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Managerial Accounting Test Review 2.docx

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Boston College
ACCT 1022
Ken Porter

Under absorption costing, fixed manufacturing-overhead costs are assigned to units of product as product costs. Under variable costing, fixed manufacturing-overhead costs are not assigned to units of product as product costs; rather they are treated as period costs and expensed during the period in which they are incurred. When inventory increases, the income reported under absorption costing will be greater than the income reported under variable costing. This difference results from the fact that under absorption costing, some of the fixed manufacturing costs incurred during the period will not be expensed. In contrast, under variable costing all of the fixed manufacturing costs incurred during the period will be expensed during that period. Many managers prefer variable costing over absorption costing because income statements prepared under variable costing more closely reflect operations. For example, when sales increase, other things being equal, income will also increase under variable costing. Under absorption costing, however, income will not necessarily increase when sales increase. Some managerial accountants believe that absorption costing may provide an incentive for managers to overproduce inventory so that the fixed manufacturing overhead costs may be spread over a larger number of product units, thereby lowering the reported product cost per unit. Throughput costing avoids this potential problem by not assigning fixed manufacturing overhead as a product cost. Variable costing is consistent with cost-volume-profit analysis because it properly reflects the cost behavior of variable and fixed costs. Only variable manufacturing costs are treated as inventoriable product costs. Fixed manufacturing costs are recorded as a lump sum and expensed during the period incurred. CVP analysis also properly maintains the cost-behavior distinction between variable and fixed costs. In contrast, absorption costing is inconsistent with CVP analysis, because fixed overhead is applied to manufactured goods as a product cost on a per-unit basis. 8-13 Inventory increases by 2,000 units, so income is greater under absorption costing. -fixed overhead rate divided by the production=x -then x multiplied by the difference (2000) =xyz -if production is less then sales, its variable and if it’s the same then theres no change 8-15 Inventory calculations (units): Fin Goods Jan 1 2000 ADD Units Produced 20000 LESS Units Sold 21000 Ending Goods Dec 31 1000 1) Under variable costing- Direct Material Used- 600000 Direct Labor Incurred- 300000 Variable MOH- 200000 TOTAL 1,100,000 1,100,000/20,000= $55 per unit x 1000 = 55,000 Fin Goods Inventory 2) Absorption fixed overhead rate =fixed MOH/planned production=420000/20000=$21 per unit difference =change in inventory units x predetermined fixed overhead rate =1000 x 21= 21000 -so since inventory decreased during the year, income reported under absorption costing will be 21000 lower than income reported under variable costing 8-16 Direct Material Used 40000 Direct Labor Incurred 20000 Variable Manufacturing Overhead 12000 TOTAL 72000 Cost per unit  72000/10000=7.20 per unit Ending Invent. 1000 x 7.20 = 7200  In Absorption: Predetermined fixed OH Rate=fixed MOH/planned production= 25000/10000= 2.50 Difference in fixed absorb/variable is =change in inventory units x predetermined  OH rate=1000 x 2.50 =2500 Since Inventory increased during the year, income reported under absorption  costing will be 2500 higher than income reported under variable costing In Throughput Costing: Direct Materials 40000 Cost per unit 40000/10000= 4.00per unit Ending is 1000 x 4.00 = 4000 8­21 predetermined overheat rate = budgeted fixed/budgeted production =  300000/150000= 2per unit Cost Per Unit Direct Material= 5 Direct Labor= 2 Variable Overhead= 3 Cost per unit under variable costing =10 Fixed overhead per unit =2 Cost per iunit under absorption = 12 Absorption Income Statement Year Ending Blah Sales Revenue (125000 x Sales Price (15))        1,875,000 LESS COGS sold at Absorption 12(125000)=     1,500,000 Gross Margin 375,000 LESS  Selling Administrative Expenses Variable at 1 per unit =    125000 Fixed                                        50,000 Net Income­ 200,000 Variable Costing Income Statement Sales Rev­ 1,875,000 LESS­ Variable Expenses Variable Manu. Costs­10per unit­ 1,250,000 Variable Selling and Administrative Costs at 1 per unit 125,000 Contribution Margin = 500,000 LESS Fixed Expenses Fixed MOH= Fixed rate x 150000=   300000 Fixed Sell. And Admin. 50000 Net Income= 150,000 Reconcile: COGS Under Absorption 1500000 LESS­ Variable Costs Under variable costing 1,250,000 Subtotal 250,000 LESS Fixed MOH as period expense under variable =   300,000 TOTAL= (50,000) Net Income Under variable  150000 Less Net Income Under absorption          200000 Difference in Net income (50000) Shortcut­Method: Difference=change in inventory units x predetermined fixed OH = 25000 x 2 = 50,000 AS shown  in req. 2 , reported income is 50,000 lower under  variable costing 8­29 General economic trends are important in forecasting sales in the airline industry. The overall health of the economy is an important factor affecting the extent of business travel. In addition, the health of the economy, inflation, and income levels affect the extent to which the general public travels by air. A master budget is based on many assumptions and predictions of unknown parameters. For example, the sales budget is built on an assumption about the nature of demand for goods or services. The direct-material budget requires an estimate of th
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