Absorption Statement Absorption costing does not distinquish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold. Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufocturing marpin. Review theincome statements on the Absorptionstatement and Iarlabie statement, then complete the following table. The company sales price per unit is $75, and the number of units in:ending inventory is 4,000. There wassino beginning inventory. Manutacturing 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 controllabie in the long run by someone within a business. For a given level of management, costs may be contrallable costsi 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 profitabie. Although the total units manufactured changes, asstume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions ( ) -(4) that followi If the answer is zero, enter 0 1. Use the income statements on the Absorption Starement and Variable statement to complete the following table for the orioinal 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. 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. 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? 5 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 handiling. storage, financing, and obsolescence costs. b. Produce the extra 10,000 units. Operating income will be increased, and the production manaper will recelve praise for creating higher profits. c. Do not produce the extre 10,000 units, Operating income does not change under absorption costing when the additional unitg are produced. d. Produce the extra 10,000 units. It's always a good ides to have extra units on hand and keep the factory operating at capacity, even if alf the umit. are not sold
