Mastery Problem: Variable Costing for Management Analysis Absorption vs. Variable Method Comparison Absorption Statement Variable Statement Manufacturing Decisions PL Absorption Statement x 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 Sales $1,125,000.00 2 Cost of goods sold: 3 Beginning inventory Cost of goods manufactured $0.00 4 840,000.00 (210,000.00) Ending inventory cost of goods sold 1 Gross profit 630,000.00 $495.000.00 275.000,00 8 Selling and administrative expenses 9 Income from operations $220,000.00 Variable Statement X 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 1 Sales $1,125,000.00 2 Variable cost of goods sold: 3 Beginning inventory $0.00 4 Variable cost of goods manufactured 600,000.00 (150,000.00) 5 Ending inventory Total variable cost of goods sold 7 Manufacturing margin 450,000.00 $675,000.00 8 Variable selling and administrative expenses 210,000.00 Contribution margin 0.00 10 Fixed costs: 11 Fixed manufacturing costs $240,000.00 12 Fixed selling and administrative expenses 65,000.00 13 Total fixed costs 305,000.00 14 Income from operations $160,000.00 Manufacturing Decisions Shaded cells have feedback. X Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing income from operations, such increases and decreases could be misinterpreted as operating efficiencies 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 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 profit. Looking at the income statements on the Absorption Statement panel and the Variable Statement panel, he notices that the income from operations 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 income from operations 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, enter "0" 1. Use the income statements on the Absorption Statement and Variable Statement panels 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. Original Production Level-Absorption $1,500 X Income From Operations Original Additional Production 10,000 Level-Variable Units-Absorption $14 X $2,000 X Additional 10,000 Units-Variable $12 X Points: 014 Contribution Margin Data For planning and control purposes, managers often compare planned and actual contribution margin. Variable costing is used as a basis for such analyses. Examine the following contribution margin data, and then complete the Contribution Margin Analysis panel. Saxon, Inc. Contribution Margin Data Schedule Actual Planned Sales $1,125,000 $1,190,000 Variable cost of goods sold $450,000 $462.000 Variable selling and administrative expenses 210,000 154,000 Total $660,000 $616,000 Contribution margin $465,000 $574,000 Number of units sold 15,000 14,000 Per unit: Sales price $75.00 $85.00 Variable cost of goods sold 30.00 33.00 Variable selling and administrative expenses 14.00 11.00 Contribution Margin Analysis Shaded cells have feedback. X Contribution margin analysis focuses on explaining the differences between planned and actual contribution margins, considering the quantity factor and the unit price factor. After reviewing the data on the Contribution Margin Data panel, complete the following contribution margin analysis. For those boxes in which you must enter subtracted or negative numbers use a minus sign. Saxon, Inc. Score: 4/44 Contribution Margin Analysis For the Year Ended December 31 1 Planned contribution margin $574,000.00 2 Effect of changes in sales: 3 Sales quantity factor $7,000.00 4 Unit price factor 15,000.00 5 Total effect of changes in sales 650,000.00 6 Effect of changes in variable cost of goods sold: 7 Variable cost quantity factor Unit cost factor 9 Total effect of changes in variable cost of goods sold 10 Effect of changes in selling and administrative expenses: 11 Variable cost quantity factor 12 Unit cost factor 13 Total effect of changes in selling and administrative expenses 14 Actual contribution margin $510,000.00 Mastery Problem: Variable Costing for Management Analysis Absorption vs. Variable Method Comparison Absorption Statement Variable Statement Manufacturing Decisions PL Absorption Statement x 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 Sales $1,125,000.00 2 Cost of goods sold: 3 Beginning inventory Cost of goods manufactured $0.00 4 840,000.00 (210,000.00) Ending inventory cost of goods sold 1 Gross profit 630,000.00 $495.000.00 275.000,00 8 Selling and administrative expenses 9 Income from operations $220,000.00 Variable Statement X 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 1 Sales $1,125,000.00 2 Variable cost of goods sold: 3 Beginning inventory $0.00 4 Variable cost of goods manufactured 600,000.00 (150,000.00) 5 Ending inventory Total variable cost of goods sold 7 Manufacturing margin 450,000.00 $675,000.00 8 Variable selling and administrative expenses 210,000.00 Contribution margin 0.00 10 Fixed costs: 11 Fixed manufacturing costs $240,000.00 12 Fixed selling and administrative expenses 65,000.00 13 Total fixed costs 305,000.00 14 Income from operations $160,000.00 Manufacturing Decisions Shaded cells have feedback. X Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing income from operations, such increases and decreases could be misinterpreted as operating efficiencies 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 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 profit. Looking at the income statements on the Absorption Statement panel and the Variable Statement panel, he notices that the income from operations 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 income from operations 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, enter "0" 1. Use the income statements on the Absorption Statement and Variable Statement panels 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. Original Production Level-Absorption $1,500 X Income From Operations Original Additional Production 10,000 Level-Variable Units-Absorption $14 X $2,000 X Additional 10,000 Units-Variable $12 X Points: 014 Contribution Margin Data For planning and control purposes, managers often compare planned and actual contribution margin. Variable costing is used as a basis for such analyses. Examine the following contribution margin data, and then complete the Contribution Margin Analysis panel. Saxon, Inc. Contribution Margin Data Schedule Actual Planned Sales $1,125,000 $1,190,000 Variable cost of goods sold $450,000 $462.000 Variable selling and administrative expenses 210,000 154,000 Total $660,000 $616,000 Contribution margin $465,000 $574,000 Number of units sold 15,000 14,000 Per unit: Sales price $75.00 $85.00 Variable cost of goods sold 30.00 33.00 Variable selling and administrative expenses 14.00 11.00 Contribution Margin Analysis Shaded cells have feedback. X Contribution margin analysis focuses on explaining the differences between planned and actual contribution margins, considering the quantity factor and the unit price factor. After reviewing the data on the Contribution Margin Data panel, complete the following contribution margin analysis. For those boxes in which you must enter subtracted or negative numbers use a minus sign. Saxon, Inc. Score: 4/44 Contribution Margin Analysis For the Year Ended December 31 1 Planned contribution margin $574,000.00 2 Effect of changes in sales: 3 Sales quantity factor $7,000.00 4 Unit price factor 15,000.00 5 Total effect of changes in sales 650,000.00 6 Effect of changes in variable cost of goods sold: 7 Variable cost quantity factor Unit cost factor 9 Total effect of changes in variable cost of goods sold 10 Effect of changes in selling and administrative expenses: 11 Variable cost quantity factor 12 Unit cost factor 13 Total effect of changes in selling and administrative expenses 14 Actual contribution margin $510,000.00