Cost Accounting (14th Edition)

332 CHAPTER 9 INVENTORY COSTING AND CAPACITY ANALYSIS
Required
1. Prepare income statements based on variable costing for each of the two years.
2. Prepare income statements based on absorption costing for each of the two years.
3. Prepare a numerical reconciliation and explanation of the difference between operating income for
each year under absorption costing and variable costing.
4. Critics have claimed that a widely used accounting system has led to undesirable buildups of inventory
levels. (a) Is variable costing or absorption costing more likely to lead to such buildups? Why? (b) What
can be done to counteract undesirable inventory buildups?
9-24 Variable and absorption costing, sales, and operating-income changes. Helmetsmart, a threeyear-old
company, has been producing and selling a single type of bicycle helmet. Helmetsmart uses standard
costing. After reviewing the income statements for the first three years, Stuart Weil, president of
Helmetsmart, commented, “I was told by our accountants—and in fact, I have memorized—that our
breakeven volume is 49,000 units. I was happy that we reached that sales goal in each of our first two years.
But, here’s the strange thing: In our first year, we sold 49,000 units and indeed we broke even. Then, in our
second year we sold the same volume and had a positive operating income. I didn’t complain, of course . . .
but here’s the bad part. In our third year, we sold 20% more helmets, but our operating income fell by more
than 80% relative to the second year! We didn’t change our selling price or cost structure over the past
three years and have no price, efficiency, or spending variances . . . so what’s going on?!”
A
B
C
D
1
Absorption Costing
2
2011
2012
2013
3
Sales (units)
49,000
49,000
58,800
4
Revenues
$1,960,000
$1,960,000
$2,352,000
5 Cost of goods sold
6
Beginning inventory
0
0
352,800
7
Production
1,764,000
2,116,800
1,764,000
8 Available for sale
1,764,000
2,116,800
2,116,800
9
Deduct ending inventory
0
(352,800)
0
10
Adjustment for production-volume variance
0
(215,600)
0
11 Cost of goods sold
1,764,000
1,548,400
2,116,800
12
Gross margin
196,000
411,600
235,200
13
Selling and administrative expenses (all fixed)
196,000
196,000
196,000
14 Operating income
$ 0
$ 215,600
$ 39,200
15
16
Beginning inventory
0
0
9,800
17
Production (units)
49,000
58,800
49,000
18
Sales (units)
49,000
49,000
58,800
19
Ending inventory
0
9,800
0
20
Variable manufacturing cost per unit
$ 14
$ 14
$ 14
21
Fixed manufacturing overhead costs
$1,078,000
$1,078,000
$1,078,000
22
Fixed manuf. costs allocated per unit produced
$ 22
$ 22
$ 22
Required
1. What denominator level is Helmetsmart using to allocate fixed manufacturing costs to the bicycle helmets?
How is Helmetsmart disposing of any favorable or unfavorable production-volume variance at
the end of the year? Explain your answer briefly.
2. How did Helmetsmart’s accountants arrive at the breakeven volume of 49,000 units?
3. Prepare a variable costing-based income statement for each year. Explain the variation in variable
costing operating income for each year based on contribution margin per unit and sales volume.
4. Reconcile the operating incomes under variable costing and absorption costing for each year, and use
this information to explain to Stuart Weil the positive operating income in 2012 and the drop in operating
income in 2013.