9-36 Absorption costing and production-volume variance alternative capacity bases. Planet Light First (PLF), a producer of energy-efficient light bulbs, expects that demand will increase markedly over the next decade. Due to the high fixed costs involved in the business, PLF has decided to evaluate its financial performance using absorption costing income. The production-volume variance is written off to cost of goods sold. The variable cost of production is $2.40 per bulb. Fixed manufacturing costs are $1,170,000 per year. Variable and fixed selling and administrative expenses are $0.20 per bulb sold and $220,000, respectively. Because its light bulbs are currently popular with environmentally conscious customers, PLF can sell the bulbs for $9.80 each. PLF is deciding among various concepts of capacity for calculating the cost of each unit produced. Its choices are as follows: Theoretical capacity Practical capacity 900,000 bulbs 520,000 bulbs Normal capacity 260,000 bulbs (average expected output for the next three years) 225,000 bulbs expected production this year Master budget capacity 1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit. 2. Suppose PLF actually produces 300,000 bulbs. Calculate the production-volume variance using each level of capacity to compute the fixed manufacturing overhead allocation rate. 3. Assume PLF has no beginning inventory. If this year's actual sales are 225,000 bulbs, calculate operat- ing income for PLF using each type of capacity to compute fixed manufacturing cost per unit.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Operating income effects of denominator-level choice and disposal of production-volume variance (continuation of 9-36). 1. If PLF sells all 300,000 bulbs produced, what would be the effect on operating income of using each type of capacity as a basis for calculating manufacturing cost per unit? 2. Compare the results of operating income at different capacity levels when 225,000 bulbs are sold and when 300,000 bulbs are sold. What conclusion can you draw from the comparison? 3. Using the original data (that is, 300,000 units produced and 225,000 units sold) if PLF had used the proration approach to allocate the production-volume variance, what would operating income have been under each level of capacity? (Assume that there is no ending work in process.)

9-36 Absorption costing and production-volume variance alternative capacity bases. Planet Light First
(PLF), a producer of energy-efficient light bulbs, expects that demand will increase markedly over the
next decade. Due to the high fixed costs involved in the business, PLF has decided to evaluate its financial
performance using absorption costing income. The production-volume variance is written off to cost of goods
sold. The variable cost of production is $2.40 per bulb. Fixed manufacturing costs are $1,170,000 per year. Variable
and fixed selling and administrative expenses are $0.20 per bulb sold and $220,000, respectively. Because its light
bulbs are currently popular with environmentally conscious customers, PLF can sell the bulbs for $9.80 each.
PLF is deciding among various concepts of capacity for calculating the cost of each unit produced. Its
choices are as follows:
Theoretical capacity
Practical capacity
900,000 bulbs
520,000 bulbs
Normal capacity
260,000 bulbs (average expected output for the next three years)
225,000 bulbs expected production this year
Master budget capacity
1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing
cost per unit.
2. Suppose PLF actually produces 300,000 bulbs. Calculate the production-volume variance using each
level of capacity to compute the fixed manufacturing overhead allocation rate.
3. Assume PLF has no beginning inventory. If this year's actual sales are 225,000 bulbs, calculate operat-
ing income for PLF using each type of capacity to compute fixed manufacturing cost per unit.

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