9 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/F Inventory Costing and Capacity Analysis Chapter 9
9 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Inventory Costingand Capacity
Analysis
Inventory Costingand Capacity
AnalysisChapter 9
9 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1Learning Objective 1
Identify what distinguishesvariable costing from
absorption costing.
9 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Inventory-Costing MethodsInventory-Costing Methods
The difference between variable costingand absorption costing is based on the
treatment of fixed manufacturing overhead.
9 - 4©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variable CostingVariable Costing
DirectMaterials
VariableFactoryLabor
VariableOverhead
Work in Process Inventory
9 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variable CostingVariable Costing
Work in ProcessInventory
Finished GoodsInventory
Cost of Goods Sold
Income Summary
Fixed FactoryLabor
9 - 6©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2Learning Objective 2
Prepare income statementsunder absorption costing
and variable costing.
9 - 7©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparing Income StatementsComparing Income Statements
The following data pertain to Davenport Fixtures:
Year 1 Year 2 TotalBeginning inventory -0- 2,000 -0-Produced 10,000 11,500 21,500Sold 8,000 13,000 21,000Ending inventory 2,000 500 500
9 - 8©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparing Income StatementsComparing Income Statements
The following information is on a per unit basis:
Sales price: $71.00
Variable manufacturing costs:Direct materials: $ 4.00Direct manufacturing labor: $21.00Indirect manufacturing costs: $24.00
Fixed manufacturing costs: $ 4.50
9 - 9©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparing Income Statements(Absorption Costing)
Comparing Income Statements(Absorption Costing)
Total fixed production costs are $54,000at a normal capacity of 12,000 units.
Fixed nonmanufacturing costs are$30,000 per year.
Variable nonmanufacturing costs are$2.00 per unit sold.
9 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparing Income Statements(Absorption Costing)
Comparing Income Statements(Absorption Costing)
Revenues $568,000Cost of goods sold 428,000Volume variance (U) 9,000Gross margin $131,000Nonmanufacturing costs 46,000Operating income $ 85,000
9 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparing Income Statements(Absorption Costing)
Comparing Income Statements(Absorption Costing)
Revenues for Year 1 are $568,000.
What is the cost of goods sold?
8,000 × $49 = $392,000
What is the manufacturing contribution margin?
$568,000 – $392,000 = $176,000
Net contribution margin = $160,000
9 - 12©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparing Income Statements (Variable Costing)
Comparing Income Statements (Variable Costing)
Revenues $568,000Cost of goods sold 392,000Variable nonmanufacturing costs 16,000Contribution margin $160,000Fixed manufacturing costs 54,000Fixed nonmanufacturing costs 30,000Operating income $ 76,000
9 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3Learning Objective 3
Explain differences in operatingincome under absorption
costing and variable costing.
9 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Operating Income(Absorption Costing)
Operating Income(Absorption Costing)
What are revenues for Year 2?
13,000 × $71 = $923,000
What is the cost of goods sold?
13,000 × $53.50 = $695,500
Is there a volume variance?
(12,000 – 11,500) × $4.50 = $2,250underallocated fixed manufacturing costs
9 - 15©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Operating Income(Absorption Costing)
Operating Income(Absorption Costing)
What is the gross margin?
$923,000 – ($695,500 + $2,250) = $225,250
What are the nonmanufacturing costs?
13,000 units sold × $2.00 = $26,000variable costs + $30,000 fixed costs = $56,000
9 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Operating Income(Absorption Costing)
Operating Income(Absorption Costing)
What is the operating income before taxes?
$225,250 – $56,000 = $169,250
What is the operating income for thetwo years combined?
$85,000 + $169,250 = $254,250
9 - 17©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Income Statements (Absorption Costing)Income Statements (Absorption Costing)
Year 1 Year 2 CombinedRevenues $568,000 $923,000 $1,491,000Cost of goods sold 428,000 695,500 1,123,500Volume variance (U) 9,000 2,250 11,250Gross margin $131,000 $225,250 $ 356,250Nonmfg. costs 46,000 56,000 102,000Operating income $ 85,000 $169,250 $ 254,250
9 - 18©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Operating Income(Variable Costing)Operating Income(Variable Costing)
Revenues for Year 2 are $923,000.
What is the cost of goods sold?
13,000 × $49 = $637,000
What is the manufacturing contribution margin?
$923,000 – $637,000 = $286,000
9 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Operating Income(Variable Costing)Operating Income(Variable Costing)
What is the net contribution margin?
$286,000 – $26,000 variable nonmanufacturing costs= $260,000 net contribution margin
What is the operating income before taxes?
$260,000 – $54,000 fixed manufacturing costs– $30,000 fixed nonmanufacturing costs = $176,000
9 - 20©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Income Statements(Variable Costing)Income Statements(Variable Costing)
Year 1 Year 2 CombinedRevenues $568,000 $923,000 $1,491,000Cost of goods sold 392,000 637,000 1,029,000Mfg. contr. margin $176,000 $286,000 $ 462,000Variable nonmfg. 16,000 26,000 42,000Net contr. margin $160,000 $260,000 $ 420,000
9 - 21©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Income Statements(Variable Costing)Income Statements(Variable Costing)
Year 1 Year 2 CombinedNet contr. margin $160,000 $260,000 $420,000Fixed mfg. costs 54,000 54,000 108,000Fixed nonmfg. costs 30,000 30,000 60,000Operating income $ 76,000 $176,000 $252,000
9 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparison of Variableand Absorption CostingComparison of Variableand Absorption Costing
Variable costing operating income Year 1: $76,000
Absorption costing operating income Year 1: $85,000
Absorption costing operating income is $9,000 higher.
Why?
9 - 23©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparison of Variableand Absorption CostingComparison of Variableand Absorption Costing
Production exceeds sales in Year 1.
The 2,000 units in ending inventoryare valued as follows:
Absorption costing: 2,000 × $53.50 = $107,000
Variable costing: 2,000 × $49.00 = $ 98,000
Difference: $ 9,000
9 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparison of Variableand Absorption CostingComparison of Variableand Absorption Costing
Variable costing operating income Year 2: $176,000
Absorption costing operating income Year 2: $169,250
Variable costing operating income is $6,750 higher.
Why?
9 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparison of Variableand Absorption CostingComparison of Variableand Absorption Costing
Sales exceeded units produced in Year 2.
13,000 – 11,500 = 1,500 decrease in inventory
Absorption costing: 1,500 × $53.50 = $80,250
Variable costing: 1,500 × $49.00 = $73,500
Higher cost of goods sold underabsorption costing: $ 6,750
9 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparison of Variableand Absorption CostingComparison of Variableand Absorption Costing
Variable costing combined net income: $252,000
Absorption costing combined net income: $254,250
Absorption costing is higher by $2,250
500 units in inventory × $4.50 = $2,250
9 - 27©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparison of Variableand Absorption CostingComparison of Variableand Absorption Costing
Absorption costingoperating income
Variable costingoperating income
Fixed manufacturingcosts in endinginventory under
absorption costing
Fixed manufacturingcosts in beginninginventory under
absorption costing
–
EQUALS
–
9 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4Learning Objective 4
Understand how absorptioncosting can provide undesirable
incentives for managers tobuild up finished goods inventory.
9 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Inventory BuildupInventory Buildup
What is the production volume variance?
(12,000 – 4,400) × $4.50 = $34,200 U
What is the net operating income or lossfor the period?
Assume that Davenport Fixtures produced4,400 units in Year 1 and sold 4,100.
9 - 30©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Inventory BuildupInventory Buildup
Revenues (4,100 × $71) $291,100Cost of goods sold (4,100 × $53.50) 219,350Volume variance 34,200Gross margin $ 37,550Nonmanufacturing costs 38,200Net loss $ 650
9 - 31©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Inventory BuildupInventory Buildup
4,400 – 4,100 = 300
How much cost is in ending inventory?
300 × $53.50 = $16,050
How many units are in ending inventory?
9 - 32©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Inventory BuildupInventory Buildup
Sales remain the same (4,100 units).
What is the volume variance?
(12,000 – 9,000) × $4.50 = $13,500 U
Suppose that management decides toproduce 9,000 units next year.
What is the operating income or loss?
9 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Inventory BuildupInventory Buildup
Revenues (4,100 × $71) $291,100Cost of goods sold (4,100 × $53.50) 219,350Volume variance 13,500Gross margin $ 58,250Nonmanufacturing costs 38,200Net income $ 20,050
9 - 34©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Inventory BuildupInventory Buildup
300 + 9,000 – 4,100 = 5,200
How much cost is in ending inventory?
5,200 × $53.50 = $278,200
How many units are in ending inventory?
9 - 35©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5Learning Objective 5
Differentiate throughputcosting from variable costing
and absorption costing.
9 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Throughput CostingThroughput Costing
Revenues $568,000Variable direct materials cost of goods sold 32,000Throughput contribution margin $536,000Manufacturing costs 504,000Nonmanufacturing costs 46,000Operating loss $ 14,000
9 - 37©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Throughput CostingThroughput Costing
Manufacturing Costs:Labor $21.00 × 10,000 $210,000Indirect costs $24.00 × 10,000 240,000Fixed costs 54,000Total manufacturing costs $504,000
What are other nonmanufacturing costs for the year?
9 - 38©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Throughput CostingThroughput Costing
Nonmanufacturing Costs:Variable $2.00 × 8,000 $16,000Fixed 30,000Total $46,000
9 - 39©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Throughput CostingThroughput Costing
Variable costing operating income: $76,000Throughput costing operating loss: $14,000
Difference in operating income: $90,000
How can this difference be explained?
9 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Throughput CostingThroughput Costing
The 2,000 units in ending inventoryare valued as follows:
Variable2,000 × $49 = $98,000
Throughput2,000 × $4 = $8,000
$90,000 difference
9 - 41©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Throughput CostingThroughput Costing
Absorption costing operating income: $85,000Throughput costing operating loss: $14,000
Difference in operating income: $99,000
How can this difference be explained?
9 - 42©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Throughput CostingThroughput Costing
The 2,000 units in ending inventoryare valued as follows:
Absorption2,000 × $53.50 =
$107,000
Throughput2,000 × $4= $8,000
$99,000 difference
9 - 43©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparison of InventoryCosting Methods
Actual CostingActual Costing
AbsorptionCosting
AbsorptionCosting
ThroughputCosting
ThroughputCosting
VariableCostingVariableCosting
9 - 44©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparison of InventoryCosting Methods
Normal CostingNormal Costing
AbsorptionCosting
AbsorptionCosting
ThroughputCosting
ThroughputCosting
VariableCostingVariableCosting
9 - 45©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Comparison of InventoryCosting Methods
Standard CostingStandard Costing
AbsorptionCosting
AbsorptionCosting
ThroughputCosting
ThroughputCosting
VariableCostingVariableCosting
9 - 46©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6Learning Objective 6
Describe the variouscapacity concepts
that can be used inabsorption costing.
9 - 47©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Alternative Denominator-LevelConcepts
Alternative Denominator-LevelConcepts
Theoretical capacity
Practical capacity
Normal capacity
Master-budget capacity
9 - 48©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Budgeted Fixed ManufacturingOverhead Rate
Budgeted Fixed ManufacturingOverhead Rate
Lloyd’s Bicycles produces bicycle partsfor domestic and foreign markets.
Fixed overhead costs are $200,000 within therelevant range of the various capacity volume.
9 - 49©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Budgeted Fixed ManufacturingOverhead Rate
Budgeted Fixed ManufacturingOverhead Rate
Assume that the theoretical capacity is10,000 machine-hours, practical capacity
is 85%, normal capacity is 75%, andmaster-budget capacity is 60%.
What is the budgeted fixed manufacturingoverhead rate at the various capacity levels?
9 - 50©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Budgeted Fixed ManufacturingOverhead Rate
Budgeted Fixed ManufacturingOverhead Rate
Theoretical 100%:$200,000 ÷ 10,000 = $20.00/machine-hour
Practical 85%:$200,000 ÷ 8,500 = $23.53/machine-hour
Normal 75%:$200,000 ÷ 7,500 = $26.67/machine-hour
Master-budget 60%:$200,000 ÷ 6,000 = $33.33/machine-hour
9 - 51©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7Learning Objective 7
Understand the major factorsmanagement considers in choosing
a capacity level to compute thebudgeted fixed overhead cost rate.
9 - 52©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Choosing a Capacity Level Choosing a Capacity Level
What factors are consideredin choosing a capacity level?
Productcosting
Pricingdecision
Performanceevaluation
Financialstatements
Regulatoryrequirements
Difficulty
9 - 53©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Decision MakingDecision Making
Assume that Lloyd’s Bicycles’ standardhours are 2 hours per unit.
What is the budgeted fixed manufacturingoverhead cost per unit?
9 - 54©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Decision MakingDecision Making
Theoretical capacity: $20 × 2 = $40.00
Practical capacity: $23.53 × 2 = $47.06
Normal capacity: $26.67 × 2 = $53.34
Master-budget capacity: $33.33 × 2 = $66.66
9 - 55©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 8Learning Objective 8
Describe how attempts torecover fixed costs of capacity
may lead to price increasesand lower demand.
9 - 56©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Downward Demand Spiral
The downward demand spiral is the continuingreduction in demand that occurs when the pricesof competitors are not met and demand drops.
9 - 57©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 9Learning Objective 9
Explain how the capacitylevel chosen to calculate
the budgeted fixed overheadcost rate affects the
production-volume variance.
9 - 58©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Effect on Financial StatementsEffect on Financial Statements
Assume that Lloyd’s Bicycles actually used8,400 machine-hours during the year.
What is the production volume variance?
9 - 59©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Production Volume VarianceProduction Volume Variance
Production volume variance= (Denominator level – Actual level)
× Budgeted fixed manufacturing overhead rate
Theoretical capacity:(10,000 – 8,400) × $20.00 = $32,000 U
Practical capacity:(8,500 – 8,400) × $23.53 = $2,353 U
9 - 60©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Production Volume VarianceProduction Volume Variance
Normal capacity:(7,500 – 8,400) × $26.67 = $24,003
Master-budget capacity:(6,000 – 8,400) × $33.33 = $79,992
9 - 61©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End of Chapter 9End of Chapter 9