Question

Speedy Motors assembles and sells motor vehicles and uses standard costing. Actual data and variable costing and absorption costing income statements relating to April and May 2017 are as follows: The variable manufacturing costs per unit of Speedy Motors are as follows: E. (Click the icon to view the variable manufacturing costs per unit.)

Answer 1

1) Income statement under Throughput costing:

	April-17	May-17
Beginning inventory	-	50
Units produced	500	450
Units sold	450	475
Closing inventory	50	25
Sales @ $26,000 per unit	$ 11,700,000	$ 12,350,000
Direct materials
Units produced @ $6,800 per unit	$    3,400,000	$    3,060,000
Add: Beginning inventory @ $6,800 per unit	$                   -	$        340,000
Less: Closing inventory @ $6,800 per unit	$        340,000	$        170,000
Throughput cost of goods sold (Direct materials)	$    3,060,000	$    3,230,000
Throughput margin	$    8,640,000	$    9,120,000
Less: Operating costs
Direct manufacturing labor @ $1,800 per unit	$        900,000	$        810,000
Variable manufacturing overhead @ $900 per unit	$        450,000	$        405,000
Fixed manufacturing overhead	$    2,250,000	$    2,250,000
Variable operating (marketing) costs @ $3,400 per unit	$    1,530,000	$    1,615,000
Fixed operating (marketing) costs	$        750,000	$        750,000
Total operating costs	$    5,880,000	$    5,830,000
Net operating income	$    2,760,000	$    3,290,000

Notes:

• Under throughput costing only the direct material costs are assigned to the products and the all other manufacturing costs are charged as period costs. This results in low cost of inventory.
• Average unit cost does not vary with changes in production levels.
• Throughput costing is used internal purposes only.

2) Comparison of results:

Apr-17	Absorption	Variable	Throughput
Gross margin	5,400,000	5,895,000	8,640,000
Operating income	3,120,000	2,895,000	2,760,000
May-17	Absorption	Variable	Throughput
Gross margin	5,475,000	6,222,500	9,120,000
Operating income	3,110,000	3,222,500	3,290,000

The gross margin (contribution) in Throughput costing is higher because it considers only direct materials as true variable cost and other reaming costs as period costs. Throughput contribution is equal to revenue minus all variable direct materials cost of goods sold.

3)

• It helps in evaluating incremental costs for special orders if there is unutilized capacity.
• It also reduces the incentive to over produce to cut down cost per unit since it considers the material costs as product cost which vary with changes in production levels.