You are the accounting manager in a medium-sized manufacturing company. The company's first year just ended, and the accounting department is working on closing the books. You plan to present information about unit costs and profits, to the generalmanager (GM) in two different formats. One method uses variable costing, and the other uses absorption costing. The GM will need to choose one or the other for accounting purposes. Whatever method he chooses will have to remain the method going forward as the choice of the method could impact reported profitability and therefore taxes. (The IRS frowns on firms making accounting methodology changes that impact any period's profits.)
You explain to the GM that if you choose to use the absorptive method, it will not only impact the reported profits of the year that just ended but will have an impact on the reported profits of the upcoming year, too. He doesn't understand what this means and asks for a more detailed explanation.
How absorption costing differs from variable costing
How the absorptive method will not only impact the reported profits of the year that just ended but will also have an impact on the reported profits of the upcoming year
Group Portion:
As the accounting manager, you and your staff need to prepare year-ending information to present to the company's general manager.
Part A:
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Part A Data
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Budgeted and actual fixed costs
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$1,000,000
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Budgeted unit volume to be produced
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10,000
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Budgeted unit volume sold
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10,000
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Actual variable costs
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$500,000
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Actual unit volume sold
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9,000
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Beginning of year inventory
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0
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End of year inventory
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1,000
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How many units of production were:
produced?
shipped?
left in inventory?
How much of the firm's fixed costs stayed in inventory?
under variable costing?
under absorption costing?
Calculate the unit cost:
using variable costing.
using absorption costing.
Based on how much of the firm's fixed costs stayed in inventory, how much of the firm's fixed costs ended up on the year's COGS and income statement?
under variable costing?
under absorption costing?
Part B:
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Part B Data
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A firms cost structure is as follows:
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Monthly fixed costs
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$20,000
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Variable cost/unit
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$80
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Selling price/unit
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$100
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Using the Part B data:
Calculate the firm's break-even point in units of production.
Predict the firm's profitability if volume is 1,200 units.