Diamond Inc. is a semiconductor company based in Winnipeg. During the year, it produced a new router system for its corporate clients. The average wholesale selling price of the system is $1,150 each. For the year, Diamond estimates that it will sell 9,580 router systems and so produces 9,580 units. Actual sales are 8,540 units. Diamond's actual costs are as follows. (Click icon to view the actual costs data.) Actual costs data t in each input cell. If the balance of an account is zero, enter "0" in the appropriate field.) $55 44 110 Variable costs per unit: Manufacturing cost per unit produced Direct materials Direct manufacturing labour Manufacturing overhead Marketing cost per unit sold Fixed costs: Manufacturing costs R&D Marketing 85 1,395,860 975,120 3,124,680 Print Done Requirement 1. Calculate the operating income under variable costing. (Enter an amount in each input cell. If the balance of an account is zero, enter "0" in the appropriate field.) Variable-Costing Based Operating Income Statement Revenue Requirement 2. Each router unit produced is allocated $154 in fixed manufacturing costs. If the production-volume variance is written off to cost of goods sold and there are no price, rate, or efficiency variances, calculate the operating income under absorption costing. (Enter an amount in each input cell. If the balance of an account is zero, enter "O" in the appropriate field.) Absorption-Costing Based Operating Income Statement Revenue Requirement 3. Explain the differences in operating incomes obtained in requirement 1 and requirement 2. (Fill in the table below to assist with comparison.) Operating income under absorption costing Operating income under variable costing Difference in operating income under absorption vs. variable costing Under absorption costing: Fixed manufacturing costs in ending inventory Fixed manufacturing costs in beginning inventory 0 Change in fixed manufacturing cost between ending and beginning inventory Operating income under absorption costing is than the operating income under variable costing because during the year inventories increased by units, and under absorption costing, fixed manufacturing overhead remained in the ending inventory and resulted in a V cost of goods sold (relative to variable costing). As shown above, the difference in the two operating incomes is V the difference in the fixed manufacturing costs included in ending vs. beginning inventory (under absorption costing). Requirement 4. Diamond's management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. What incentives will this create for the supervisors? Do you think this new bonus plan is a good idea? Explain briefly. 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 Diamond's supervisors. It takes into account both variable costs and fixed costscosts that the supervisors should in the long-runand therefore, it is a complete measure than contribution margin which fixed costs (and may cause the supervisors to pay less attention to fixed costs). The downside of usi absorption-costing-based gross margin is the supervisor's temptation to use to control the gross marginin particular, to shore up a sagging gross margin by building up 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 performance measures such as the ratio of ending to beginning inventory
