Exam 9: Income Effects of Denominator Level on Inventory Valuation

Absorption costing can be criticized as a method that encourages managers to make decisions that may be contrary to the long-term interest of the company.

________ provides the denominator-level capacity based on demand for more than one budget cycle .

Absorption-costing income statements cannot easily differentiate between variable and fixed costs.

SamTech Company has two identical divisions,East and West.Their sales,production volume,and fixed manufacturing costs have been the same for the last five years.The amounts for each division were as follows: East Division uses absorption costing and West Division uses variable costing.Both use FIFO inventory methods.Variable manufacturing costs are $5 per unit.Selling and administrative expenses were identical for each division.There were no inventories at the beginning of Year 1. Required: Which division reports the highest income each year? Explain.

Variable costing will generally report less operating income than absorption costing when the inventory level decreases.

Use the information below to answer the following question(s). Car Tunes produces car radios.Actual fixed manufacturing overhead is the same as the budgeted amount,$330,000.Production in September increased by 10% over the previous month's production.August production was 5,000 radios.The production level is the same as the budgeted denominator level.At the end of September,1,000 radios remained in stock.In August,all of the radios were sold by the end of the month and there was no remaining work in process inventory. -What is the Car Tune's September cost of goods sold amount if absorption costing is used?

Use the information below to answer the following question(s). Balloon Arrangements produces balloon bouquets.The following information has been provided by management: -What is the total cost per bouquet if absorption costing is used?

Answer the following question(s)using the information below. Greene Manufacturing incurred the following expenses during the current year: -What will be the break-even point if variable costing is used?

Answer the following question(s)using the information below. Greene Manufacturing incurred the following expenses during the current year: -What will be the break-even point in units if absorption costing is used?

Answer the following question(s)using the information below. The following information pertains to the Bean Company: -What is the absorption costing break-even point in units?

The following data are available for Ruggles Company for the year ended September 30,2016. Required: a.Determine operating income using the variable costing approach. b.Determine operating income using the absorption costing approach. c.Explain why the income was different each year using the two methods.Show computations.

Theoretical capacity is rarely used to calculate the budgeted fixed manufacturing cost per case because it departs significantly from the real capacity available to a company.

Evaluate the statement,"The breakeven points are generally different under both variable costing and absorption costing." Include in your discussion the factors that can cause the breakeven in absorption costing to vary.

Changes in inventory levels do not affect income amounts between variable and absorption costing because the difference in accounting for fixed manufacturing overhead offsets the affect.

For the current year,Bonnet Inc. ,had sales of 42,000 units and production of 50,000 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.

Full product costs under absorption costing include only inventoriable costs and upstream costs.

Wallace's Wrench Company manufactures socket wrenches.For next month the vice-president of production plans on producing 4,400 wrenches per day.The company can produce as many as 5,000 wrenches per day,but are more likely to produce 4,500 per day.The demand for wrenches for the next three years is expected to average 4,250 wrenches per day.Fixed manufacturing costs per month total $336,600.The company works 20 days a month due to local zoning restrictions.Fixed manufacturing overhead is charged on a per wrench basis. Required: a.What is the theoretical fixed manufacturing overhead rate per wrench? b.What is the practical fixed manufacturing overhead rate per wrench? c.What is the normal fixed manufacturing overhead rate per wrench? d.What is the master-budget fixed manufacturing overhead rate per wrench?

Answer the following question(s)using the information below. Peggy's Pillows produces and sells a decorative pillow for $75.00 per unit.In the first month of operation,2,000 units were produced and 1,750 units were sold.Actual fixed costs are the same as the amount budgeted for the month.Other information for the month includes: -What is cost of goods sold using variable costing?

Master-budget capacity utilization can be more reliably estimated than normal capacity utilization.

Holding fixed cost and unit contribution margin constant,operating income rises as the level of sales rises.