9-32 Variable costing versus absorption costing. The Garvis Company uses an absorption-costing system based on standard costs. Variable manufacturing cost consists of direct material cost of $4.50 per unit and other variable manufacturing costs of $1.50 per unit. The standard production rate is 20 units per machine- hour. Total budgeted and actual fixed manufacturing overhead costs are $840,000. Fixed manufacturing overhead is allocated at $14 per machine-hour based on fixed manufacturing costs of $840,000 ÷ 60,000 machine-hours, which is the level Garvis uses as its denominator level. The selling price is S10 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold, is $2 per unit. Fixed operating (nonmanufacturing) costs are $240,000. Beginning inventory in 2017 is 60,000 units; ending inventory is 80,000 units. Sales in 2017 are 1,080,000 units. The same standard unit costs persisted throughout 2016 and 2017. For simplicity, assume that there are no price, spending, or efficiency variances. 1. Prepare an income statement for 2017 assuming that the production-volume variance is written off at year-end as an adjustment to cost of goods sold. 2. The president has heard about variable costing. She asks you to recast the 2017 statement as it would appear under variable costing. 3. Explain the difference in operating income as calculated in requirements 1 and 2. 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. 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 managers do to counteract undesirable inventory buildups? Required
9-32 Variable costing versus absorption costing. The Garvis Company uses an absorption-costing system based on standard costs. Variable manufacturing cost consists of direct material cost of $4.50 per unit and other variable manufacturing costs of $1.50 per unit. The standard production rate is 20 units per machine- hour. Total budgeted and actual fixed manufacturing overhead costs are $840,000. Fixed manufacturing overhead is allocated at $14 per machine-hour based on fixed manufacturing costs of $840,000 ÷ 60,000 machine-hours, which is the level Garvis uses as its denominator level. The selling price is S10 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold, is $2 per unit. Fixed operating (nonmanufacturing) costs are $240,000. Beginning inventory in 2017 is 60,000 units; ending inventory is 80,000 units. Sales in 2017 are 1,080,000 units. The same standard unit costs persisted throughout 2016 and 2017. For simplicity, assume that there are no price, spending, or efficiency variances. 1. Prepare an income statement for 2017 assuming that the production-volume variance is written off at year-end as an adjustment to cost of goods sold. 2. The president has heard about variable costing. She asks you to recast the 2017 statement as it would appear under variable costing. 3. Explain the difference in operating income as calculated in requirements 1 and 2. 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. 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 managers do to counteract undesirable inventory buildups? Required
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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Question
Throughput Costing (continuation of 9-32)
- Prepare an income statement under throughput costing for the year ended December 31, 2017 for Garvis Company
- Reconcile the different between the contribution margin and throughput margin for Garvis in 2017. Then reconcile the operating income between variable costing and throughput costing for Garvis in 2017.
- Advocates of throughput costing say it provides managers less incentive to produce for inventory than either variable costing or, especially, absorption costing. Do you agree? Why or why not? Under what circumstances might you recommend that Garvis use throughput costing?
Reference Problem:
Transcribed Image Text:9-32 Variable costing versus absorption costing. The Garvis Company uses an absorption-costing system
based on standard costs. Variable manufacturing cost consists of direct material cost of $4.50 per unit and
other variable manufacturing costs of $1.50 per unit. The standard production rate is 20 units per machine-
hour. Total budgeted and actual fixed manufacturing overhead costs are $840,000. Fixed manufacturing
overhead is allocated at $14 per machine-hour based on fixed manufacturing costs of $840,000 ÷ 60,000
machine-hours, which is the level Garvis uses as its denominator level.
The selling price is S10 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold,
is $2 per unit. Fixed operating (nonmanufacturing) costs are $240,000. Beginning inventory in 2017 is 60,000
units; ending inventory is 80,000 units. Sales in 2017 are 1,080,000 units.
The same standard unit costs persisted throughout 2016 and 2017. For simplicity, assume that there are no
price, spending, or efficiency variances.
1. Prepare an income statement for 2017 assuming that the production-volume variance is written off at
year-end as an adjustment to cost of goods sold.
2. The president has heard about variable costing. She asks you to recast the 2017 statement as it would
appear under variable costing.
3. Explain the difference in operating income as calculated in requirements 1 and 2.
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.
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 managers do to counteract undesirable inventory buildups?
Required
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