Question
The Alabang Division of Triumph, Inc. uses Absorption Costing for profit reporting. The general manager of the Alabang is concerned about meeting the income objectives
The Alabang Division of Triumph, Inc. uses Absorption Costing for profit reporting. The general manager of the Alabang is concerned about meeting the income objectives of the division. At the beginning of the reporting period, the division had an adequate supply of inventory. The general manager had decided to increase production of goods in the plant in order to allocate fixed manufacturing cost over a greater number of units. Unfortunately, the increased production can not be sold and will increase the inventory. However, the impact on earnings will be positive because the lower cost per unit will be matched against sales. GM has come to the controller to determine exactly how much additional production is required in order to increase net income enough to meet the division's profit objectives. The controller analyzes the data and determines that the inventory be increased by 30% in order to absorb enough fixed costs and meet the income objective. The controller reported this to the division manager.
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