Mastery Problem: Variable Cesting for Management Analysis Absorption vs. Variable Operating income is one of the most importantiers reported by a company. Depending on the decision-making needs of management, operating wone can be determined using absorption costing or variable costing Select whether the following characters are most often a cid with absorption costing or variable costing Required under generally accepted accounting principles (GAAP) often used for internal use in decision making Cost of goods manufactured includes only variable manufacturing costs Used in reports prepared for external users Fored factory overhead costs are not part of cost of goods manufactured Both fixed and variable factory costs are included in cost of goods sold and inventory 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 $1,360,000 Sales Cost of goods sold: Cost of goods manufactured Ending Inventory $840,000 (126,000) Total cost of goods sold (714,000) Gross profit $646.000 Selling and administrative expenses (320.000) Operating income $326,000 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 Statement Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement indudes a computation of manufacturing margin Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31 Sales $1,160,000 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 (255,000) Contribution margin $595,000 Fixed costs: Fored manufacturing costs $240,000 Fored selling and administrative expenses 65.000 Total fixed costs (305.000) $290,000 Operating income Method Comparison runt is $80, and the number of units in ending investory is 3,000 Review the income statements on the Absorption Statement and Variable Statement then complete the following table. The company's sales prie There was no beginning inventory Item Number of units sold Variable sales and administrative cost per unit Number of units manufactured Variable cost of goods manufactured per unit Foxed manufacturing cost per unit Al costs are control the long run by someone within a business for a l l of management, maybe o the ring incomes higher on the tow boost operating income and say the c h n sidering emisc tugther h e c matured unter the contact price 1. Use the income arents on the absorption Statement and State to complete the following for the orginal productive the prepare incom m ents a production 10.000 Original Production Level-Absorption Operating income Original Production Aditional 10.000 Level Variatie Uits-Absorption Additional 10,000 Units-Variable 2. What is the change in rating income from producing 10.000 d onants under absorption cost ? 3. What is the change in operating income from produce 10,000 a n al units under vanable con 4. What would be your recommendation to the production manager to conting is to manufacturing costs being inventory and the detai l her manding s to a. Do not produce the extra 10.000 unts. The increase in orang income storage facing and obsolescence costs b. Produce the extra 10.000 units Operating income will be increased, and the production manager will receive praise for creating Do not produce the extra 10.000 units Operating income does not changer under absorption costing when the con t re Produce the extra 10.000 goed to have t o hand and the factory corting at t h e
