LifeSpan is dedicated to benefiting the way people work, exercise, and live in sustainable, healthy ways." (from their website). LifeSpan's factory outside of Salt Lake City, UT manufactures a single line of treadmills, model TR4000i. The factory uses a standard costing system, in which all over/under applied overhead costs are closed to cost of goods sold at the end of each month. The factory uses a weighted average cost approach over its entire inventory, both WIP and finished goods^* and allocates fixed overhead based on machine hours.

 

LifeSpan's ANNUAL budget expects total production of 2,400 treadmills, using 48,000 machine hours. The factory expects to have $1,344,000 of fixed overhead during the year. LifeSpan expects all production and costs to be spread evenly during the year.

During the last week of February, the plant was shut down for maintenance, so at the start of March, there was no work-in-process inventory. There was finished goods inventory of 28 treadmills, with a total fixed cost (under absorption costing) of $16,184. During March, the factory completed 220 treadmills, and has 10 treadmills remaining in work-in-process inventory. The WIP is 40% complete with respect to fixed overhead.

Actual fixed overhead for the factory in March is $127,680 and actual machine hours 4,256. The factory sold 230 treadmills during the month.

1. How much fixed cost was included in inventory on LifeSpan's March 31 balance sheet,

a) Under absorption costing?

b)  Under variable costing?

2.How much fixed cost is included in cost of goods sold on LifeSpan's income statement for the month ended March 31,

a) Under absorption costing?

b) Under variable costing?      

 

3. The factory manager is currently considering a modernization program which would significantly reduce the fixed overhead at the plant. The modernization program is somewhat risky however and so she is unsure whether or not the reduced costs will be sufficient to offset the risk. Assuming that the factory manager is evaluated (and paid) based on the profitability of the plant, and that the risks are the same regardless of whether she uses absorption or variable costing, under which system would the factory manager be MORE likely to adopt the modernization program? Briefly your reasoning.

Absorption Variable