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6-4 What arguments in favor of treating fixed manufacturingoverhead costs as product costs?

6-6 If the units produced and unit sales are equal, which methodwould you expet to show the higer operating income, variablecosting or absorption costing? Why?

6-7 If the units produced exceed unit sales, which method wouldyou expect to show the higher net operating income, variablecosting or absorptioncosting? Why?

6-8 If fixed manufacturing overhead costs are relaesed frominventory under absorption costing, what does this tell you aboutthe level of production in relation to the level of sales?

6-9 Under absorption costing, how is it possible to increase netoperating income without increasing sales?

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Deanna Hettinger
Deanna HettingerLv2
28 Sep 2019
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6-7 If the units produced exceed unit sales, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?

Diego Company manufactures one product that is sold for $73 perunit in two geographic regions—the East and West regions. Thefollowing information pertains to the company’s first year ofoperations in which it produced 44,000 units and sold 39,000units.

Variable costs per unit: Manufacturing: Direct materials $ 23Direct labor $ 16 Variable manufacturing overhead $ 2 Variableselling and administrative $ 4 Fixed costs per year: Fixedmanufacturing overhead $ 748,000 Fixed selling and administrativeexpenses $ 400,000

The company sold 29,000 units in the East region and 10,000units in the West region. It determined that $180,000 of its fixedselling and administrative expenses is traceable to the Westregion, $130,000 is traceable to the East region, and the remaining$90,000 is a common fixed cost. The company will continue to incurthe total amount of its fixed manufacturing overhead costs as longas it continues to produce any amount of its only product.

What is the company’s net operating income (loss) underabsorption costing? 7. What is the amount of the difference betweenthe variable costing and absorption costing net operating incomes(losses)? Difference of Variable Costing and Absorption Costing NetOperating Incomes Variable costing net operating income (loss)Absorption costing net operating income (loss) Add: Fixedmanufacturing overhead cost deferred in inventory under absorptioncosting Add: Fixed manufacturing overhead cost released frominventory under absorption costing Deduct: Fixed manufacturingoverhead cost deferred in inventory under absorption costingDeduct: Fixed manufacturing overhead cost released from inventoryunder absorption costing which one? 8. What is the company’sbreak-even point in unit sales? 9. If the sales volumes in the Eastand West regions had been reversed, what would be the company’soverall break-even point in unit sales? 10. What would have beenthe company’s variable costing net operating income (loss) if ithad produced and sold 39,000 units? 11. What would have been thecompany’s absorption costing net operating income (loss) if it hadproduced and sold 39,000 units? 12. If the company produces 5,000fewer units than it sells in its second year of operations, willabsorption costing net operating income be higher or lower thanvariable costing net operating income in Year 2? Higher or Lower13. Prepare a contribution format segmented income statement thatincludes a Total column and columns for the East and West regions.Income Statement Total Company East West 0 0 $0

6–6 If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?

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