Question

Donaldson Corporation is a manufacturer of computer accessories. It uses absorption costing based on standard costs and reports the following data for 2014: (Click the icon to view the data.) There are no price, spending, or efficiency variances. Actual operating costs equal budgeted operating costs. The production-volume variance is written off to cost of goods sold. For each choice of denominator level, the budgeted production cost per unit is also the cost per unit of beginning inventory. Data Table - X ance as favorable (F) or unfavorable (U). Theoretical capacity 275,000 units Practical capacity 265,000 units Normal capacity utilization 233,200 units Selling price 39 per unit Beginning inventory 35,000 units Production 235,000 units Sales volume 250,000 units Variable budgeted manufacturing cost 8 per unit Total budgeted fixed manufacturing costs $ 2,915,000 Total budgeted operating (non-manuf.) costs (all fixed) $ 200,000 Print Done Requirement 3. Why is the operating income under normal capacity utilization lower than the other two scenarios? During 2014 Donaldson had in inventory levels. The v allocated to each unit of production, and when those units are sold, the Normal utilization capacity is the capacity of the three, hence in this year, when production was than sales, the absorption-costing based operating income is the smallest when normal capacity utilization is used as the denominator level. Requirement 4. Reconcile the difference in operating income based on theoretical capacity and practical capacity with the difference in fixed manufacturing overhead included in inventory. (Abbreviation used: Mfg. = Manufacturing.) Less: D Less: Multiply by: Difference in operating income = Difference in fixed mfg overhead included in inventory

Answer 1

Part 3

During 2014 Donaldson had a drop of 15,000 units in inventory levels. The smaller the denominator level, the larger is the budgeted fixed cost allocated to each unit of production, and when those units are sold, the larger is the cost of each unit sold, and the smaller is the operating income. Normal capacity utilization is the smallest capacity of the three; hence, in this year, when production was less than sales, the absorption-costing based operating income is the smallest when normal capacity utilization is used as the denominator level.

Part 4

Theoretical Capacity Operating Income	4476000	Fixed mfg. cost allocated per unit under practical capacity	11.00
Less: Practical Capacity Operating Income	4470000	Less: fixed mfg. cost allocated per unit under theoretical capacity	10.60
			$0.40
		Multiply by: Decrease in inventory level during 2014	15000
Difference in operating income	$6000	Difference in fixed mfg. overheaded included in inventory	$6000

	Theoretical capacity	Practical capacity	Normal capacity utilization
Denominator level in units	275000	265000	233200
Budgeted fixed manuf. Costs	2915000	2915000	2915000
Budgeted fixed manuf. cost allocated per unit	10.60	11.00	12.50
Production in units	235000	235000	235000
Allocated fixed manuf. costs (production in units ´budgeted fixed manuf. cost allocated per unit)	2491000	2585000	2937500
Production volume variance (budgeted fixed manuf. costs – allocated fixed manuf. costs)	$424000 U	$330000 U	$22500 F

ABSORPTION-COSTING BASED INCOME STATEMENTS
	Theoretical capacity	Practical capacity	Normal capacity utilization
Revenues ($39 selling price per unit ´units sold)	9750000	9750000	9750000
Cost of goods sold
Beginning inventory (35,000 units ´budgeted cost per unit of inventory)	651000	665000	717500
Variable manufacturing costs (235,000 units ´$8 per unit)	1880000	1880000	1880000
Allocated fixed manufacturing overhead (235,000units ´ 18.60; 19.00; 20.50)	2491000	2585000	2937000
Cost of goods available for sale	5022000	5130000	5535000
Deduct ending inventory (20,000 units ´18.60; 19.00; 20.50)	(372000)	(380000)	(410000)
Adjustment for production-volume variance	$424000 U	$330000 U	$22500 F
Total cost of goods sold	5074000	5080000	5102500
Gross margin	4676000	4670000	4647500
Operating costs	200000	200000	200000
Operating income	4476000	4470000	444700

Ending inventory = Beginning inventory + production – sales = 35,000 + 235,000 – 250,000 = 20,000 units

10.60+8 = 18.60

11+8 = 19

12.50+8 = 20.50