Cost15EChapter09-Solutions

9-1CHAPTER9INVENTORYCOSTINGANDCAPACITYANALYSIS9-1No.Differencesinoperatingincomebetweenvariablecostingandabsorptioncostingareduetoaccountingforfixedmanufacturingcosts.Undervariablecosting,onlyvariablemanufacturingcostsareincludedasinventoriablecosts.Underabsorptioncosting,bothvariableandfixedmanufacturingcostsareincludedasinventoriablecosts.Fixedmarketinganddistributioncostsarenotaccountedfordifferentlyundervariablecostingandabsorptioncosting.9-2Thetermdirectcostingisamisnomerforvariablecostingfortworeasons:a.Variablecostingdoesnotincludealldirectcostsasinventoriablecosts.Onlyvariabledirectmanufacturingcostsareincluded.Anyfixeddirectmanufacturingcostsandanydirectnonmanufacturingcosts(eithervariableorfixed)areexcludedfrominventoriablecosts.b.Variablecostingincludesasinventoriablecostsnotonlydirectmanufacturingcostsbutalsosomeindirectcosts(variableindirectmanufacturingcosts).9-3No.Thedifferencebetweenabsorptioncostingandvariablecostsisduetoaccountingforfixedmanufacturingcosts.Asserviceormerchandisingcompanieshavenofixedmanufacturingcosts,thesecompaniesdonotmakechoicesbetweenabsorptioncostingandvariablecosting.9-4Themainissuebetweenvariablecostingandabsorptioncostingisthepropertimingofthereleaseoffixedmanufacturingcostsascostsoftheperiod:a.atthetimeofincurrence,orb.atthetimethefinishedunitstowhichthefixedoverheadrelatesaresold.Variablecostinguses(a)andabsorptioncostinguses(b).9-5No.Acompanythatmakesavariable-cost/fixed-costdistinctionisnotforcedtouseanyspecificcostingmethod.TheStassenCompanyexampleinthetextofChapter9makesavariable-cost/fixed-costdistinction.Asillustrated,itcanusevariablecosting,absorptioncosting,orthroughputcosting.Acompanythatdoesnotmakeavariable-cost/fixed-costdistinctioncannotusevariablecostingorthroughputcosting.However,itisnotforcedtoadoptabsorptioncosting.Forinternalreporting,itcould,forexample,classifyallcostsascostsoftheperiodinwhichtheyareincurred.9-6Variablecostingdoesnotviewfixedcostsasunimportantorirrelevant,butitmaintainsthatthedistinctionbetweenbehaviorsofdifferentcostsiscrucialforcertaindecisions.Theplanningandmanagementoffixedcostsiscritical,irrespectiveofwhatinventorycostingmethodisused.9-7Underabsorptioncosting,heavyreductionsofinventoryduringtheaccountingperiodmightcombinewithlowproductionandalargeproductionvolumevariance.Thiscombinationcouldresultinloweroperatingincomeeveniftheunitsaleslevelrises.9-29-8(a)Thefactorsthataffectthebreakevenpointundervariablecostingare1.fixed(manufacturingandoperating)costs.2.contributionmarginperunit.(b)Thefactorsthataffectthebreakevenpointunderabsorptioncostingare1.fixed(manufacturingandoperating)costs.2.contributionmarginperunit.3.productionlevelinunitsinexcessofbreakevensalesinunits.4.denominatorlevelchosentosetthefixedmanufacturingcostrate.9-9Examplesofdysfunctionaldecisionsmanagersmaymaketoincreasereportedoperatingincomeare:a.Plantmanagersmayswitchproductiontothoseordersthatabsorbthehighestamountoffixedmanufacturingoverhead,irrespectiveofthedemandbycustomers.b.Plantmanagersmayacceptaparticularordertoincreaseproductioneventhoughanotherplantinthesamecompanyisbettersuitedtohandlethatorder.c.Plantmanagersmaydefermaintenancebeyondthecurrentperiodtofreeupmoretimeforproduction.9-10Approachesusedtoreducethenegativeaspectsassociatedwithusingabsorptioncostinginclude:a.Changetheaccountingsystem:Adopteithervariableorthroughputcosting,bothofwhichreducetheincentivesofmanagerstoproduceforinventory.Adoptaninventoryholdingchargeformanagerswhotieupfundsininventory.b.Extendthetimeperiodusedtoevaluateperformance.Byevaluatingperformanceoveralongertimeperiod(say,threetofiveyears),theincentivetotakeshort-runactionsthatreducelong-termincomeislessened.c.Includenonfinancialaswellasfinancialvariablesinthemeasuresusedtoevaluateperformance.9-11Thetheoreticalcapacityandpracticalcapacitydenominator-levelconceptsemphasizewhataplantcansupply.Thenormalcapacityutilizationandmaster-budgetcapacityutilizationconceptsemphasizewhatcustomersdemandforproductsproducedbyaplant.9-12Thedownwarddemandspiralisthecontinuingreductionindemandforacompany’sproductthatoccurswhenthepricesofcompetitors’productsarenotmet,and(asdemanddropsfurther)higherandhigherunitcostsresultinmoreandmorereluctancetomeetcompetitors’prices.Pricingdecisionsneedtoconsidercompetitorsandcustomersaswellascosts.9-13No.Itdependsonhowacompanyhandlestheproduction-volumevarianceintheend-of-periodfinancialstatements.Forexample,iftheadjustedallocation-rateapproachisused,eachdenominator-levelcapacityconceptwillgivethesamefinancialstatementnumbersatyear-end.9-14FortaxreportingintheUnitedStates,theIRSrequiresonlythatindirectproductioncostsare“fairly”apportionedamongallitemsproduced.Overheadratesbasedonnormalormaster-budgetcapacityutilization,aswellasthepracticalcapacityconcept,arepermitted.Atyear-end,9-3prorationofanyvariancesbetweeninventoriesandcostofgoodssoldisrequired(unlessthevarianceisimmaterialinamount).9-15No.Thecostsofhavingtoomuchcapacity/toolittlecapacityinvolverevenueopportunitiespotentiallyforgoneaswellascostsof