Question

HODILI VILIVIIVIHIL 9-30 Comparison of variable costing and absorption costing. Hinkle Company uses standard costing. Tim Bartina, the new president of Hinkle Company, is presented with the following data for 2012: А . C Home Insert Page Layout Formulas Data Review View B Hinkle Company Income Statements for the Year Ended December 31, 2012 Variable Costing 5 Revenues $9,000,000 6 Cost of goods sold (at standard costs) 4,680,000 7 Fixed manufacturing overhead (budgeted) 1,200,000 8 Fixed manufacturing overhead variances (all unfavorable): 9 Spending 100,000 10 Production volume 11 Total marketing and administrative costs (all fixed) 1,500,000 12 Total costs 7.480.000 13 Operating income $11520.000 Absorption Costing $9,000,000 5,860,000 100,000 400,000 1,500,000 7.860,000 $1.140.000 15 Inventories (at standard costs) 16 December 31, 2011 17 December 31, 2012 $1,200,000 66,000 $1,720,000 206,000 Required 1. At what percentage of denominator level was the plant operating during 2012? 2. How much fixed manufacturing overhead was included in the 2011 and the 2012 ending inventory under absorption costing? 3. Reconcile and explain the difference in 2012 operating incomes under variable and absorption costing. 4. Tim Bartina is concerned: He notes that despite an increase in sales over 2011, 2012 operating income has actually declined under absorption costing. Explain how this occurred.

Answer 1

Hinkle Company
1)	Production Volume Unfavorable=Budgeted Fixed Manufacturing Overhead> Fixed Overhead allocated
	Production Volume Variance=Budgeted Fixed Manufacturing Overhead-Fixed Overhead allocated
	Unfavorable Production Volume=	$    4,00,000.00
	Budgeted Fixed Manufacturing Overhead=	$ 12,00,000.00
	$400000=$1200000-Fixed Overhead allocated
	Fixed Overhead allocated=$1200000-$400000
	Fixed Overhead allocated=$800000
	Plant operating at ($800000/$1200000)*100=67% of denominator level in 2012.	67%
2)	Under Variable costing all fixed cost are absorbed as period cost.
	No Inventories exist under variable costing.
	Under Absorption costing inventories are in both fixed and variable cost.
	Difference arises in Variable and Absorption Costing Method due to fixed Manufacturing Overhead cost deferred in Inventory
	Difference in Inventories under two methods arises due to Fixed manufacturing cost included in Inventory.
		Absorption costing	Variable costing	Fixed manufacturing overhead in Inventory
	Inventories at December 31st,2011	$ 17,20,000.00	$ 12,00,000.00	$    5,20,000.00
	Inventories at December 31st,2012	$    2,06,000.00	$        66,000.00	$    1,40,000.00
3)	Difference in Operating Income	Absorption costing	Variable costing	Difference
		$ 15,20,000.00	$ 11,40,000.00	$    3,80,000.00
	Difference in Operating Income under two methods arises due to release of $380000 of Inventories in 2012.
	Decreased in Inventory ($520000-$140000)=	$    3,80,000.00
	Absorption costing:
	Fixed cost under cost of goods sold=($5860000-$4680000)	1180000
	Production volume variance	400000
		1580000
	Fixed cost charged to expense under variable costing	1200000
	Difference in Operating income	380000
4)	Under absorption costing ,operating income has actually declined,despite of increased in sales ,this is due to larger amount of inventories fixed cost included in 2012 cost of goods sold.
		Absorption costing	Variable costing	Fixed manufacturing overhead in Inventory
	Inventories at December 31st,2011	$ 17,20,000.00	$ 12,00,000.00	$    5,20,000.00
	Inventories at December 31st,2012	$    2,06,000.00	$        66,000.00	$    1,40,000.00