Mastery Problem: Variable Costing for Management Analysis Absorption vs. Variable Operating Income is one of the most important items reported by a company. Depending on the decision-making needs of management operating income can be determined using absorption conting or variable costing Select whether the following characteristics are most often associated with absorption costing or variable costi Hequired under generally accepted accounting principles (GAAP) Absorption Costing Often used for internal use in decision making Variable Costing Cost of goods manufactured includes only variable manufacturing costs Variable Costing Used in reports prepared for external users Absorption Costing Fixed factory overhead costs are not part of cost of goods manufactured Variatile Costing Both fixed and variable factory costru induded in cost of goods sold and loventory Absorption Costing Absorption Statement Abortion costing does not distinguish between variable and red costs. All manufacturing costs are included in the cost of goods sold Saxon, Inc Absorption Costing Income Statement For the Year Ended December 31 Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31 Sales $1,125,000 $800,000 C200,000) Cost of goods sold Cost of goods manufactured Ending inventory Total cost of goods sold Gross profit Selling and administrative expenses Operating income Variable Statement (600,000) $525.000 (295.000) $250,000 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 51.125,000 Variable cost of goods sold: Variable cost of goods manufactured 5560,000 (140,000) Ending inventory LE Variable Costing Income Statement For the Year Ended December 31 Sales $1,125,000 Variable cost of goods soldi Variable cost of quod manufactured $560,000 Ending inventory (140,000) Total variable cost of goods sold (420,000) Manufacturing margin $705.000 Variable selling and administrative expenses (210,000) Contribution margin 1495,000 tiedot: Freed manufacturing costs $240.000 Fixed selling and administrative expenses 65.000 Totalled costs (105,000) Operating income $190,000 Method Comparison Review the income statements on the Auserpoon Statement and let the complete the following table. The company's sale price per unit is $75, and the number of unitsin ending ventory is 5.000 There was no beginning inventory Item Amount Fixed selling and administrative expenses 65,000 Yotal costs (305.000) Operating income $190,000 Method Comparison Review the income statements on the Absorption Statement and Varber Statement, thest complete the following table. The company's sale price per unit is $75, and the number of units to die Inventory I 5.000. There was no beginning inventory Item Amount Number of its old Variables and administrative cost per Number of units manufactured Variate cost of good manufactured it Fixed manufacturing compert Manufacturing Decisions Whenever the manufactured differ from the finished invested in an operating loco och Increases and decreases could be misinterreted as operating licences of infectade decision to should be carefully analyzed in deciding whether absorption or variable costing reporting would be more se care controlable in the long run by someone with bones. Forgivenlever management costs wees encontro con Punem 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 eflidendes 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 tovel of management, costs may be controllable costs or noncontrollable costs The production manager for Saxon, Inc. is worried because the company is not showing 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 cont 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 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, entero". 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 fled costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels Original Production Level-Absorption Operating Income Original Production Additional 10,000 Level-Variable Units-Absorption Additional 10,000 Units-Variable 2. What is the change in operating income from producing 10.000 aditional units under absorption costing! 3. What is the change in operating income from producing 10,000 additional units under variable conting! 4. What would be your recommendation to the production mancat Original Production Level Absorption Original Production Level-Variable Antonal 10,000 Units Absorption Anal 10 KIO Units Variable 2. What is the change in operating income from producing 10.000 additional units under absorption conting? What is the change in operating Income from producing 10.000 additional units under variabile conting? 4. What would be your recommendation to the production manager aDenat produce the extra 10,000 units. The increase in operating income under tsorption couting is doe to fived manufacturing costs being held in inventory, and the additional Inventory will lead to higher handling, stora financing and obsolescence costu. Produce the extra 10,000 units Operating income is be increased and the production manager will receive praise for creating higher profit Damat produce the extra 10,000 Operating income does not change onder absorption costing when the additional units are produced d. Produce the extra 10,000 units. I was good idea to have extra units on hand and the factory Operating at capacity, even if all the units are not sold