Variable Statement Absorption Statement Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold. manufacturing margin Saxon, Inc. Saxon, Inc. Absorption Costing Income Statement Variable Costing Income Statement For the Year Ended December 31 For the Year Ended December 3 1 Sales $1,275,000.00 1 Sales $1,275,000.00 2 Cost of goods sold: 2 Variable cost of goods sold 0.00 3Beginning inventory 3Beginning inventory $0.00 Cost of goods manufactured 800,000.00 Variable cost of goods manufactured 560,000.00 5 Ending inventory (120,000.00) 5 Ending inventory (84,000.00) 6 Total cost of goods sold 680,000.00 6 Total variable cost of goods sold 476,000.00 595,000.00 7 Gross profit 799,000.00 7 Manufacturing margin 8 Selling and administrative expenses 320,00000 8 Variable selling and administrative expenses 255,000.00 275,000.00 9 Income from operations $544,000.00 9 Contribution margin 10 Fixed costs 240,000.00 1 Fixed manufacturing costs 12 Fixed selling and administrative expenses 65,000.00 13 Total fixed costs 305,000.00 $239,000.00 14Income from operations Manufacturing Decisions Shaded cells have feedback. 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 cotrollable costs or noncontrollable 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 "O" 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. Income From Operations Original Production Level-Variable Original Production Level-Absorption Additional 10,000 Units-Absorption Additional 10,000 Units-Variable K Points: 0/4 Feedback Check My Work Following the examples on the Absorption Statement and Variable Statement panels, recompute income from operations under the absorption and variable cost methods, given that the additional units are manufactured. Don't forget that fixed costs will remain the same at any production level within the relevant range Shaded cells have Manufacturing Decisions feedback 2. What is the change in income from operations from producing 10,000 additional units under absorption costing? $36,000x Points: Feedbachk Check My Work Review your chart and determine the change in income from operations, focusing only on the change in absorption costing amounts. 3. What is the change in income from operations from producing 10,000 additional units under variable costing? $160,000x Points: Feedback Check My Work Review your chart and determine the change in income from operations, focusing only on the change in variable costing amount:s 4. What would be your recommendation to the production manager? Do not produce the extra 10,000 units. The increase in income from operations 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. x 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. Do not produce the extra 10,000 units. Income from operations does not change under absorption costing when the additional units are produced Produce the extra 10,000 units. Income from operations will be increased, and the production manager will receive praise for creating higher profits Points: Variable Statement Absorption Statement Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold. manufacturing margin Saxon, Inc. Saxon, Inc. Absorption Costing Income Statement Variable Costing Income Statement For the Year Ended December 31 For the Year Ended December 3 1 Sales $1,275,000.00 1 Sales $1,275,000.00 2 Cost of goods sold: 2 Variable cost of goods sold 0.00 3Beginning inventory 3Beginning inventory $0.00 Cost of goods manufactured 800,000.00 Variable cost of goods manufactured 560,000.00 5 Ending inventory (120,000.00) 5 Ending inventory (84,000.00) 6 Total cost of goods sold 680,000.00 6 Total variable cost of goods sold 476,000.00 595,000.00 7 Gross profit 799,000.00 7 Manufacturing margin 8 Selling and administrative expenses 320,00000 8 Variable selling and administrative expenses 255,000.00 275,000.00 9 Income from operations $544,000.00 9 Contribution margin 10 Fixed costs 240,000.00 1 Fixed manufacturing costs 12 Fixed selling and administrative expenses 65,000.00 13 Total fixed costs 305,000.00 $239,000.00 14Income from operations Manufacturing Decisions Shaded cells have feedback. 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 cotrollable costs or noncontrollable 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 "O" 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. Income From Operations Original Production Level-Variable Original Production Level-Absorption Additional 10,000 Units-Absorption Additional 10,000 Units-Variable K Points: 0/4 Feedback Check My Work Following the examples on the Absorption Statement and Variable Statement panels, recompute income from operations under the absorption and variable cost methods, given that the additional units are manufactured. Don't forget that fixed costs will remain the same at any production level within the relevant range Shaded cells have Manufacturing Decisions feedback 2. What is the change in income from operations from producing 10,000 additional units under absorption costing? $36,000x Points: Feedbachk Check My Work Review your chart and determine the change in income from operations, focusing only on the change in absorption costing amounts. 3. What is the change in income from operations from producing 10,000 additional units under variable costing? $160,000x Points: Feedback Check My Work Review your chart and determine the change in income from operations, focusing only on the change in variable costing amount:s 4. What would be your recommendation to the production manager? Do not produce the extra 10,000 units. The increase in income from operations 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. x 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. Do not produce the extra 10,000 units. Income from operations does not change under absorption costing when the additional units are produced Produce the extra 10,000 units. Income from operations will be increased, and the production manager will receive praise for creating higher profits Points