Question

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 31
Sales		$1,200,000
Cost of goods sold:
Cost of goods manufactured	$800,000
Ending inventory	(200,000)
Total cost of goods sold		(600,000)
Gross profit		$600,000
Selling and administrative expenses		(290,000)
Operating income		$310,000

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 31
Sales		$1,200,000
Variable cost of goods sold:
Variable cost of goods manufactured	$560,000
Ending inventory	(140,000)
Total variable cost of goods sold		(420,000)
Manufacturing margin		$780,000
Variable selling and administrative expenses		(225,000)
Contribution margin		$555,000
Fixed costs:
Fixed manufacturing costs	$240,000
Fixed selling and administrative expenses	65,000
Total fixed costs		(305,000)
Operating income		$250,000

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 $80, and the number of units in ending inventory is 5,000. There was no beginning inventory.

Item	Amount
Number of units sold
Variable sales and administrative cost per unit	$
Number of units manufactured
Variable cost of goods manufactured per unit	$
Fixed manufacturing cost per unit	$

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-Absorption	Original Production Level-Variable	Additional 10,000 Units-Absorption	Additional 10,000 Units-Variable
$	$	$	$

2. What is the change in operating income from producing 10,000 additional units under absorption costing?

$

3. What is the change in operating income from producing 10,000 additional units under variable costing?

$

Answer 1

As per Question ,Under absorption base costing system
The company Sale price per unit $ / Unit	80
The number of Ending Inventory	5000
As per Variable costing ,
	Amnt$
Sales value	12,00,000
Selling price per Unit $ / Unit		80
Number of Sellinh Unit		15,000
($1200000/80)
Variable Selling & Admin OH $		2,25,000
Number of Sellinh Unit		15,000
Rate / Unit $/ Unit		15
($225000/15000)
Number of unti at Inventory		5,000
Number of Sellinh Unit		15,000
Total Production unit		20,000
Variable cost of goods manufactured$		5,60,000
Total Production unit		20,000
Rate / Unit $/ Unit		28
($560000/20000)
Fixed manufacturing cost $		2,40,000
Total Production unit		20,000
Rate / Unit $/ Unit		12
($560000/20000)

Now derived Absorptio costing revised Operating Income - Under additional

10000 Unit

Saxon Inc
Absorption Based Costing
31st Dec
Sales - ( 80*15000)	Amnt$	Amnt$	Amnt$
Unit =15000			12,00,000
Rate /Unit =80
Less
Cost of goods sold -'20000*28
Opening Inventory	5,60,000
Cost of goods Manuafctured
Unit =20000
Add- 1000 Unit
Tptal Unit 30000
Rate /Unit =as above =$28
Add = Fixed manuafctring OH-Cost	2,40,000	8,00,000
Ending Inventory		-4,00,000
Cost of goods sold -$800000
Total Unit of production = 30,000Unit
Additional Unit =10000
Add - Cloing Inventory -5000
Total Unit of Inventpry = 15000
($800000*15000/30000)
Cost of goods sold ( Net of Inventory)			4,00,000
Gross Profit			8,00,000
Less Selling & GA
Fixed cost =	65,000
Variable	2,25,000
Unit =15000
Rate / Unit =15
Total Selling & GA			2,90,000
Income from Operation			5,10,000

Saxon Inc
Variable costing
31st Dec
Sales - ( 80*15000)	Amnt$	Amnt$	Amnt$
Unit =15000			12,00,000
Rate /Unit =80
Less
Cost of goods sold
Opening Inventory			-
Variable cost of goods mAnufactured
Unit = 30,000		8,40,000
Rate / Unit =28
Less Ending Inventory		-4,20,000
Number of Unit *$28
15000*$28
Variable cost of goods mAnufactured			4,20,000
Operating Margin			7,80,000
Less
Variable sellung & GA			2,25,000
15000*$15
Contribution Margin			5,55,000
Fixed Manuafcturing cost	2,40,000
Fixed Selling & GA	65000
Total Fixed cost			3,05,000
Income from Operation			2,50,000

On the basis of above analysis , we noticed following point :

Ans 1	Operating Income
	Original Production	Original Production	Additional 10,000	Additional 10,000
	Level-Absorption	Level-Variable	Units-Absorption	Units-Variable
	$ 310,000	$250,000	$510,000	$250,000
Ans 2	Additional 10,000 Unit	Amnt$
	Absorption unit givem additional Profit additional 10000 Unit	5,10,000
	Less
	Original Production - Absorption cost	3,10,000
	Additional Profit	2,00,000
Ans 3	No Change in profit under Absorption costing
	both situation Profit amount same $ 250,000