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Absorption Statement Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold. Saxon, Inc.

Absorption Statement
Absorption costing does not distinguish between variable and fixed 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 of goods manufactured $840,000
Ending inventory (126,000)
Total cost of goods sold (714,000)
Gross profit $646,000
Selling and administrative expenses (286,000)
Operating income $360,000
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 $1,360,000
Variable cost of goods sold:
Variable cost of goods manufactured $600,000
Ending inventory (90,000)
Total variable cost of goods sold (510,000)
Manufacturing margin $850,000
Variable selling and administrative expenses (221,000)
Contribution margin $629,000
Fixed costs:
Fixed manufacturing costs $240,000
Fixed selling and administrative expenses 65,000
Total fixed costs (305,000)
Operating income $324,000
Method Comparison
Review the income statements on the Absorption Statement and Variable Statement, then complete the following table. The companys 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 fill in the blank 9b63ad079f9a046_1
Variable sales and administrative cost per unit $fill in the blank 9b63ad079f9a046_2
Number of units manufactured fill in the blank 9b63ad079f9a046_3
Variable cost of goods manufactured per unit $fill in the blank 9b63ad079f9a046_4
Fixed manufacturing cost per unit $fill in the blank 9b63ad079f9a046_5
Question Content Area
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 companys capacity for manufacturing, in the coming year. He reasons that this will boost operating income and satisfy the companys 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
Level-Absorption Original Production
Level-Variable Additional 10,000
Units-Absorption Additional 10,000
Units-Variable
$fill in the blank eb31b0086041f8e_1
$fill in the blank eb31b0086041f8e_2
$fill in the blank eb31b0086041f8e_3
$fill in the blank eb31b0086041f8e_4
2. What is the change in operating income from producing 10,000 additional units under absorption costing?
$fill in the blank eb31b0086041f8e_5
3. What is the change in operating income from producing 10,000 additional units under variable costing?
$fill in the blank eb31b0086041f8e_6
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 th

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