Sugarplum uses standard costing to produce a particularly popular type of candy. Sugarplum's President, Jack Macon was unhappy after reviewing the income statements for the first 3 years of business. He said, "I was told by our accountants—and in fact, I have memorized—that our breakeven volume is 31,000 units. I was happy that we reached that sales goal in each of our first 2 years. But here's the strange thing: In our first year, we sold 31,000 units and indeed we broke even. Then, in our second year we sold the same volume and had a signficant, positive operating income. I didn't complain, of course. . . but here's the bad part. In our third year, we sold 10% more candy, but our operating income dropped by nearly 90% from what it was in the second year! We didn't change our selling price or cost structure over the past 3 years and have no price, efficiency, or spending variances . . . so what's going on?!" LOADING... (Click the icon to view the absorption costing income statements for the three years.) Read the requirements LOADING... . Requirement 1. What denominator level is Sugarplum using to allocate fixed manufacturing costs to the candy? How is Sugarplum treating any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly. The denominator level used to allocate fixed manufacturing costs is units. We can see from Sugarplum's income statements that it disposes of any production-volume variance against ▼ beginning inventory. cost of goods sold. fixed manufacturing costs. other costs. production. In 2020, 34,100 units were produced instead of the budgeted 31,000 units. This resulted in a ▼ favorable unfavorable production-volume variance; which, when written off, ▼ decreased increased gross margin. Requirement 2. How did Sugarplum's accountants arrive at the breakeven volume of 31,000 units? ÷ = Breakeven quantity 2019 ÷ = 2020 ÷ = 2021 ÷ = Requirement 3. Prepare a variable costing-based income statement for each year. Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume. (Complete all input fields. Enter a "0" for any zero amounts.) 2019 2020 2021 Sales (units) Revenues Variable cost of goods sold Beginning inventory Variable manufacturing costs Deduct ending inventory Variable cost of goods sold Contribution margin Fixed manufacturing costs Fixed selling and administrative costs Operating income Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume by completing the following table. (Complete all input fields. Enter a "0" for any zero amounts.) 2019 2020 2021 Contribution margin Total fixed costs Operating income Requirement 4. Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to Jack Macon the positive operating income in 2020 and the drop in operating income in 2021. (Complete all input fields. Enter a "0" for any zero amounts. Use parentheses or a minus sign for negative differences.) Reconciliation of absorption/variable costing operating income 2019 2020 2021 (1) Absorption costing operating income (2) Variable costing operating income (3) Difference (1) - (2) (4) Fixed mfg. costs in ending inventory (Absorption) (5) Fixed mfg. costs in beginning inventory (Absorption) (6) Difference (4) - (5) Use the reconciliation table you completed above to explain to Jack Macon the positive operating income in 2020 and the drop in operating income in 2021, that is shown on the absorption costing income statement. ▼ In 2020 In 2021 , there were units in ending inventory. These units had each absorbed $59 of fixed costs per unit, which would remain as assets on Sugarplum's balance sheet until they were sold. Cost of goods sold was accordingly reduced by the production volume variance, resulting in a positive operating income even though sales were at breakeven levels. ▼ In 2020 In 2021 , production was less than sales, i.e., all of the fixed costs that were included in a prior ending inventory, flowed through COGS in this year. The contribution margin in this year, for absorption costing, shows the COGS also contains the

Sugarplum uses standard costing to produce a particularly popular type of candy. Sugarplum's President, Jack Macon was unhappy after reviewing the income statements for the first 3 years of business. He said, "I was told by our accountants—and in fact, I have memorized—that our breakeven volume is 31,000 units. I was happy that we reached that sales goal in each of our first 2 years. But here's the strange thing: In our first year, we sold 31,000 units and indeed we broke even. Then, in our second year we sold the same volume and had a signficant, positive operating income. I didn't complain, of course. . . but here's the bad part. In our third year, we sold 10% more candy, but our operating income dropped by nearly 90% from what it was in the second year! We didn't change our selling price or cost structure over the past 3 years and have no price, efficiency, or spending variances . . . so what's going on?!" LOADING... (Click the icon to view the absorption costing income statements for the three years.) Read the requirements LOADING... . Requirement 1. What denominator level is Sugarplum using to allocate fixed manufacturing costs to the candy? How is Sugarplum treating any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly. The denominator level used to allocate fixed manufacturing costs is units. We can see from Sugarplum's income statements that it disposes of any production-volume variance against ▼ beginning inventory. cost of goods sold. fixed manufacturing costs. other costs. production. In 2020, 34,100 units were produced instead of the budgeted 31,000 units. This resulted in a ▼ favorable unfavorable production-volume variance; which, when written off, ▼ decreased increased gross margin. Requirement 2. How did Sugarplum's accountants arrive at the breakeven volume of 31,000 units? ÷ = Breakeven quantity 2019 ÷ = 2020 ÷ = 2021 ÷ = Requirement 3. Prepare a variable costing-based income statement for each year. Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume. (Complete all input fields. Enter a "0" for any zero amounts.) 2019 2020 2021 Sales (units) Revenues Variable cost of goods sold Beginning inventory Variable manufacturing costs Deduct ending inventory Variable cost of goods sold Contribution margin Fixed manufacturing costs Fixed selling and administrative costs Operating income Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume by completing the following table. (Complete all input fields. Enter a "0" for any zero amounts.) 2019 2020 2021 Contribution margin Total fixed costs Operating income Requirement 4. Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to Jack Macon the positive operating income in 2020 and the drop in operating income in 2021. (Complete all input fields. Enter a "0" for any zero amounts. Use parentheses or a minus sign for negative differences.) Reconciliation of absorption/variable costing operating income 2019 2020 2021 (1) Absorption costing operating income (2) Variable costing operating income (3) Difference (1) - (2) (4) Fixed mfg. costs in ending inventory (Absorption) (5) Fixed mfg. costs in beginning inventory (Absorption) (6) Difference (4) - (5) Use the reconciliation table you completed above to explain to Jack Macon the positive operating income in 2020 and the drop in operating income in 2021, that is shown on the absorption costing income statement. ▼ In 2020 In 2021 , there were units in ending inventory. These units had each absorbed $59 of fixed costs per unit, which would remain as assets on Sugarplum's balance sheet until they were sold. Cost of goods sold was accordingly reduced by the production volume variance, resulting in a positive operating income even though sales were at breakeven levels. ▼ In 2020 In 2021 , production was less than sales, i.e., all of the fixed costs that were included in a prior ending inventory, flowed through COGS in this year. The contribution margin in this year, for absorption costing, shows the COGS also contains the

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Question

Sugarplum

uses standard costing to produce a particularly popular type of candy.

Sugarplum's

President,

Jack

Macon

was unhappy after reviewing the income statements for the first 3 years of business. He said, "I was told by our

accountants—and

in fact, I have

memorized—that

our breakeven volume is

31,000

units. I was happy that we reached that sales goal in each of our first 2 years. But here's the strange thing: In our first year, we sold

31,000

units and indeed we broke even. Then, in our second year we sold the same volume and had a signficant, positive operating income. I didn't complain, of course. . . but here's the bad part. In our third year, we sold

10%

more candy, but our operating income dropped by nearly

90%

from what it was in the second year! We didn't change our selling price or cost structure over the past 3 years and have no price, efficiency, or spending variances . . . so what's going on?!"

(Click

the icon to view the absorption costing income statements for the three years.)

Read the

requirements

Requirement 1. What denominator level is

Sugarplum

using to allocate fixed manufacturing costs to the candy? How is

Sugarplum

treating any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly.

The denominator level used to allocate fixed manufacturing costs is

units.

We can see from

Sugarplum's

income statements that it disposes of any production-volume variance against

▼

beginning inventory.

cost of goods sold.

fixed manufacturing costs.

other costs.

production.

2020,

34,100

units were produced instead of the budgeted

31,000

units. This resulted in a

▼

favorable

unfavorable

production-volume variance; which, when written off,

▼

decreased

increased

gross margin.

Requirement 2. How did

Sugarplum's

accountants arrive at the breakeven volume of

31,000

units?

Breakeven quantity

2019	÷	=
2020	÷	=
2021	÷	=

Requirement 3. Prepare a variable costing-based income statement for each year. Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume. (Complete all input fields. Enter a "0" for any zero amounts.)

	2019	2020	2021
Sales (units)
Revenues
Variable cost of goods sold
Beginning inventory
Variable manufacturing costs
Deduct ending inventory
Variable cost of goods sold

Contribution margin
Fixed manufacturing costs
Fixed selling and administrative costs
Operating income

Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume by completing the following table. (Complete all input fields. Enter a "0" for any zero amounts.)

	2019	2020	2021
Contribution margin
Total fixed costs
Operating income

Requirement 4. Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to

Jack

Macon

the positive operating income in

2020

and the drop in operating income in

2021.

(Complete all input fields. Enter a "0" for any zero amounts. Use parentheses or a minus sign for negative differences.)

Reconciliation of absorption/variable costing operating income	2019	2020	2021
(1)	Absorption costing operating income
(2)	Variable costing operating income
(3)	Difference (1) - (2)
(4)	Fixed mfg. costs in ending inventory (Absorption)
(5)	Fixed mfg. costs in beginning inventory (Absorption)
(6)	Difference (4) - (5)

Use the reconciliation table you completed above to explain to

Jack

Macon

the positive operating income in

2020

and the drop in operating income in

2021,

that is shown on the absorption costing income statement.

▼

In 2020

In 2021

, there were units in ending inventory. These units had each absorbed $59 of fixed costs per unit, which would remain as

assets on Sugarplum's balance sheet until they were sold. Cost of goods sold was accordingly reduced by the production

volume variance, resulting in a positive operating income even though sales were at breakeven levels.

▼

In 2020

In 2021

, production was less than sales, i.e., all of the fixed costs that were included in a prior ending inventory, flowed through

COGS in this year. The contribution margin in this year, for absorption costing, shows the COGS also contains the allocated

Data Table
A
В
D
1 Absorption Costing
2019
2020
2021
2 Sales (units)
31,000
31,000
34,100
3 Revenues
$ 2,418,000 $ 2,418,000 $ 2,659,800
4 Cost of goods sold
5
Beginning inventory
220,100
6
Production
2,201,000
2,421,100
2,201,000|
7
Available for sale
2,201,000
2,421,100
2,421,100
(220,100)
(182,900)
8
Deduct ending inventory
9
Adjustment for production-volume variance
10
Cost of goods sold
2,201,000
2,018,100
2,421,100
11 Gross margin
217,000
399,900
238,700
12 Selling and administrative expenses (all fixed)
217,000
217,000
217,000
$
13 Operating income
14 Beginning inventory
15 Production (units)
182,900
21,700
3,100
31,000
34,100
31,000
16 Sales (units)
17 Ending inventory
18 Variable manufacturing cost per unit
19 Fixed manufacturing overhead costs
20 Fixed manuf. costs allocated per unit produced $
31,000
31,000
34,100
3,100
$
12 $
12 $
12
$ 1,829,000 $ 1,829,000 $ 1,829,000
59 $
59 $
59

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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