Outback Corporation manufactures rechargeable flashlights in Brisbane, Australia. The firm uses an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Outback’s planned and actual operations for 20x1 follow:
| Budgeted Costs |
| ||
| Per Unit | Total | Actual Costs | |
Direct material | $12.00 | $1,680,000 | $1,560,000 | |
Direct labor | 9.00 | 1,260,000 | 1,170,000 | |
Variable manufacturing overhead | 4.00 | 560,000 | 520,000 | |
Fixed manufacturing overhead | 5.00 | 700,000 | 715,000 | |
Variable selling expenses | 8.00 | 1,120,000 | 1,000,000 | |
Fixed selling expenses | 7,00 | 980,000 | 980,000 | |
Variable administrative expenses | 2.00 | 280,000 | 250,000 | |
Fixed administrative expenses | 3.00 | 420,000 | 425,000 | |
Total | $50.00 | $7,000,000 | $6,620,000 | |
| Planned Activity | Actual Activity | ||
Beginning finished-goods inventory in units | 35,000 | 35,000 | ||
Sales in units | 140,000 | 125,000 | ||
Production in units | 140,000 | 130,000 | ||
The budgeted per-unit cost figures were based on Outback producing and selling 140.000 units in 20x1. Outback uses a predetermined overhead rate for applying manufacturing overhead to its product. A total manufacturing overhead rate of S9.00 per unit was employed for absorption costing purposes in 20x1. Any overapplied or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the year. The 20x1 beginning finished-goods inventory for absorption costing purposes was valued at the 20x0 budgeted unit manufacturing cost, which was the same as the 20x1 budgeted unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price for 20x1 was $70 per unit.
Required: Was Outback’s 20x1 income higher under absorption costing or variable costing? Why? Compute the following amounts.
1.The value of Outback Corporation’s 20x1 ending finished-goods inventory under absorption costing.
2.The value of Outback Corporation’s 20x1 ending finished-goods inventory under variable costing.
3.The difference between Outback Corporation’s 20x1 reported income calculated under absorption costing and calculated under variable costing.
4.Suppose Outback Corporation had introduced a JIT production and inventory management system at the beginning of 20x1.
a. What would likely be different about the scenario as described in the problem?
b. Would reported income under variable and absorption costing differ by the magnitude you found in requirement (3)? Explain.
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