ment, operating income can be determined using absorption costing or variable costing. Select whether the following characteristics are most often associated with absorption costing or variable costing. Required under generally accepted accounting principles (GAAP) Often used for internal use in decision mak
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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Mastery Problem: Variable Costing for Management Analysis
Absorption vs. Variable
Operating income is one of the most important items reported by a company. Depending on the decision-making needs of management, operating income can be determined using absorption costing or variable costing.
Select whether the following characteristics are most often associated with absorption costing or variable costing.
Required under generally accepted accounting principles (GAAP) Often used for internal use in decision making Cost of goods manufactured includes only variable manufacturing costs Used in reports prepared for external users Fixed factory overhead costs are not part of cost of goods manufacturedBoth fixed and variable factory costs are included in cost of goods sold and inventory Absorption Statement
Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.
Saxon, Inc.
Absorption Costing Income Statement
For the Year Ended December 31Sales $1,200,000 Cost of goods sold: Cost of goods manufactured $840,000 Ending inventory (168,000) Total cost of goods sold (672,000) Gross profit $528,000 Selling and administrative expenses (273,000) Operating income $255,000 Variable Statement
Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin.
Saxon, Inc.
Variable Costing Income Statement
For the Year Ended December 31Sales $1,200,000 Variable cost of goods sold: Variable cost of goods manufactured $600,000 Ending inventory (120,000) Total variable cost of goods sold (480,000) Manufacturing margin $720,000 Variable selling and administrative expenses (208,000) Contribution margin $512,000 Fixed costs: Fixed manufacturing costs $240,000 Fixed selling and administrative expenses 65,000 Total fixed costs (305,000) Operating income $207,000 Method Comparison
Review the income statements on the Absorption Statement and Variable Statement, then complete the following table. The company’s sales price per unit is $75, and the number of units in ending inventory is 4,000. There was no beginning inventory.
Item Amount Number of units sold fill in the blank a8cedf09c07bfe8_1 Variable sales and administrative cost per unit $fill in the blank a8cedf09c07bfe8_2 Number of units manufactured fill in the blank a8cedf09c07bfe8_3 Variable cost of goods manufactured per unit $fill in the blank a8cedf09c07bfe8_4 Fixed manufacturing cost per unit $fill in the blank a8cedf09c07bfe8_5 Manufacturing Decisions
Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing operating income, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision-making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful.
All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs.
The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement and the Variable Statement, he notices that the operating income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company’s capacity for manufacturing, in the coming year. He reasons that this will boost operating income and satisfy the company’s owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0".
1. Use the income statements on the Absorption Statement and Variable Statement to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.
Operating Income Original Production
Level-AbsorptionOriginal Production
Level-VariableAdditional 10,000
Units-AbsorptionAdditional 10,000
Units-Variable$fill in the blank 680e6cfc6016046_1 $fill in the blank 680e6cfc6016046_2 $fill in the blank 680e6cfc6016046_3 $fill in the blank 680e6cfc6016046_4 2. What is the change in operating income from producing 10,000 additional units under absorption costing?
$fill in the blank 680e6cfc6016046_5
3. What is the change in operating income from producing 10,000 additional units under variable costing?
$fill in the blank 680e6cfc6016046_6
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