Jawapan MA 12th ed- Chapter 9

CHAPTER 9
INVENTORY COSTING AND CAPACITY ANALYSIS

9-1

No. Differences in operating income between variable costing and absorption costing are due to accounting for fixed manufacturing costs. Under variable costing only variable manufacturing costs are included as inventoriable costs. Under absorption costing both variable and fixed manufacturing costs are included as inventoriable costs. Fixed marketing and distribution costs are not accounted for differently under variable costing and absorption costing.


9-2

The term direct costing is a misnomer for variable costing for two reasons:

a. Variable costing does not include all direct costs as inventoriable costs. Only variable direct manufacturing costs are included. Any fixed direct manufacturing costs, and any direct nonmanufacturing costs, (either variable or fixed) are excluded from inventoriable costs.

b. Variable costing includes as inventoriable costs not only direct manufacturing costs but also some indirect costs (variable indirect manufacturing costs).


9-3

No. The difference between absorption costing and variable costs is due to accounting for fixed manufacturing costs. As service or merchandising companies have no fixed manufacturing costs, these companies do not make choices between absorption costing and variable costing.


9-4

The main issue between variable costing and absorption costing is the proper timing of the release of fixed manufacturing costs as costs of the period:
a. at the time of incurrence, or
b. at the time the finished units to which the fixed overhead relates are sold.
Variable costing uses (a) and absorption costing uses (b).


9-5

No. A company that makes a variable-cost/fixed-cost distinction is not forced to use any specific costing method. The Stassen Company example in the text of Chapter 9 makes a variable-cost/fixed-cost distinction. As illustrated, it can use variable costing, absorption costing, or throughput costing.

A company that does not make a variable-cost/fixed-cost distinction cannot use variable costing or throughput costing. However, it is not forced to adopt absorption costing. For internal reporting, it could, for example, classify all costs as costs of the period in which they are incurred.

9-6

Variable costing does not view fixed costs as unimportant or irrelevant, but it maintains that the distinction between behaviors of different costs is crucial for certain decisions. The planning and management of fixed costs is critical, irrespective of what inventory costing method is used.


9-7

Under absorption costing, heavy reductions of inventory during the accounting period might combine with low production and a large production volume variance. This combination could result in lower operating income even if the unit sales level rises.


9-8

(a) The factors that affect the breakeven point under variable costing are:
1. Fixed costs,
2. Contribution margin per unit.

(b) The factors that affect the breakeven point under absorption costing are:
1. Fixed costs,
2. Contribution margin per unit,
3. Production level in units in excess of breakeven sales in units.
4. Denominator level chosen to set the fixed manufacturing cost rate.


9-9

Examples of dysfunctional decisions managers may make to increase reported operating income are:
a. Plant managers may switch production to those orders that absorb the highest amount of fixed manufacturing overhead, irrespective of the demand by customers.

b. Plant managers may accept a particular order to increase production even though another plant in the same company is better suited to handle that order.

c. Plant managers may defer maintenance beyond the current period to free up more time for production.


9-10

Approaches used to reduce the negative aspects associated with using absorption costing include:
a. Change the accounting system:
• Adopt either variable or throughput costing, both of which reduce the incentives of managers to produce for inventory.
• Adopt an inventory holding charge for managers who tie up funds in inventory.

b. Extend the time period used to evaluate performance. By evaluating performance over a longer time period (say, 3 to 5 years), the incentive to take short-run actions that reduce long-term income is lessened.

c. Include nonfinancial as well as financial variables in the measures used to evaluate performance.


9-11

The theoretical capacity and practical capacity denominator-level concepts emphasize what a plant can supply. The normal capacity utilization and master-budget capacity utilization concepts emphasize what customers demand for products produced by a plant.


9-12

The downward demand spiral is the continuing reduction in demand for its product that occurs when the prices of competitors’ products are not met and (as demand drops further), higher and higher unit costs result in more and more reluctance to meet competitors’ prices. Pricing decisions need to consider competitors and customers as well as costs.


9-13

No. It depends on how a company handles the production-volume variance in the end-of-period financial statements. For example, if the adjusted allocation-rate approach is used, each denominator-level capacity concept will give the same financial statement numbers at year end.


9-14

For tax reporting in the U.S., the IRS requires companies to use the practical capacity concept. At year end, proration of any variances between inventories and cost of goods sold is required (unless the variance is immaterial in amount).


9-15

No. The costs of having too much capacity/too little capacity involve revenue opportunities potentially forgone as well as costs of money tied up in plant assets.


9-16 Variable and absorption costing, explaining operating income differences.

1.
Key inputs for income statement computations are:


The fixed manufacturing costs per unit and total manufacturing costs per unit under absorption costing are:


(a)
Variable Costing

a $2,500 × 700; $2,500 × 800; $2,500 × 1,500
b $? × 0; $900 × 300; $900 × 300
c $900 × 1,000; $900 × 800; $900 × 1,250
d $900 × 300; $900 × 300; $900 × 50
e $600 × 700; $600 × 800; $600 × 1,500

(b)
Absorption Costing

a $2,500 × 700; $2,500 × 800; $2,500 × 1,500
b ($?× 0; $1,300 × 300; $1,400 × 300)
c $900 × 1,000, $900 × 800, $900 × 1,250
d ($400 × 1,000); ($500 × 800); ($320 × 1,250)
e ($1,300 × 300); ($1,400 × 300); ($1,220 × 50)
f $600 × 700; $600 × 800; $600 × 1,500

2.
Absorption costing, OI – Variable costing, OI
= Fixed manufacturing costs in EI – Fixed manufacturing costs in BI

January:
$280,000 – $160,000 = ($400 × 300) – $0
$120,000 = $120,000

February:
$290,000 – $260,000 = ($500 × 300) – ($400 × 300)
$30,000 = $30,000

March:
$826,000 – $960,000 = ($320 × 50) – ($500 × 300)
– $134,000 = – $134,000

The difference between absorption and variable costing is due solely to moving fixed manufacturing costs into inventories as inventories increase (as in January) and out of inventories as they decrease (as in March).


9-17 Throughput costing (continuation of Exercise 9-16).

1.

a $2,500 × 700; $2,500 × 800; $2,500 × 1,500
b ($? × 0; $500 × 300; $500 × 300)
c $500 × 1,000; $500 × 800; $500 × 1,250
d $500 × 300; $500 × 300; $500 ×50
e ($400 × 1,000) + $400,000
...($400 × 800) + $400,000
...($400 × 1,250) + $400,000
f ($600 × 700) + $140,000
...($600 × 800) + $140,000
...($600 × 1,500) + $140,000

2. Operating income under:


Throughput costing puts greater emphasis on sales as the source of operating income than does absorption or variable costing.

3.
Throughput costing puts a penalty on producing without a corresponding sale in the same period. Costs other than direct materials that are variable with respect to production are expensed when incurred, whereas under variable costing they would be capitalized as an inventoriable cost.


9-18 Variable vs. absorption costing.

1.


Absorption Costing Data


Fixed manufacturing overhead allocation rate
= Fixed manufacturing overhead ÷ Denominator level machine-hours
= $1,440,000 ÷ 6,000
= $240 per machine-hour

Fixed manufacturing overhead allocation rate per unit
= Fixed manufacturing overhead allocation rate ÷ standard production rate
= $240 ÷ 50
= $4.80 per unit


a Production volume variance
= [(6,000 hours × 50) – 294,900) × $4.80
= (300,000 – 294,900) × $4.80
= $24,480

2.
Zwatch’s pre-tax profit margins –


3.
Operating income using variable costing is about 9% higher than operating income calculated using absorption costing.

Variable costing operating income – Absorption costing operating income
= $2,937,320 – $2,694,920
= $242,400

Fixed manufacturing costs in BI under absorption costing –
Fixed manufacturing costs in EI under absorption costing
= ($4.80 × 85,000) – ($4.80 × 34,500)
= $242,400

4.
The factors the CFO should consider include:
(a) Effect on managerial behavior, and
(b) Effect on external users of financial statements.

Absorption costing has many critics. However, the dysfunctional aspects associated with absorption costing can be reduced by:
· Careful budgeting and inventory planning,
· Adding a capital charge to reduce the incentives to build up inventory, and
· Monitoring nonfinancial performance measures.


9-19 Absorption and variable costing.

The answers for 1(a) and 2(c). Computations:

1.a)
Absorption Costing:

a $40 × 120,000
b $20 × 120,000
c Fixed manufacturing rate = $600,000 ÷ 200,000 = $3 per output unit
...Fixed manufacturing costs = $3 × 120,000
d $10 × 120,000

2.c)
Variable Costing:

a $40 × 120,000
b $20 × 120,000
c $10 × 120,000


9-20 Comparison of actual-costing methods.

The numbers are simplified to ease computations. This problem avoids standard costing and its complications.

1.
Variable-costing income statements:

a Unit inventoriable costs:
...Year 1: $700 ÷ 1,400 = $0.50 per unit; $0.50 × (1400 – 1000)
...Year 2: $500 ÷ 1,000 = $0.50 per unit; $0.50 × (400 + 1,000 – 1,200)

2.
Absorption-costing income statements:

a Fixed manufacturing costs:
...Year 1: $700 ÷ 1,400 = $0.50 per unit
...Year 2: $700 ÷ 1,000 = $0.70 per unit
b Unit inventoriable costs:
...Year 1: $1,400 ÷ 1,400 = $1.00 per unit; $1.00 × (1400 – 1000)
...Year 2: $1,200 ÷ 1,000 = $1.20 per unit $1.20 × (400 + 1,000 – 1,200)

3.


Absorption costing, OI – Variable costing, OI
= Fixed manufacturing costs in EI – Fixed manufacturing costs in BI

Year 1:
$600 – $400 = $0.50 × 400 – $0
= $200

Year 2:
$640 – $700 = ($0.70 × 200) – ($0.50 × 400)
= –$60

The difference in reported operating income is due the amount of fixed manufacturing overhead in the beginning and ending inventories. In Year 1, absorption costing has a higher operating income of $200 due to ending inventory having $200 more in fixed manufacturing overhead than does beginning inventory. In Year 2, variable costing has a higher operating income of $60 due to ending inventory under absorption costing having $60 less in fixed manufacturing overhead than does beginning inventory.

4a.
Absorption costing is more likely to lead to inventory build-ups than variable costing. Under absorption costing, operating income in a given accounting period is increased by inventory buildup, because some fixed manufacturing costs are accounted for as an asset (inventory) instead of as a cost of the period of production.

4b.
Although variable costing will counteract undesirable inventory build-ups, other measures can be used without abandoning absorption costing. Examples include:
(1) careful budgeting and inventory planning,
(2) incorporating a carrying charge for inventory,
(3) changing the period used to evaluate performance to be long-term,
(4) including nonfinancial variables that measure inventory levels in performance evaluations.


9-22 Capacity management, denominator-level capacity concepts.

1. d
2. c, d
3. d
4. a
5. c
6. a, b
7. a
8. b
9. c, d
10. b
11. a, b


9-23 Denominator-level problem

1.
Budgeted fixed manufacturing overhead costs rates:


2.
The rates are different because of varying denominator-level concepts. Theoretical and practical capacity levels are driven by supply-side concepts, i.e. “how much can I produce?” Normal and master-budget capacity levels are driven by demand-side concepts, i.e. “how much can I sell?” (or “how much should I produce?”)

In order to incorporate fixed manufacturing costs into unit product costs, fixed manufacturing costs have to be unitized for inventory costing. Absorption costing is the method used for tax reporting to the IRS and for financial reporting using generally accepted accounting principles.

The choice of a denominator level becomes relevant under absorption costing because fixed costs are accounted for along with variable costs at the individual product level. Variable and throughput costing account for fixed costs as a lump sum, expensed in the period incurred.

The variances that arise from use of the theoretical or practical level concepts will signal that there is a divergence between the supply of capacity and the demand for capacity. This is useful input to managers. As a general rule, however, it is important not to place undue reliance on the production volume variance as a measure of the economic costs of unused capacity.

3.
Under a cost-based pricing system, the choice of a master-budget level denominator will lead to high prices when demand is low (more fixed costs allocated to the individual product level), further eroding demand; conversely it will lead to low prices when demand is high, forgoing profits. This has been referred to as the downward demand spiral—the continuing reduction in demand that occurs when the prices of competitors are not met and demand drops, resulting in even higher unit costs and even more reluctance to meet the prices of competitors. The positive aspect of the master-budget denominator level is that it indicates the price at which all costs per unit would be recovered to enable the company to make a profit. Master-budget denominator level is also a good benchmark against which to evaluate performance.


9-26 Variable and absorption costing and breakeven points.

1.
Production
= Sales + Ending Inventory - Beginning Inventory
= 242,400 + 24,800 - 32,600
= 234,600 cases

2.
Breakeven point in cases:
a. Variable Costing:

QT = (Total fixed costs + Target OI) ÷ CM per unit
QT = [($3,753,600 + $6,568,800) + $0]
.........÷ [$94 - ($16 + $10 + $6 + $14 + $2)]
QT = $10,322,400 ÷ $46
QT = 224,400 cases

b. Absorption costing:

Fixed manuf. cost rate
= $3,753,600 ÷ 234,600
= $16 per case

QT =

QT = {$10,322,400 + [$16 (QT - 234,600)]} ÷ $46
QT = ($10,322,400 + 16QT - $3,753,600) ÷ $46
QT = ($6,568,800 + 16 QT) ÷ $46
46 QT - 16 QT = $6,568,800
30 QT = $6,568,800
QT = 218,960 cases.

3.
If grape prices increase by 25%, the cost of grapes per case will increase from $16 in 2007 to $20 in 2008. This will decrease the unit contribution margin from $46 in 2007 to $42 in 2008.

a. Variable Costing:
QT = $10,322,400 ÷ $42
.....= 245,772 cases (rounded up)

b. Absorption Costing:
QT = ($6,568,800 + $16 QT) ÷ $42
$42 QT = $6,568,800 + $16 QT
$26 QT = $6,568,800
QT = 252,647 cases (rounded up)


9-27 Variable costing versus absorption costing.

1.
Absorption Costing:

a $3.00 + ($7.00 ÷ 10) = $3.00 + $0.70 = $3.70
b [(10 × 60,000) – 550,000)] = 50,000 units

2.
Variable Costing:


3.
The difference in operating income between the two costing methods is:

Absorption costing, OI – Variable costing, OI
= Fixed manufacturing costs in EI – Fixed manufacturing costs in BI
$7,000 – $0 = [(40,000 × $0.70) – (30,000 × $0.70)]
$7,000 = $28,000 – $21,000
$7,000 = $7,000

The absorption-costing operating income exceeds the variable costing figure by $7,000 because of the increase of $7,000 during 2007 of the amount of fixed manufacturing costs in ending inventory vis-a-vis beginning inventory.

4.


5.
Absorption costing is more likely to lead to buildups of inventory than does variable costing. Absorption costing enables managers to increase reported operating income by building up inventory which reduces the amount of fixed manufacturing overhead included in the current period's cost of goods sold.

Ways to reduce this incentive include:
(a) Careful budgeting and inventory planning,
(b) Change the accounting system to variable costing or throughput costing,
(c) Incorporate a carrying charge for carrying inventory,
(d) Use a longer time period to evaluate performance than a quarter or a year, and
(e) Include nonfinancial as well as financial measures when evaluating management performance.


9-28 Breakeven under absorption costing (continuation of Problem 9-27).

1.
The unit contribution margin is $5 – $3 – $1 = $1. Total fixed costs ($540,000) divided by the unit contribution margin ($1.00) equals 540,000 units. Therefore, under variable costing 540,000 units must be sold to break even.

2.
If there are no changes in inventory levels, the breakeven point can be the same, 540,000 units, under both variable costing and absorption costing. However, as the chapter demonstrates, under absorption costing, the breakeven point is not unique; operating income is a function of both sales and production. Some fixed overhead is "held back" when inventories rise (10,000 units × $0.70 = $7,000), so operating income is positive even though sales are at the breakeven level as commonly conceived.

Breakeven sales in unit =

Let N = Breakeven sales in units
N = [$540,000 + $0 + $0.70(N - 550,000)] ÷ $1.00
N = $155,000 + $0.70N
$0.30N = $155,000
N = 516,667 units (rounded)

Therefore, under absorption costing, when 550,000 units are produced, 516,667 units must be sold for the income statement to report zero operating income.

Proof of 2004 breakeven point:


3.
If no units are sold, variable costing will show an operating loss equal to the fixed manufacturing costs, $420,000 in this instance. In contrast, the company would break even under absorption costing, although nothing was sold to customers. This is an extreme example of what has been called "selling fixed manufacturing overhead to inventory."

A final note: We find it helpful to place the following comparisons on the board, keyed to the three parts of this problem:
1. Breakeven = f (sales)
2. Breakeven = f (sales and production)
3. Breakeven = f (0 units sold and 540,000 units produced), an extreme case


9-29 Variable costing and absorption costing. The All-Fixed Company.

This problem always generates active classroom discussion.

1.
The treatment of fixed manufacturing overhead in absorption costing is affected primarily by what denominator level is selected as a base for allocating fixed manufacturing costs to units produced. In this case, is 10,000 tons per year, 20,000 tons, or some other denominator level the most appropriate base?

We usually place the following possibilities on the board or overhead projector and then ask the students to indicate by vote how many used one denominator level versus another. Incidentally, discussion tends to move more clearly if variable-costing income statements are discussed first, because there is little disagreement as to computations under variable costing.

a.
Variable-Costing Income Statement:


b.
Absorption-Costing Income Statement:

The ambiguity about the 10,000- or 20,000-unit denominator level is intentional. IF YOU WISH, THE AMBIGUITY MAY BE AVOIDED BY GIVING THE STUDENTS A SPECIFIC DENOMINATOR LEVEL IN ADVANCE.

Alternative 1.
Use 20,000 units as a denominator;
Fixed manufacturing overhead per unit:
= $280,000 ÷ 20,000
= $14


* Inventory carried forward from 2006 and sold in 2007.

Alternative 2.
Use 10,000 units as a denominator;
Fixed manufacturing overhead per unit:
= $280,000 ÷ 10,000
= $28


*Inventory carried forward from 2006 and sold in 2007.

Note that operating income under variable costing follows sales and is not affected by inventory changes.

Note also that students will understand the variable-costing presentation much more easily than the alternatives presented under absorption costing.

2.
Breakeven point under variable costing
= Fixed cost ÷ Contribution margin per ton
= $320,000 ÷ $30
= 10,667 tons per year or 21,333 for two years.

If the company could sell 667 more tons per year at $30 each, it could get the extra $20,000 contribution margin needed to break even.

Most students will say that the breakeven point is 10,667 tons per year under both absorption costing and variable costing. The logical question to ask a student who answers 10,667 tons for variable costing is: "What operating income do you show for 2006 under absorption costing?" If a student answers $120,000 (alternative 1 above), or $260,000 (alternative 2 above), ask: "But you say your breakeven point is 10,667 tons. How can you show an operating income on only 10,000 tons sold during 2006?"

The answer to the above dilemma lies in the fact that operating income is affected by both sales and production under absorption costing.

Given that sales would be 10,000 tons in 2006, solve for the production level that will provide a breakeven level of zero operating income. Using the formula in the chapter, sales of 10,000 units, and a fixed manufacturing overhead rate of $14 (based on $280,000 ÷ 20,000 units denominator level = $14):

Let P = Production level
Breakeven sales in units =

10,000 tons = [$320,000 + $0 +$14(10,000 - P)] ÷ $30
$300,000 = $320,000 + $140,000 – $14P
$14P = $160,000
P = 11,429 units (rounded)

Proof:


Given that production would be 20,000 tons in 2006, solve for the breakeven unit sales level. Using the formula in the chapter and a fixed manufacturing overhead rate of $14 (based on a denominator level of 20,000 units):

Let N = Breakeven sales in units
N =

N = [$320,000 + $0 +$14(N - 20,000)] ÷ $30
$30N = $320,000 + $14N – $280,000
$16N = $40,000
N = 2,500 units

Proof:


We find it helpful to put the following comparisons on the board:

Variable costing breakeven
= f(sales)
= 10,667 tons

Absorption costing breakeven
= f(sales and production)
= f(10,000 and 11,429)
= f(2,500 and 20,000)

3.
Absorption costing inventory cost:
Either $140,000 or $280,000 at the end of 2006 and zero at the end of 2007.

Variable costing:
Zero at all times. This is a major criticism of variable costing and focuses on the issue of the definition of an asset.

4.
Operating income is affected by both production and sales under absorption costing. Hence, most managers would prefer absorption costing because their performance in any given reporting period, at least in the short run, is influenced by how much production is scheduled near the end of a period.


9-30 Alternative denominator-level concepts, effect on operating income.

1.


The differences arise for several reasons:

a. The theoretical and practical capacity concepts emphasize supply factors, while normal capacity utilization and master-budget utilization emphasize demand factors.

b. The two separate six-month rates for the master-budget utilization concept differ because of seasonal differences in budgeted production.

2.
Theoretical capacity is based on the production of output at maximum efficiency for 100% of the time.

Practical capacity--reduces theoretical capacity for unavoidable operating interruptions such as scheduled maintenance time, shutdowns for holidays and other days, and so on.

For each of the three determinants of capacity in Lucky Larger's plant, practical capacity is less than theoretical capacity:


The smaller the denominator, the higher the amount of overhead costs capitalized for inventory units. Thus, if the plant manager wishes to be able to "adjust" plant operating income by building inventory, master-budget utilization or possibly normal capacity utilization would be preferred.


9-31 Operating income effects of alternative denominator- level concepts (continuation of Problem 9-30).

1.
Solution Exhibit 9-31 reports the operating income for each denominator-level concept. Computations include:

* $120,380,000 ÷ 2,600,000 = $46.30 per barrel

The total fixed manufacturing overhead variance (spending variance plus production-volume variance) for each denominator-level concept is:

(a)
Theoretical capacity:
= $40,632,000 – ($7.99 × 2,600,000)
= $40,632,000 – $20,774,000
= $19,858,000 U

(b)
Practical capacity:
= $40,632,000 – ($12.00 × 2,600,000)
= $40,632,000 – $31,200,000
= $ 9,432,000 U

(c)
Normal utilization:
= $40,632,000 – ($15.00 × 2,600,000)
= $40,632,000 – $39,000,000
= $ 1,632,000 U

Illustration of operating income differences:

Practical – Theoretical:
= $13,848,000 – $13,046,000
= $ 802,000

Normal – Practical:
= $14,448,000 – $13,848,000
= $ 600,000

Normal – Theoretical:
= $14,448,000 – $13,046,000
= $1,402,000

The difference in operating income across the three denominator-level concepts is due solely to differences in fixed manufacturing overhead included in the ending 200,000 barrels of inventory:


2.
Given the data in this question, the theoretical capacity concept reports the lowest operating income and thus (other things being equal) the lowest tax bill for 2003. Lucky Larger benefits by having deductions as early as possible. The theoretical capacity denominator-level concept maximizes the deductions for manufacturing costs.

3.
The IRS may restrict the flexibility of a company in several ways.
a. Restrict the denominator-level concept choice.
b. Restrict the cost line items that can be expensed rather than inventoried.
c. Restrict the ability of a company to use shorter write-off periods or more accelerated write-off periods for inventoriable costs.
d. Require proration or allocation of variances to represent actual costs and actual capacity used.

Solution Exhibit 9-3

a See the answer to requirement 1 for computation. The variances are the difference between actual fixed manufacturing overhead costs and fixed manufacturing overhead costs allocated to products. Thus, the variances are the sum of the fixed overhead spending variance and the production-volume variance.


9-35 Cost allocation, downward demand spiral.

3.
Alternative denominator levels include:
a. Capacity available.
The data in the problem note that the facility can serve 3,650,000 meals a year. With this denominator level, there will be budgeted unused capacity, which could be recorded as a separate line in the cost report for the MedChef facility.

b. Budgeted usage of capacity.
With the 2004 budgeted usage of 2,920,000 meals, the fixed costs charge is $1.50 per meal. The marketplace is signaling that Mission One's own central food-catering facility is not providing value for the costs charged. If Jenkins decides to raise prices to recover fixed costs from a declining demand base, he will likely encounter the downward demand spiral:


Jenkins might adopt a contribution margin approach, which means viewing the $3.80 variable cost as the only per-unit cost and the $4,380,000 as a fixed cost. Alternatively, Jenkins could use practical capacity to cost the meals and work to reduce costs of unused capacity.


9-36 Cost allocation, budgeted rates, ethics (continuation of Problem 9-35).

2.
Hospitals are charged a budgeted variable cost rate and an allocation of budgeted fixed costs. By overestimating budgeted meal counts, the denominator of the budgeted fixed cost rate is larger, and hence the amount charged to individual hospitals is lower. Consider 2008 where the budgeted fixed cost rate of $1.50 is computed as follows:
= $1.50 per meal

Suppose in 2008, hospital administrators "inflated" their budgeted meal count by 20%: The budgeted fixed cost rate for 2008 rate would have been
= $1.25 per meal

Hence, by deliberately overstating budgeted meal count demand, they could reduce the costs charged per meal in 2008. The use of budgeted meals as the denominator means the central food-catering facility bears the risk of demand overestimates.

3.
Evidence that could be collected includes:
(a) Budgeted meal-count estimates and actual meal-count figures each year for each hospital controller. Over an extended time period, there should be a sizable number of both underestimates and overestimates. Controllers could be ranked on both their percentage of overestimation and the frequency of their overestimation.

(b) Look at the underlying demand estimates by patients at individual hospitals. Each hospital controller has other factors (such as hiring of nurses) that give insight into their expectations of future meal-count demands. If these factors are inconsistent with the meal-count demand figures provided to the central food-catering facility, explanations should be sought.

4.
(a) Highlight the importance of a corporate culture of honesty and openness. Mission One could institute a Code of Ethics that highlights the upside of individual hospitals providing honest estimates of demand (and the penalties for those who do not).

(b) Have individual hospitals contract in advance for their budgeted meal count. Unused amounts would be charged to each hospital at the end of the accounting period. This approach puts a penalty on hospital administrators who overestimate demand.

(c) Use an incentive scheme that has an explicit component for meal-count forecasting accuracy. Each meal-count “forecasting error” would reduce the bonus by $0.05. Thus, if a hospital bids for 292,000 meals and actually uses 200,000 meals, its bonus would be reduced by
$0.05 × (292,000 – 200, 000) = $4,600.


9-37 Absorption, variable, and throughput costing.

1.
(a)
Unit fixed manufacturing overhead cost
= $7,500,000 ÷ (3,000 vehicles x 20 standard hours)
= $7,500,000 ÷ 60,000
= $125 per standard assembly hour or $2,500per vehicle

(b)


2.




a Production–volume variances
= (Denomination level – Production) × Budgeted rate

January:
= (3,000 – 3,200) × $2,500 per vehicle
= $500,000 F

February:
= (3,000 – 2,400) × $2,500 per vehicle
= $1,500,000 U

March:
= (3,000 – 3,800) × $2,500 per vehicle
= $2,000,000 F

3.




4.


The difference between absorption and variable costing arises because of differences in production and sales:


With absorption costing, by building for inventory, Hart can capitalize $2,500 of fixed manufacturing overhead costs per unit. This will provide a bonus payment of $12.50 (0.5% × $2,500) per unit. Operating income under absorption costing will exceed that under variable costing when production is greater than sales. Over the three-month period, the inventory buildup is 1,300 units giving a difference of $16,250 ($12.50 × 1,300) in bonus payments.

5.

a ($3,800 x 3,200) + $7,500,000
...($3,800 x 2,400) + $7,500,000
...($3,800 x 3,800) + $7,500,000



A summary of the bonuses paid is:


6.
Alternative approaches include:
(a) Careful budgeting and inventory planning,
(b) Use an alternative income computation approach to absorption costing (such as variable costing or throughput costing),
(c) Use a financial charge for inventory buildup,
(d) Change the compensation package to have a longer-term focus using either an external variable (e.g., stock options) or an internal variable (e.g., five-year average income), and
(e) Adopt non-financial performance targets––e.g., attaining but not exceeding present inventory levels.

Soalan yang tak ada jawapan:
9-19 (not complete)
9-21
9-24
9-25
9-28 (3,didn't have operating income)
9-32
9-33
9-34
9-35 (1 & 2)
9-36 (1)