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Accounting for Business Decisions II

by: Johnnie Little

Accounting for Business Decisions II ACCT 311

Marketplace > University of Idaho > Accounting > ACCT 311 > Accounting for Business Decisions II
Johnnie Little
GPA 3.6


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Class Notes
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This 4 page Class Notes was uploaded by Johnnie Little on Friday October 23, 2015. The Class Notes belongs to ACCT 311 at University of Idaho taught by Staff in Fall. Since its upload, it has received 34 views. For similar materials see /class/227955/acct-311-university-of-idaho in Accounting at University of Idaho.


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Date Created: 10/23/15
Variable vs Absorption Costing The Zwatch Company manufactures trendy highquality moderately priced watches As Zwatch s senior nancial analyst you are asked to recommend a method of inventory costing The CFO will use your recommendation to prepare Zwatch s 2007 income statement The following Data are for the year ended December 31 2007 V cost per materials The xed manufacturing costs are allocated to the products based on machine hours During the period the total machine hours used is 6000 Assume that standard costs per unit are the same for units in beginning inventory and units produced during the year 1 Prepare income statements under variable and absorption costing for the year ended December 31 2007 2 What is Zwatch s operating income as percentage of revenues under each costing method 3 Explain the difference in operating income between the two methods 4 Which costing method would you recommend to the CFO Why 9 20 40 min Variable versus absorption costing 1 Income Statement for the Zwatch Company Variable Costing for the Year Ended December 31 2007 Revenues 22 X 345400 7598800 Variable costs Beginning inventory 510 X 85000 433500 Variable manufacturing costs 510 X 294900 1 503 990 Cost of goods available for sale 1937490 Deduct ending inventory 510 X 34500 175 950 Variable cost of goods sold 1761540 Variable operating costs 110 X 345400 379940 Adjustment for variances 0 Total variable costs 2 141 480 Contribution margin 5457320 Fixed costs Fixed manufacturing overhead costs 1440000 Fixed operating costs 1 080 000 Total xed costs 2 520 000 Operating income 2 937 320 Absorption Costing Data Fixed manufacturing overhead allocation rate Fixed manufacturing overheadDenominator level machinehours 1440000 6000 240 per machine hour Fixed manufacturing overhead allocation rate per unit J Fixed f iugoverhead quot J ur J quot rate240 50 480 per unit Income Statement for the Zwatch Company Absorption Costing for the Year Ended December 31 2007 Revenues 22 X 345400 Cost of goods sold Beginning inventory 510 480 X 85000 841500 Variable manuf costs 510 X 294900 1503990 Allocated xed manuf costs 480 X 294900 1 415 520 Cost of goods available for sale 3761010 Deduct ending inventory 510 480 X 34500 341550 Adjust for manuf variances 480 X 5100a 24 480 U Cost of goods sold Gross margin Operating costs Variable operating costs 110 X 345400 379940 Fixed operating costs 1 080 000 Total operating costs Operating income a Production volume variance 6000 hours X 50 7 294900 X 480 300000 7 294900 X 480 24480 Zwatch s operating margins as a percentage of revenues are Under variable costing Revenues 7598800 Operating income 2937320 Operating income as percentage of revenues 387 Under absorption costing Revenues 7598800 Operating income 2694920 Operating income as percentage of revenues 355 7598800 3 443 940 4154860 1 459 940 2 694 920 3 Operating income using variable costing is about 9 higher than operating income calculated using absorption costing Variable costing operating income 7 Absorption costing operating income 2937320 7 2694920 242400 Fixed manufacturing costs in beginning inventory under absorption costing 7 Fixed manufacturing costs in ending inventory under absorption costing 480 X 85000 7 480 X 34500 242400 4 The factors the CFO should consider include a Effect on managerial behavior b Effect on external users of financial statements I would recommend absorption costing because it considers all the manufacturing resources whether variable or fixed used to produce units of output Absorption costing has many critics However the dysfunctional aspects associated with absorption costing can be reduced by 0 Careful budgeting and inventory planning 0 Adding a capital charge to reduce the incentives to build up inventory 0 Monitoring nonfinancial performance measures


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