On December 30, 2009, a bomb blast destroyed the bulk of the accounting records of the Horne Division, a small one-product manufacturing division that uses standard costs and flexible budgets. All variances are written off as additions to (or deductions from) income; none is prorated to inventories. In addition, the chief accountant mysteriously disappeared. You have the task of reconstructing the records for the year 2009. The general manager has said that the accountant had been experimenting with both absorption costing and variable costing. The records are a mess, but you have gathered the following data (simplified here to save computations) for 2009: Cash, December 31, 2009 $ 10 Sales 128,000 Actual fixed indirect manufacturing costs 21,000 Accounts receivable, December 31, 2009 20,000 Standard variable manufacturing costs per unit 1 Variances from standard for all variable manufacturing costs 5,000 U Operating income, absorption-costing basis 14,400 Accounts payable, December 31, 2009 18,000 Gross margin, absorption costing at standard (before deducting variances) 22,400 Total liabilities 100,000 Unfavorable spending variance, fixed manufacturing costs 1,000 Notes receivable from chief accountant 4,000 Contribution margin, at standard (before deducting variances) 48,000 Direct material purchases, at standard prices 50,000 Actual marketing and administrative costs (all fixed) 6,000 Required: Using a word processor or spreadsheet, show your work that supports your answers. 1 Operating income on a variable-costing basis. 2 Number of units sold. 3 Number of units produced. 4 Number of units used as the denominator level to obtain fixed manufacturing overhead allocation rate per unit on absorption-costing basis. 5 Did inventory (in units) increase or decrease? Explain. 6 By how much in dollars did the inventory level change (a) under absorption costing? (b) under variable costing? 7 Variable manufacturing cost of goods sold, at standard cost. 8 Manufacturing cost of goods sold at standard cost, absorption costing.

Review of absorption costing, variable costing, and analysis of variances. On December 30, 2009, a bomb blast destroyed the bulk of the accounting records of the Horne Division, a small one-product manufacturing division that uses standard costs and flexible budgets. All variances are written off as additions to (or deductions from) income; none is prorated to inventories. In addition, the chief accountant mysteriously disappeared. You have the task of reconstructing the records for the year 2009. The general manager has said that the accountant had been experimenting with both absorption costing and variable costing. The records are a mess, but you have gathered the following data (simplified here to save computations) for 2009: 1 Cash, December 31, 2009 $ 2 Sales Using a 3 Actual fixed indirect manufacturing costs 4 Accounts receivable, December 31, 2009 word 5 Standard variable manufacturing costs per unit 6 Variances from standard for all variable manufacturing costs 7 Operating income, absorption-costing basis 8 Accounts payable, December 31, 2009 9 Gross margin, absorption costing at standard (before deducting variances) 10 Total liabilities 11 Unfavorable spending variance, fixed manufacturing costs 12 Notes receivable from chief accountant 13 Contribution margin, at standard (before deducting variances) 14 Direct material purchases, at standard prices 15 Actual marketing and administrative costs (all fixed) 10 128,000 21,000 20,000 1 5,000 U 14,400 18,000 22,400 100,000 1,000 4,000 48,000 50,000 6,000 processor or spreadsheet, show your work that supports your answers. Print this page and Required: Solve for the following (these do not necessarily have to be solved in any particular order. Ignore income taxes.) Each correct answer is worth 6 points for a max total of 48 points. Partial credit within any question is not available. Thus, each question is worth either zero or 6 points. staple your work to it. Submit no later than 12.6.10 1 2 3 4 Operating income on a variable-costing basis. Number of units sold. Number of units produced. Number of units used as the denominator level to obtain fixed manufacturing overhead allocation rate per unit on absorption-costing basis. 5 Did inventory (in units) increase or decrease? Explain. 6 By how much in dollars did the inventory level change (a) under absorption costing? (b) under variable costing? 7 Variable manufacturing cost of goods sold, at standard cost. 8 Manufacturing cost of goods sold at standard cost, absorption costing. Hints: In all cases, operating income should be calculated at actual cost. Exhibit 9-6 on page 395 may offer some conceptual clues. Remember to apply your understanding of the elements and events which cause operating income to differ between AC and VC. 9-3