The Mavis Company uses an absorption-costing system based on standard costs. Total variable manufacturing cost, including direct material cost, is $3 per unit; the standard production rate is 10 units per machine-hour. Total budgeted and actual fixed manufacturing overhead costs are $420,000. Fixed manufacturing overhead is allocated at $7 per machine-hour ($420,000 / 60,000 machine-hours of denominator level). Selling price is $5 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold, is $1 per unit. Fixed operating (nonmanufacturing) costs are $120,000. Beginning inventory in 2014 is 30,000 units; ending inventory is 40,000 units. Sales in 2014 are 540,000 units. The same standard unit costs persisted throughout 2013 and 2014. For simplicity, assume that there are no price, spending, or efficiency variances. Read the requirements. (After you hit continue, the screen may take you below the beginning of the next step. If so, scroll back up to the top of the step.) Requirement 4. Graph how fixed manufacturing overhead is accounted for under absorption costing. That is, there will be two lines: one for the budgeted fixed manufacturing overhead (which is equal to the actual fixed manufacturing overhead in this case) and one for the fixed manufacturing overhead allocated. Show the production-volume variance in the graph. Begin by drawing two lines: one for the budgeted fixed manufacturing overhead and one for the fixed manufacturing overhead allocated. Next shade the areas, by selecting the region shading tool, that would represent the favorable and unfavorable production-volume variance areas. Lastly, label the two lines and two shaded areas. (Enlarge the graph to medium size and use the line tool and region shading tool buttons displayed to draw the graph.) Click to enlarge graph 5125 000 O 15,00030,00045,00060,00075,000 Machine-hours Requirement 5. Critics have claimed that a widely used accounting system has led to undesirable buildups of inventory levels. (a) Is variable costing or absorption costing more likely to lead to such buildups? Why? (b) What can be done to counteract undesirable inventory buildups? a) Is variable costing or absorption costing more likely to lead to such buildups? Why? V enables managers to costing is more likely to lead to buildups of inventory. by building up inventory which V included in the current period's cost of goods sold. (b) Select three things that can be done to counteract undesirable inventory buildups. |(540,000 $5) Sales 2,700,000 Cost of goods sold: Beginning inventory (30,000 x $3.70) 111,000 Cost of goods produced (550,000 x $3.70) Cost of goods available for sale Less: Ending inventory (40,000 $3.70) Cost of goods sold: 2,035,000 2,146,000 148,000 1,998,000 |(600,000 - 550,000) $0.70 Add: Unfavourable production volume variance 35,000 Adjusted Cost of goods sold 2,033,000 Gross Margin 667,000 Less: Selling and administrative costs: Variable (540000 $1) 540,000 Fixed 660,000 7,000 120,000 Operating income Working Note-1 Direct material cost per unit 3.00 Fixed manufacturing overhead cost per unit 0.70 Production cost per unlt 3.70 %24 Unit produced = Units sold + Ending inventory - Beginning inventory = 540,000 + 40,000 - 30,000 = 550,000 Budgeted machine hours 60000 Production per machine hour 10 units Budgeted production 600000 Fixed cost per unit = Fixed cost per machine hour / Units per machine hour = $7 / 10 = S0.70