Cost Accounting, Chapter 9 11ch09

(1)

Inventory Costing

and Capacity

Analysis

Inventory Costing

and Capacity

Analysis

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Learning Objective 1

Identify what distinguishes

variable costing from

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Inventory-Costing Methods

The difference between variable costing and absorption costing is based on the

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Variable Costing

Direct Materials

Variable Factory

Labor

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Variable Costing

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold Fixed Factory

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Prepare income statements

under absorption costing

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Comparing Income Statements

The following data pertain to Davenport Fixtures: Year 1 Year 2 Total Beginning inventory -0- 2,000

-0-Produced 10,000 11,500 21,500

Sold 8,000 13,000 21,000

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The following information is on a per unit basis:

Sales price: $71.00

Variable manufacturing costs:

Direct materials: $ 4.00

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Comparing Income Statements

(Absorption Costing)

Total fixed production costs are $54,000 at a normal capacity of 12,000 units.

Fixed nonmanufacturing costs are $30,000 per year.

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Revenues $568,000

Cost of goods sold 428,000 Volume variance (U) 9,000

Gross margin $131,000

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Comparing Income Statements

Revenues for Year 1 are $568,000. What is the cost of goods sold?

8,000 × $49 = $392,000

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(Variable Costing)

Revenues $568,000

Cost of goods sold 392,000 Variable nonmanufacturing costs 16,000

Contribution margin $160,000

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Explain differences in operating

income under absorption

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Operating Income

What are revenues for Year 2? 13,000 × $71 = $923,000

What is the cost of goods sold? 13,000 × $53.50 = $695,500

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Operating Income

What is the gross margin?

$923,000 – ($695,500 + $2,250) = $225,250 What are the nonmanufacturing costs?

13,000 units sold × $2.00 = $26,000

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Operating Income

What is the operating income before taxes? $225,250 – $56,000 = $169,250

What is the operating income for the two years combined?

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Income Statements

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Operating Income

(Variable Costing)

Operating Income

(Variable Costing)

Revenues for Year 2 are $923,000. What is the cost of goods sold?

13,000 × $49 = $637,000

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Operating Income

(Variable Costing)

Operating Income

(Variable Costing)

What is the net contribution margin?

$286,000 – $26,000 variable nonmanufacturing costs = $260,000 net contribution margin

What is the operating income before taxes? $260,000 – $54,000 fixed manufacturing costs

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Income Statements

(Variable Costing)

Income Statements

(Variable Costing)

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Income Statements

(Variable Costing)

Income Statements

(Variable Costing)

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Comparison of Variable

and Absorption Costing

Variable costing operating income Year 1: $76,000 Absorption costing operating income Year 1: $85,000 Absorption costing operating income is $9,000 higher.

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Production exceeds sales in Year 1. The 2,000 units in ending inventory

are valued as follows:

Absorption costing: 2,000 × $53.50 = $107,000 Variable costing: 2,000 × $49.00 = $ 98,000

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Comparison of Variable

Variable costing operating income Year 2: $176,000 Absorption costing operating income Year 2: $169,250

Variable costing operating income is $6,750 higher.

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Sales exceeded units produced in Year 2.

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Comparison of Variable

Variable costing combined net income: $252,000 Absorption costing combined net income: $254,250 Absorption costing is higher by $2,250

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Absorption costing operating income

Variable costing operating income

Fixed manufacturing costs in ending

inventory under

Fixed manufacturing costs in beginning

inventory under

–

EQUALS

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Understand how absorption

costing can provide undesirable

incentives for managers to

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Inventory Buildup

What is the production volume variance? (12,000 – 4,400) × $4.50 = $34,200 U What is the net operating income or loss

for the period?

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Inventory Buildup

Revenues (4,100 × $71) $291,100 Cost of goods sold (4,100 × $53.50) 219,350

Volume variance 34,200

Gross margin $ 37,550

Nonmanufacturing costs 38,200

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Inventory Buildup

4,400 – 4,100 = 300

How much cost is in ending inventory? 300 × $53.50 = $16,050

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Inventory Buildup

Sales remain the same (4,100 units). What is the volume variance?

(12,000 – 9,000) × $4.50 = $13,500 U Suppose that management decides to

(33)

Inventory Buildup

Revenues (4,100 × $71) $291,100 Cost of goods sold (4,100 × $53.50) 219,350

Volume variance 13,500

Gross margin $ 58,250 Nonmanufacturing costs 38,200

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Inventory Buildup

300 + 9,000 – 4,100 = 5,200

How much cost is in ending inventory? 5,200 × $53.50 = $278,200

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Differentiate throughput

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Throughput Costing

Revenues $568,000

Variable direct materials

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Throughput Costing

Manufacturing Costs:

Labor $21.00 × 10,000 $210,000 Indirect costs $24.00 × 10,000 240,000

Fixed costs 54,000

(38)

Throughput Costing

Nonmanufacturing Costs:

Variable $2.00 × 8,000 $16,000

Fixed 30,000

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Throughput Costing

Variable costing operating income: $76,000 Throughput costing operating loss: $14,000

(40)

Throughput Costing

The 2,000 units in ending inventory are valued as follows:

Variable

2,000 × $49 = $98,000

Throughput

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Throughput Costing

Absorption costing operating income: $85,000 Throughput costing operating loss: $14,000

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Throughput Costing

The 2,000 units in ending inventory are valued as follows:

Absorption

2,000 × $53.50 = $107,000

Throughput 2,000 × $4

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Comparison of Inventory

Costing Methods

Actual Costing_{Actual Costing}

Absorption Costing Absorption Costing Throughput Costing Throughput Costing Variable

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Comparison of Inventory

Costing Methods

Normal Costing_{Normal Costing}

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Comparison of Inventory

Costing Methods

Standard Costing_{Standard Costing}

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Alternative Denominator-Level

Concepts

Alternative Denominator-Level

Concepts

Theoretical capacity

Practical capacity

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Budgeted Fixed Manufacturing

Overhead Rate

Lloyd’s Bicycles produces bicycle parts for domestic and foreign markets.

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Overhead Rate

Assume that the theoretical capacity is 10,000 machine-hours, practical capacity

is 85%, normal capacity is 75%, and master-budget capacity is 60%.

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Overhead Rate

Theoretical 100%:

$200,000 ÷ 10,000 = $20.00/machine-hour Practical 85%:

$200,000 ÷ 8,500 = $23.53/machine-hour Normal 75%:

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Learning Objective 7

Understand the major factors

management considers in choosing

a capacity level to compute the

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Choosing a Capacity Level

What factors are considered in choosing a capacity level?

Product costing

Pricing decision

Performance evaluation

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Decision Making

Assume that Lloyd’s Bicycles’ standard hours are 2 hours per unit.

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Decision Making

Theoretical capacity: $20 × 2 = $40.00

Practical capacity: $23.53 × 2 = $47.06

(55)

Describe how attempts to

recover fixed costs of capacity

may lead to price increases

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Downward Demand Spiral

The downward demand spiral is the continuing reduction in demand that occurs when the prices

(57)

Explain how the capacity

level chosen to calculate

the budgeted fixed overhead

cost rate affects the

(58)

Effect on Financial Statements

Assume that Lloyd’s Bicycles actually used 8,400 machine-hours during the year.

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Production Volume Variance

Production volume variance

= (Denominator level – Actual level)

× Budgeted fixed manufacturing overhead rate Theoretical capacity:

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Production Volume Variance

Normal capacity:

(7,500 – 8,400) × $26.67 = $24,003 Master-budget capacity:

(61)