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 costing or variable costing. Select whether the following characteristics are most often associated with absorption costing or variable costing. Required under generally accepted accounting principles (GAAP) rm\" w/ Often used for internal use in decision making 'W 9" V Cost of goods manufactured includes only variable manufacturing costs rm 9" J Used in reports prepared for external users rm\" J Fixed factory overhead costs are not part of cost of goods manufactured Nahum\" 4 Both fixed and variable factory costs are included in cost of goods sold and inventory Absorption Costing w J Feedbaw Absorption Statement Absorption costing does not distinguish between variable and xed costs. All manufacturing costs are included in the cost of goods sold. Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31 Sales $1,200,000 Cost of goods sold: Cost of goods manufactured $800,000 Ending inventory (160,000) Total cost of goods sold (640,000) Gross prot $560,000 Selling and administrative expenses (305,000) Operating income $255,000 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 Costing Income Statement For the Year Ended December 31 Sales $1,200,000 Variable cost of goods sold: Variable cost of goods manufactured $560,000 Ending inventory (112,000) Total variable cost of goods sold (448,000) Manufacturing margin $752,000 Variable selling and administrative expenses (240,000) Contribution margin $512,000 Fixed costs: Fixed manufacturing costs $240,000 Fixed selling and administrative expenses 65,000 Total fixed costs (305,000) Operating income $207,000 Method Comparison Review the income statements on the Absorption Statement and Variable Statement, then complete the following table. The company's sales price per unit is $75, and the number of units in ending inventory is 4,000. There was no beginning inventory.Item Amount Number of units sold Variable sales and administrative cost per unit E w/ Number of units manufactured Variable cost of goods manufactured per unit V/ Fixed manufacturing cost per unit Q v/ M A 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 efciencies or inefciencies. 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 level of management, costs may be controllable costs or noncontrollable costs. The production manager for Saxon, Inc. is worried because the company is not showing a high enough prot. 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 sufciently 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, enter "0". 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. Operating Income Original Production Original Production Additional 10,000 Additional 10,000 Level-Absorption Level-Variable Units-Absorption Units-Variable 2. what is the change in operating income from producing 10,000 additional units under absorption costing? D 3. what is the change in operating income from producing 10,000 additional units under variable costing? D 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 handling, storage, financing, and obsolescence costs. b. Produce the extra 10,000 units. Operating income will be increased, and the production manager will receive praise for creating higher prots. c. Do not produce the extra 10,000 units. Operating income does not change under absorption costing when the additional units are produced. d. Produce the extra 10,000 units. It's always a good idea to have extra units on hand and keep the factory operating at capacity, even if all the units are not sold. la VJ Forecast Sales Volume and Sales Budget For 20Y8, Raphael Frame Company prepared the sales budget that follows. At the end of December 20Y8, the following unit sales data were reported for the year: Unit Sales 8" x 10" 12" x 16" Frame Frame East 28,980 15,582 Central 7,416 5,194 West 6,402 4,223 Raphael Frame Company Sales Budget > For the Year Ending December 31, 20Y8 Unit Unit Sales Product and Area Selling Total Sales Volume Price 8" x 10" Frame: East 27,600 $15 $414,000 Central 7,200 15 108,000 West 6,600 15 99,000 Total 41,400 $621,000 12" x 16" Frame: East 14,700 $16 $235,200 Central 5,300 16 84,800 West 4,100 16 65,600 Total 24,100 $385,600 Total revenue from sales $1,006,600 For the year ending December 31, 20Y9, unit sales are expected to follow the patterns established during the year ending December 31, 20Y8. The unit selling price for the 8" x 10" frame is expected to increase to $16 and the unit selling price for the 12" x 16" frame is expected to increase to $18, effective January 1, 2019. Required: 1. Compute the increase or decrease of actual unit sales for the year ended December 31, 20Y8, over budget. Use the minus sign to indicate a decrease in amount and percent. Round percents to the nearest whole percent. Unit Sales, Increase (Decrease) Year Ended 20Y8 Actual Over Budget Budget Actual Sales Amount Percent 8" x 10" Frame: East Central 0/ West % 12" x 16" Frame: East o/o DOO 000 Central o/c West %2. Assuming that the increase or decrease in actual sales to budget indicated in part (1) is to continue in 20Y9, compute the unit sales volume to be used for preparing the sales budget for the year ending December 31, 20Y9. Use the minus sign to indicate a decrease in percent. Round budgeted units to the nearest whole unit. 20Y8 Percentage 20Y9 Actual Increase Budgeted Units (Decrease) Units (rounded) 8" x 10" Frame: East \"la Central % West % 12" x 16" Frame: East % Central % West \"/u M HUB UUU HUB UUU DUB ' 3. Prepare a sales budget for the year ending December 31, 20Y9. Raphael Frame Company Sales Budget For the Year Ending December 31, 20Y9 Product and Area Unit Sales Volume Unit Selling Price Total Sales 8" x 10" Frame: C] D as: Q l: [:1 Total E $[:] :1 24:] 25C] West Q [j [:1 Total :1 Q: Total revenue from sales $C} Cash Budget The controller of Bridgeport Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information: September October November Sales $99,000 $128,000 $167,000 Manufacturing costs 42,000 55,000 60,000 Selling and administrative expenses 35,000 38,000 63,000 Capital expenditures 40,000 The company expects to sell about 10% of its merchandise for cash. of sales on account, 70% are expected to be collected in the month following the sale and the remainder the following month (second month following sale). Depreciation, insurance, and property tax expense represent $10,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in January, and the annual property taxes are paid in December. of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month. Current assets as of September 1 include cash of $38,000, marketable securities of $53,000, and accounts receivable of $110,700 ($23,700 from July sales and $87,000 from August sales). Sales on account for July and August were $79,000 and $87,000, respectively. Current liabilities as of September 1 include $10,000 of accounts payable incurred in August for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $15,000 will be made in October. Bridgeport's regular quarterly dividend of $10,000 is expected to be declared in October and paid in November. Management desires to maintain a minimum cash balance of $37,000. Required: 1. Prepare a monthly cash budget and supporting schedules for September, October, and November. Assume 360 days per year for interest calculations. Bridgeport Housewares Inc. Cash Budget For the Three Months Ending November 30 September October November Estimated cash receipts from: Cash sales Collection of accounts receivable Total cash receipts Less estimated cash payments for: Manufacturing costs Selling and administrative expenses Capital expenditures Other purposes: Income tax 1020006 0 00 100 00000 000 Dividends Total cash payments Cash increase or (decrease) V Plus cash balance at beginning of month Cash balance at end of month Less minimum cash balance Excess or (deficiency) $