Cost15EChapter09Solutions.docx

Cost15EChapter09Solutions.docx

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Cost15EChapter09Solutions

CHAPTER9

INVENTORYCOSTINGANDCAPACITYANALYSIS

9-1No.Differencesinoperatingincomebetweenvariablecostingandabsorptioncostingareduetoaccountingforfixedmanufacturingcosts.Undervariablecosting,onlyvariablemanufacturingcostsareincludedasinventoriablecosts.Underabsorptioncosting,bothvariableandfixedmanufacturingcostsareincludedasinventoriablecosts.Fixedmarketinganddistributioncostsarenotaccountedfordifferentlyundervariablecostingandabsorptioncosting.

9-2Thetermdirectcostingisamisnomerforvariablecostingfortworeasons:

a.Variablecostingdoesnotincludealldirectcostsasinventoriablecosts.Onlyvariabledirectmanufacturingcostsareincluded.Anyfixeddirectmanufacturingcostsandanydirectnonmanufacturingcosts（eithervariableorfixed）areexcludedfrominventoriablecosts.

b.Variablecostingincludesasinventoriablecostsnotonlydirectmanufacturingcostsbutalsosomeindirectcosts（variableindirectmanufacturingcosts）.

9-3No.Thedifferencebetweenabsorptioncostingandvariablecostsisduetoaccountingforfixedmanufacturingcosts.Asserviceormerchandisingcompanieshavenofixedmanufacturingcosts,thesecompaniesdonotmakechoicesbetweenabsorptioncostingandvariablecosting.

9-4Themainissuebetweenvariablecostingandabsorptioncostingisthepropertimingofthereleaseoffixedmanufacturingcostsascostsoftheperiod:

a.atthetimeofincurrence,or

b.atthetimethefinishedunitstowhichthefixedoverheadrelatesaresold.

Variablecostinguses（a）andabsorptioncostinguses（b）.

9-5No.Acompanythatmakesavariable-cost/fixed-costdistinctionisnotforcedtouseanyspecificcostingmethod.TheStassenCompanyexampleinthetextofChapter9makesavariable-cost/fixed-costdistinction.Asillustrated,itcanusevariablecosting,absorptioncosting,orthroughputcosting.

Acompanythatdoesnotmakeavariable-cost/fixed-costdistinctioncannotusevariablecostingorthroughputcosting.However,itisnotforcedtoadoptabsorptioncosting.Forinternalreporting,itcould,forexample,classifyallcostsascostsoftheperiodinwhichtheyareincurred.

9-6Variablecostingdoesnotviewfixedcostsasunimportantorirrelevant,butitmaintainsthatthedistinctionbetweenbehaviorsofdifferentcostsiscrucialforcertaindecisions.Theplanningandmanagementoffixedcostsiscritical,irrespectiveofwhatinventorycostingmethodisused.

9-7Underabsorptioncosting,heavyreductionsofinventoryduringtheaccountingperiodmightcombinewithlowproductionandalargeproductionvolumevariance.Thiscombinationcouldresultinloweroperatingincomeeveniftheunitsaleslevelrises.

9-8（a）Thefactorsthataffectthebreakevenpointundervariablecostingare

1.fixed（manufacturingandoperating）costs.

2.contributionmarginperunit.

（b）Thefactorsthataffectthebreakevenpointunderabsorptioncostingare

1.fixed（manufacturingandoperating）costs.

2.contributionmarginperunit.

3.productionlevelinunitsinexcessofbreakevensalesinunits.

4.denominatorlevelchosentosetthefixedmanufacturingcostrate.

9-9Examplesofdysfunctionaldecisionsmanagersmaymaketoincreasereportedoperatingincomeare:

a.Plantmanagersmayswitchproductiontothoseordersthatabsorbthehighestamountoffixedmanufacturingoverhead,irrespectiveofthedemandbycustomers.

b.Plantmanagersmayacceptaparticularordertoincreaseproductioneventhoughanotherplantinthesamecompanyisbettersuitedtohandlethatorder.

c.Plantmanagersmaydefermaintenancebeyondthecurrentperiodtofreeupmoretimeforproduction.

9-10Approachesusedtoreducethenegativeaspectsassociatedwithusingabsorptioncostinginclude:

a.Changetheaccountingsystem:

∙Adopteithervariableorthroughputcosting,bothofwhichreducetheincentivesofmanagerstoproduceforinventory.

∙Adoptaninventoryholdingchargeformanagerswhotieupfundsininventory.

b.Extendthetimeperiodusedtoevaluateperformance.Byevaluatingperformanceoveralongertimeperiod（say,threetofiveyears）,theincentivetotakeshort-runactionsthatreducelong-termincomeislessened.

c.Includenonfinancialaswellasfinancialvariablesinthemeasuresusedtoevaluateperformance.

9-11Thetheoreticalcapacityandpracticalcapacitydenominator-levelconceptsemphasizewhataplantcansupply.Thenormalcapacityutilizationandmaster-budgetcapacityutilizationconceptsemphasizewhatcustomersdemandforproductsproducedbyaplant.

9-12Thedownwarddemandspiralisthecontinuingreductionindemandforacompany’sproductthatoccurswhenthepricesofcompetitors’productsarenotmet,and（asdemanddropsfurther）higherandhigherunitcostsresultinmoreandmorereluctancetomeetcompetitors’prices.Pricingdecisionsneedtoconsidercompetitorsandcustomersaswellascosts.

9-13No.Itdependsonhowacompanyhandlestheproduction-volumevarianceintheend-of-periodfinancialstatements.Forexample,iftheadjustedallocation-rateapproachisused,eachdenominator-levelcapacityconceptwillgivethesamefinancialstatementnumbersatyear-end.

9-14FortaxreportingintheUnitedStates,theIRSrequiresonlythatindirectproductioncostsare“fairly”apportionedamongallitemsproduced.Overheadratesbasedonnormalormaster-budgetcapacityutilization,aswellasthepracticalcapacityconcept,arepermitted.Atyear-end,prorationofanyvariancesbetweeninventoriesandcostofgoodssoldisrequired（unlessthevarianceisimmaterialinamount）.

9-15No.Thecostsofhavingtoomuchcapacity/toolittlecapacityinvolverevenueopportunitiespotentiallyforgoneaswellascostsofmoneytiedupinplantassets.

9-16（30min.）Variableandabsorptioncosting,explainingoperating-incomedifferences.

1.Keyinputsforincomestatementcomputationsare

April

May

Beginninginventory

Production

Goodsavailableforsale

Unitssold

Endinginventory

0

500

500

350

150

150

400

550

520

30

Thebudgetedfixedcostperunitandbudgetedtotalmanufacturingcostperunitunderabsorptioncostingare

April

May

（a）Budgetedfixedmanufacturingcosts

（b）Budgetedproduction

（c）=（a）÷（b）Budgetedfixedmanufacturingcostperunit

（d）Budgetedvariablemanufacturingcostperunit

（e）=（c）+（d）Budgetedtotalmanufacturingcostperunit

$2,000,000

500

$4,000

$10,000

$14,000

$2,000,000

500

$4,000

$10,000

$14,000

（a）Variablecosting

April2014

May2014

Revenuesa

$8,400,000

$12,480,000

Variablecosts

Beginninginventory

$0

$1,500,000

Variablemanufacturingcostsb

5,000,000

4,000,000

Costofgoodsavailableforsale

5,000,000

5,500,000

Deductendinginventoryc

（1,500,000）

（300,000）

Variablecostofgoodssold

3,500,000

5,200,000

Variableoperatingcostsd

1,050,000

1,560,000

Totalvariablecosts

4,550,000

6,760,000

Contributionmargin

3,850,000

5,720,000

Fixedcosts

Fixedmanufacturingcosts

2,000,000

2,000,000

Fixedoperatingcosts

600,000

600,000

Totalfixedcosts

2,600,000

2,600,000

Operatingincome

$1,250,000

$3,120,000

a$24,000×350;$24,000×520c$10,000×150;$10,000×30

b$10,000×500;$10,000×400d$3,000×350;$3,000×520

（b）Absorptioncosting

April2014

May2014

Revenuesa

$8,400,000

$12,480,000

Costofgoodssold

Beginninginventory

$0

$2,100,000

Variablemanufacturingcostsb

5,000,000

4,000,000

Allocatedfixedmanufacturingcostsc

2,000,000

1,600,000

Costofgoodsavailableforsale

7,000,000

7,700,000

Deductendinginventoryd

（2,100,000）

（420,000）

Adjustmentforprod.-vol.variancee

0

400,000U

Costofgoodssold

4,900,000

7,680,000

Grossmargin

3,500,000

4,800,000

Operatingcosts

Variableoperatingcostsf

1,050,000

1,560,000

Fixedoperatingcosts

600,000

600,000

Totaloperatingcosts

1,650,000

2,160,000

Operatingincome

$1,850,000

$2,640,000

a$24,000×350;$24,000×520d$14,000×150;$14,000×30

b$10,000×500;$10,000×400e$2,000,000–$2,000,000;$2,000,000–$1,600,000

c$4,000×500;$4,000×400f$3,000×350;$3,000×520

2.

–

=

–

April:

$1,850,000–$1,250,000=（$4,000×150）–（$0）

$600,000=$600,000

May:

$2,640,000–$3,120,000=（$4,000×30）–（$4,000×150）

–$480,000=$120,000–$600,000

–$480,000=–$480,000

Thedifferencebetweenabsorptionandvariablecostingisduesolelytomovingfixedmanufacturingcostsintoinventoriesasinventoriesincrease（asinApril）andoutofinventoriesastheydecrease（asinMay）.

9-17（20min.）Throughputcosting（continuationofExercise9-16）.

1.

April2014

May2014

Revenuesa

$8,400,000

$12,480,000

Directmaterialcostofgoodssold

Beginninginventory

Directmaterialsingoodsmanufacturedb

$0

3,350,000

$1,005,000

2,680,000

Costofgoodsavailableforsale

Deductendinginventoryc

3,350,000

（1,005,000）

3,685,000

（201,000）

Totaldirectmaterialcostofgoodssold

Throughputmargin

Othercosts

2,345,000

6,055,000

3,484,000

8,996,000

Manufacturingcosts

3,650,000d

3,320,000e

Otheroperatingcosts

1,650,000f

2,160,000g

Totalothercosts

Operatingincome

5,300,000

$755,000

5,480,000

$3,516,000

a$24,000×350;$24,000×520e（$3,300×400）+$2,000,000

b$6,700×500;$6,700×400f（$3,000×350）+$600,000

c$6,700×150;$6,700×30g（$3,000×520）+$600,000

d（$3,300×500）+$2,000,000

2.Operatingincomeunder: