Cost Accounting (14th Edition)

322 CHAPTER 9 INVENTORY COSTING AND CAPACITY ANALYSIS
Exhibit 9-7
Income-Statement Effects of Using Alternative Capacity-Level Concepts: Stassen
Company for 2012
A
B
Master-
Normal Budget
Theoretical Practical Capacity Capacity
1
2
3
4
5
6
7
8
9
10
11
12
Denominator level in cases
Revenues a
Cost of goods sold
Beginning inventory
Variable manufacturing costs b
Fixed manufacturing costs c
Cost of goods available for sale
Deduct ending inventory d
Cost of goods sold (at standard cost)
Adjustment for production-volume variance
Cost of goods sold
Capacity
18,000
$6,000,000
0
1,600,000
480,000
2,080,000
(520,000)
1,560,000
600,000 U
2,160,000
Capacity
12,000
$6,000,000
0
1,600,000
720,000
2,320,000
(580,000)
1,740,000
360,000 U
2,100,000
Utilization
10,000
$6,000,000
0
1,600,000
864,000
2,464,000
(616,000)
1,848,000
216,000 U
2,064,000
Utilization
8,000
$6,000,000
0
1,600,000
1,080,000
2,680,000
(670,000)
2,010,000
0
2,010,000
13 Gross
margin
14 Marketing
costs e
15 Operating income
16
3,840,000 2,490,000 $1,350,000 3,900,000
2,490,000
$1,410,000
3,936,000
2,490,000
$1,446,000
3,990,000
2,490,000
$1,500,000
17
$1,000 × 6,000 units = $6,000,000
18
$200 × 8,000 units = $1,600,000
19
Fixed manufacturing overhead costs:
d Ending inventory costs:
($200 + $60) × 2,000 units = $520,000
($200 + $90) × 2,000 units = $580,000
20
21
22
23
$60 × 8,000 units = $ 480,000
$90 × 8,000 units = $ 720,000
$108 × 8,000 units = $ 864,000
$135 × 8,000 units = $1,080,000
($200 + $108) × 2,000 units = $616,000
($200 + $135) × 2,000 units = $670,000
e Marketing costs:
$1,380,000 + $185 × 6,000 units = $2,490,000
C
D
E
F
G
H
I
variance among inventories and cost of goods sold or to simply write off the variance to
cost of goods sold. The objective is to write off the portion of the production-volume
variance that represents the cost of capacity not used to support the production of output
during the period. Determining this amount is almost always a matter of judgment.
Decision
Point
What are the major
factors managers
consider in choosing
the capacity level to
compute the
budgeted fixed
manufacturing
cost rate?
Tax Requirements
For tax reporting purposes in the United States, the Internal Revenue Service (IRS) requires
companies to assign inventoriable indirect production costs by a “method of allocation
which fairly apportions such costs among the various items produced.” Approaches that
involve the use of either overhead rates (which the IRS terms the “manufacturing burden
rate method”) or standard costs are viewed as acceptable. Under either approach, U.S. tax
reporting requires end-of-period reconciliation between actual and applied indirect costs
using the adjusted allocation-rate method or the proration method. 5 More interestingly,
under either approach, the IRS permits the use of practical capacity to calculate budgeted
fixed manufacturing cost per unit. Further, the production-volume variance thus generated
can be deducted for tax purposes in the year in which the cost is incurred. The tax benefits
from this policy are evident from Exhibit 9-7. Note that the operating income when the
5 For example, Section 1.471-11 of the U.S. Internal Revenue Code states, “The proper use of the standard cost method . . .
requires that a taxpayer must reallocate to the goods in ending inventory a pro rata portion of any net negative or net positive
overhead variances.” Of course, if the variances are not material in amount, they can be expensed (i.e., written off to cost of
goods sold), provided the same treatment is carried out in the firm’s financial reports.