fixed intervals Cost Classification Charles has provided some of the costs he expects to incur as follows. Decide on the classifications that could be applied to each of these costs using the table provided. The cost object in each case is the cheesecake. (Select "Yes" or "No" from the below dropdowns.) Product Period Cost Direct Direct Factory Selling Cost Cost Materials Labor Overhead Expense Eggs used o make heesecakes Baker's wages Delivery drive wages Depreciation of office computers Power to run he cheesecake ovens President's salary Sales commissions Factory supervisor salary Financial Statements Charles found some sample income statements and balance sheets on the Internet, and asked which of them might be most appropriate for a manufacturing business like his. Review income statements A and B, and balance sheets C and D. Determine which income statement and balance sheet would be most appropriate for a manufacturing business like Able Baker Charlie Company. Income Statement A Sample Company A 2arlie Company, to and the general onfused about the p him run his etween managerial ow to set up his fill in some missing ociated with e rather d future rvals follows. Decide on using the table Factory Selling Administrative Direct Indirect Prime Conversion Overhead Expense Expense Cost Cost Cost Cost eets on the Internet, ufacturing business s C and D. e most appropriate + 2 . . .Supplies 2,100 ? Land 17,000 Total assets $55,900 Liabilities Accounts payable $17,800 Stockholders' Equity Common stock $19,000 Retained earnings 19,100 Total stockholders' equity 38,100 Total liabilities and stockholders' equity $55,900 Balance Sheet D Sample Company D Balance Sheet December 31, 20Y8 Assets Cash $20,800 Accounts receivable (net) 10,000 Inventory: Direct materials $2,500 Work in process 1,500 Finished goods 2,000 Total inventory 6,000 Supplies 2,100 Land 17,00 Total assets $55,900 Liabilities Accounts payable $17,800 Stockholders' Equity Common stock $19,000 Retained earnings 19,100 Total stockholders' equity 38,100 Total liabilities and stockholders' equity $55,900 Which income statement is most appropriate for a manufacturing business? Which balance sheet is most appropriate for a manufacturing business? Costs and Balances At the end of February, after the second month of operations of Able Baker Charlie Company, Charles shows you the data he's collected, but he was unable to figure out some of the amounts. Review the following data and fill in the missing amounts on the chart for Able Baker Charlie Company. Note: It may be helpful to use T accounts to map the flow of the amounts through the manufacturing accounts and solve for the missing dollar values. It may also be helpful to review the steps for determining the cost of materials used, total manufacturing cost incurred, and cost of goods manufactured. Data for February Decrease in materials inventory $3,000 Materials inventory on Feb. 28 50% of materials inventory on Jan. 31 Direct materials purchased $12,000 Direct materials used 3 times the direct labor incurred Total manufacturing costs incurred in period $29,400 Total manufacturing costs incurred in period 70% of Cost of Goods Manufactured Total manufacturing costs incurred in period $10,000 less than Cost of Goods Sold Account Balances Account Jan. 31 Feb. 28 Costs Incurred Materials Inventory Direct Materials Used Work in Process Inventory 21,000 Direct Labor Incurred Finished Goods Inventory 15,500 Factory Overhead Incurred Cost of Goods Sold Next Assignment Score: 0.0% Email Instructor Save and Exit Submit Assignment for Grading 2 .. .6:17 1 v2.cengagenow.com Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31 Sales $1,360,000 Variable cost of goods sold: Variable cost of goods manufactured $560,000 Ending inventory (84,000) Total variable cost of goods sold (476,000) Manufacturing margin $884,000 Variable selling and administrative expenses (238,000) Contribution margin $646,000 Fixed costs: Fixed manufacturing costs $240,000 Fixed selling and administrative expenses 65,00 Total fixed costs (305,000) Operating income $341,000 Method Comparison Review the income statements on the Absorption Statement and Variable Statement, then complete the following table. The company's sales price per unit is $80, and the number of units in ending inventory is 3,000. There was no beginning inventory. Item Amount Number of units sold Variable sales and administrative cost per unit Number of units manufactured Variable cost of goods manufactured per unit Fixed manufacturing cost per unit Manufacturing Decisions Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing operating income, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision- making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful. All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs. The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement and the Variable Statement, he notices that the operating income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company's capacity for manufacturing, in the coming year. He reasons that this will boost operating income and satisfy the company's owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0". 1. Use the income statements on the Absorption Statement and Variable Statement to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels. Operating Income Original Production Original Production Additional 10,000 Additional 10,000 Level-Absorption Level-Variable Units-Absorption Units-Variable 2. What is the change in operating income from producing 10,000 additional units Previous Assignment Score: 0.0% Email Instructor Save and Exit Submit Assignment for Grading 26:17 1 v2.cengagenow.com Number of units manufactured Variable cost of goods manufactured per unit Fixed manufacturing cost per unit Manufacturing Decisions Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing operating income, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision- making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful. All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs. The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement and the Variable Statement, he notices that the operating income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company's capacity for manufacturing, in the coming year. He reasons that this will boost operating income and satisfy the company's owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0". 1. Use the income statements on the Absorption Statement and Variable Statement to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels. Operating Income Original Production Original Production Additional 10,00 Additional 10,000 Level-Absorption Level-Variable Units-Absorption Units-Variable 2. What is the change in operating income from producing 10,000 additional units under absorption costing? $ 3. What is the change in operating income from producing 10,000 additional units under variable costing? $ 4. What would be your recommendation to the production manager? a. Do not produce the extra 10,000 units. The increase in operating income under absorption costing is due to fixed manufacturing costs being held in inventory, and the additional inventory will lead to higher handling, storage, financing, and obsolescence costs. b. Produce the extra 10,000 units. Operating income will be increased, and the production manager will receive praise for creating higher profits. c. Do not produce the extra 10,000 units. Operating income does not change under absorption costing when the additional units are produced. d. Produce the extra 10,000 units. It's always a good idea to have extra units on hand and keep the factory operating at capacity, even if all the units are not sold. Previous Assignment Score: 0.0% Email Instructor Save and Exit for Grading 2
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