Question

Review the income statements on the Absorption Statement and Variable Statement panels, then complete the following table. The company’s sales price per unit is $75.00, and the number of units in ending inventory is 3,000.

Item	Amount
Number of units sold
Variable sales and administrative cost per unit
Number of units manufactured
Variable cost of goods manufactured per unit
You are in Column ItemFixed manufacturing cost per unit	You are in Column Amount

Review the definitions of the items in the table, and think backwards from one of the income statements to get the desired values.

Explanation

none

X

Absorption Statement

Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.

Question not attempted.

Saxon, Inc.

Absorption Costing Income Statement

For the Year Ended December 31

1	Sales		$1,275,000.00
2	Cost of goods sold:
3	Beginning inventory	$0.00
4	Cost of goods manufactured	800,000.00
5	Ending inventory	(120,000.00)
6	Total cost of goods sold		680,000.00
7	Gross profit		$595,000.00
8	Selling and administrative expenses		286,000.00
9	Income from operations		$309,000.00

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

The variable cost of goods sold deducted from sales.

.

Question not attempted.

Saxon, Inc.

Variable Costing Income Statement

For the Year Ended December 31

1	Sales		$1,275,000.00
2	Variable cost of goods sold:
3	Beginning inventory	$0.00
4	Variable cost of goods manufactured	560,000.00
5	Ending inventory	(84,000.00)
6	Total variable cost of goods sold		476,000.00
7	Manufacturing margin		$799,000.00
8	Variable selling and administrative expenses		221,000.00
9	Contribution margin		$578,000.00
10	Fixed costs:
11	Fixed manufacturing costs	$240,000.00
12	Fixed selling and administrative expenses	65,000.00
13	Total fixed costs		305,000.00
14	Income from operations		$273,000.00

none

X

Manufacturing Decisions

Shaded cells have feedback.

Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing income from operations, 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

Costs that can be influenced (increased or decreased) by management at that level.

or noncontrollable costs

Costs that another level of management controls.

.

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 panel and the Variable Statement panel, he notices that the income from operations 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 income from operations 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 panels 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.

Income From Operations
Original	Original	Additional	Additional
Production	Production	10,000	10,000
Level-Absorption	Level-Variable	Units-Absorption	Units-Variable
?	?	?	?

Following the examples on the Absorption Statement and Variable Statement panels, recompute income from operations under the absorption and variable cost methods, given that the additional units are manufactured. Don’t forget that fixed costs will remain the same at any production level within the relevant range.

Explanation

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

Review your chart and determine the change in income from operations, focusing only on the change in absorption costing amounts.

Explanation

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

Answer 1

Question 1 :

		Amount
Number of units sold	Total sales revenue /selling price per unit 1275000/75 17000	17000 units
Variable sales and administrative cost per unit	Total Variable sales and administrative expense / Number of units sold 221000/17000	$ 13 per unit
Number of units manufactured	Units sold +ending inventory-beginning inventory 17000 +3000 -0 20000	20000 units
Variable cost of goods manufactured per unit	Total Variable cost of goods manufactured /units manufactured 560000/20000 28	$ 28 per unit
Fixed manufacturing cost per unit	Fixed manufacturing cost /units produced 240000/20000 12	$12 per unit

b)

All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs	Controllable cost is a cost that can be controlled by given level of management .Such cost is incurred in direct proportion to production volume (Which is in line with variable cost) .Thus variable costing is appropriate.
Costs that can be influenced (increased or decreased) by management at that level. or noncontrollable costs	Absorption costing might be appropriate
Costs that another level of management controls.	Since such cost are not influenced by manager or superisor of an undertaking ,such cost are uncontrollable .Absorption costing might be appropriate

2)Under Absorption costing ,fixed manufacturing cost is treated as product cost .

Fixed manufacturing cost per unit if (10000 units are additionally produced) = 240000/30000 = $ 8 per unit

Cost of goods sold per unit =variable cost of goods manufactured per unit +fixed manufacturing cost per unit

            = 28+8

            = 36

sales		1275000
cost of goods sold
Beginning inventory	0
cost of goods manufactured (30000*36)	1080000
less:Ending inventory [3000+10000=13000*36]	(468000)
cost of gods sold		(612000)
Gross margin		663000
Selling and administrative expenses		286000
Income from operations		377000

change in income from operations =Income if additional units produced -Income before

                = 377000-309000

                 = 68000

3)There will be no change in income from operations under variable costing as Fixed manufacturing overhead cost is treated as period cost and whole of the cost is charged to income statement irrespective of number of units produced.