Exam 9: Inventory Costing and Capacity Analysis

Heston Company has the following information for the current year: What is the difference between operating incomes under absorption costing and variable costing?

Davey Jones and Sons Company was concerned that increased sales did not result in increased profits for 2012. Both variable unit and total fixed manufacturing costs for 2011 and 2012 remained constant at $20 and $2,000,000, respectively. In 2011, the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no beginning inventory in 2011. In 2012, the company made 70,000 units and sold 90,000 units at a price of $50. Selling and administrative expenses were all fixed at $200,000 each year. Required: a. Prepare income statements for each year using absorption costing. b. Prepare income statements for each year using variable costing. c. Explain why the income was different each year using the two methods. Show computations.

Briefly discuss two methods of reducing the undesirable incentives associated with the use of absorption costing to evaluate the performance of a plant manager.

Should a company with high fixed costs and unused capacity raise selling prices to try to fully recoup its costs?

For 2011, Nichols, Inc., had sales of 150,000 units and production of 200,000 units. Other information for the year included: Required: a. Compute the ending finished goods inventory under both absorption and variable costing. b. Compute the cost of goods sold under both absorption and variable costing.

Normal capacity utilization is the expected level of capacity utilization for the current budget period, which is typically one year.

The two most common methods of costing inventories in manufacturing companies are variable costing and absorption costing.

Under variable costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in:

Charlassier Corporation manufactures and sells laptop computers and uses standard costing. For the month of September there was no beginning inventory, there were 3,000 units produced and 2,500 units sold. The manufacturing variable cost per unit is $385 and the variable operating cost per unit was $312.50. The fixed manufacturing cost is $450,000 and the fixed operating cost is $75,000. The selling price per unit is $925. Required: Prepare the income statement for Charlassier Corporation for September under variable costing.

The breakeven point using absorption costing depends on all of the following factors, EXCEPT:

The only difference between variable and absorption costing is the expensing of:

The following data are available for Ruggles Company for the year ended September 30, 2011. Manufacturing costs incurred: Nonmanufacturing costs incurred: Required: a. Determine operating income using the variable-costing approach. b. Determine operating income using the absorption-costing approach. c. Explain why operating income is not the same under the two approaches.

Both theoretical and practical capacity measure capacity in terms of demand for the output.

If managers report inventories of zero at the start and end of each accounting period, operating incomes under absorption costing and variable costing will be the same.

Answer the following questions using the information below: Goldfarb Company produces a specialty item. Management has provided the following information: -What is the cost per statue if throughput costing is used?

Answer the following questions using the information below: The following information pertains to the Bean Company: -What is the absorption costing breakeven point in units?

A company may use absorption costing for external reports and still choose to use throughput costing for internal reports.

Answer the following questions using the information below: Veach Corporation incurred fixed manufacturing costs of $6,000 during 2011. Other information for 2011 includes: The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. -Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances)total:

Explain how using master-budget capacity utilization for setting prices can lead to a downward demand spiral.

Absorption costing is required by GAAP (Generally Accepted Accounting Principles)for external reporting.