Problem for Self-Study

Assume Stassen Company on January 1, 2020, decides to contract with another company to preassemble a large percentage of the components of its telescopes. The revised manufacturing cost structure for Stassen during the 2020–2021 period is as follows:

A table shows the revised manufacturing cost structure for Stassen during the 2020 through 2021 period

The table depicts the revised manufacturing cost structure for Stassen during the 2020 through 2021 period. The details of the table are as follows:

  1. Variable manufacturing cost per unit produced, direct materials: 250 dollars

  2. Variable manufacturing cost per unit produced, direct manufacturing labor: 20 dollars

  3. Variable manufacturing cost per unit produced, manufacturing overhead: 5 dollars

  4. Total variable manufacturing cost per unit produced: 275 dollars

  5. Fixed manufacturing costs: 480,000 dollars

Under the revised cost structure, a larger percentage of Stassen’s manufacturing costs are variable for units produced. The denominator level of production used to calculate budgeted fixed manufacturing cost per unit in 2020 and 2021 is 8,000 units. Assume no other change from the data underlying Exhibits 9-1 and 9-2. Summary information pertaining to absorption-costing operating income and variable-costing operating income with this revised cost structure are as follows:

<p>A table shows summary information pertaining to absorption-costing operating income and variable-costing operating income with a revised cost structure</p>

The table depicts absorption-costing operating income, variable-costing operating income, and the difference between the two for 2020 and 2021. The details of the table are as follows:

  1. Absorption-costing operating income

    • 2020: 1,500,000 dollars
    • 2021: 1,560,000 dollars

  2. Variable-costing operating income

    • 2020: 1,380,000 dollars
    • 2021: 1,650,000 dollars

  3. Difference: Absorption-costing operating income minus variable-costing operating income

    • 2020: 120,000 dollars
    • 2021: negative 90,000 dollars

Required

  1. Compute the budgeted fixed manufacturing cost per unit in 2020 and 2021.
  2. Explain the difference between absorption-costing operating income and variable-costing operating income in 2020 and 2021, focusing on fixed manufacturing costs in beginning and ending inventory.
  3. Why are these differences smaller than the differences in Exhibit 9-2?
  4. Assume the same preceding information, except that for 2020, the master-budget capacity utilization is 10,000 units instead of 8,000. How would Stassen’s absorption-costing income for 2020 differ from the $1,500,000 shown previously? Show your computations.

Solution

Budgeted fixedmanufacturingcost per unit=Budgeted fixed manufacturing costBudgeted production units=$480,0008,000  units=$60  per unit

Absorption‐costingoperatingincome − Variable‐costingoperatingincome = Fixed manufacturingcosts in endinginventory underabsorption costing − Fixed manufacturingcosts in beginninginventor underabsorption costing2020: $1,500,000−$1,380,000=($60 per unit×2,000  units)  − ($60  per unit    ×   0  units) $120,000=$120,0002021 : $1,560,000−$1,650,000=($60  per unit×500  units)  −   ($60  per unit    ×    2,000  units)−$90,000=−$90,000

  1. Subcontracting a large part of manufacturing has greatly reduced the magnitude of fixed manufacturing costs. This reduction, in turn, means differences between absorption costing and variable costing are much smaller than in Exhibit 9-2.
  2. Given the higher master-budget capacity utilization level of 10,000 units, the budgeted fixed manufacturing cost rate for 2020 is now as follows:

$480,00010,000 units=$48 per unit

The manufacturing cost per unit is $323 ($275+$48). So, the production-volume variance for 2020 is

(10,000 units−8,000 units)×$48 per unit=$96,000 U

The absorption-costing income statement for 2020 is as follows:

<p>A table shows the absorption-costing income statement for 2020</P>

The table depicts the absorption-costing income statement for 2020. The details of the table are as follows:

1. Revenues: 1,000 dollars per unit times 6,000 units: 6,000,000 dollars

2. Cost of goods sold, beginning inventory: 0 dollars

3. Cost of goods sold, variable manufacturing costs, 275 dollars per unit times 8,000 units: 2,200,000 dollars

4. Cost of goods sold, fixed manufacturing costs, 48 dollars per unit times 8,000 units: 384,000 dollars

5. Cost of goods available for sale: 2,584,000 dollars

6. Deduct ending inventory, 323 dollars per unit times 2,000 units: 646,000 dollars

7. Cost of goods sold at standard costs: 1,938,000 dollars

8. Adjustment for production volume variance: 96,000 dollars U

9. Cost of goods sold: 2,034,000 dollars

10. Gross margin: 3,966,000 dollars

11. Marketing costs, 1,380,000 dollars fixed plus the quantity 185 dollars per unit times 6,000 units sold: 2,490,000 dollars

12. Operating income: 1,476,000 dollars

The higher denominator level used to calculate the budgeted fixed manufacturing cost per unit means that fewer fixed manufacturing costs are inventoried ($48 per unit × 2,000  units=$96,000) than when the master-budget capacity utilization was 8,000  units  ($60  per unit   ×   2,000 units =$120,000). This difference of $24,000  ($120,000   −   $96,000) results in operating income being lower by $24,000 relative to the prior calculated income level of $1,500,000.