Section C - Cost Management This section represents 25% of the Part 1 Exam. This section focuses on the process of determining and also ways of controlling how much it costs to produce a product. This includes several types of cost accumulation and cost allocation systems as well as sources of operational efficiency and business process performance for a firm. An important concept in the business process performance portion is the concept of competitive advantage and how a firm can attain it. Major topics include: • Variable and Absorption Costing, • JOint-product and Byproduct Costing, • Process Costing, • Job Order Costing, • Life-cycle Costi ng, • Overhead Cost Allocation, • Activity-based Costing, • Estimating Fixed Costs, • Operational EffiCiency, and • Business Process Performance. In the area of costing systems, the three that are the most complicated are: 1) Variable and Absorption Costing, 2) Process Costing, and 3) Activity-based Costing. This is not to say that the others are not important or will not be tested, but simply that these three are where you will need to spend more time to ensure that you fully understand them for the Exam. 179 Classifications of Costs CMA Part 1 Classifications of Costs The first thing that needs to be covered for this Section is a number of terms and concepts related to the different classifications of costs. This is a large element of the Exam (both directly and indirectly) and as such, it is important that from the very beginning a candidate understands the different types, classifications and treatments of costs. Costs Based on Level of Production In the following table are the main groups of costs based on their behavior as the level of production changes. For these three types of costs you need to know both how the cost per unit changes and how the total cost changes as the level of production changes. Fixed costs Fixed costs do not change within the relevant range of production. The total Variable costs Variable costs are those that are incurred only when a product is made, such as Mixed costs These are costs that have both a fixed and a variable component. An example is amount of these costs does not change with a change in production. However, the cost per unit decreases as production increases. material or labor. The per unit variable cost remains unchanged as production increases or decreases while total variable cost increases as production increases and decreases as production decreases. Note: In reality, variable costs per unit may change as production increases. This is caused by discounts that are received when more units are purchased as a result of larger production volume. However, this effect is not relevant in our discussion of variable costs for the Exam. a mobile phone. You pay a certain fixed amount each month and then a variable amount for each call that you make. Having looked at the above table and the basics of these classifications, we will now examine in greater depth the different ways in which fixed and variable costs behave in the production process as production level changes. It is important that you know how total costs and costs per unit change as production changes. This fundamental behavior of fixed and variable costs is used in other sections of Part 2 as well as in other Exams. Although this is not inherently difficult, we will look in more detail at this subject because it is such an underlying element of the process. Variable Costs Variable costs are those costs that are incurred only if the company actually produces something. This means that if a company produces no units (sits idle for the entire period), there will be no variable costs incurred by the company. Direct material and direct labor are usually variable costs. There are some situations, however, in which direct labor may be a fixed cost. As production level increases, the total amount of variable costs will increase, but the variable cost per unit will remain unchanged. Note: This topic will be covered in many other areas of the Exams, and is only presented here for awareness purposes. The selling price minus all variable costs is equal to the unit contribution. Contribution is the amount from the sale that the company is able to put towards the covering of fixed costs or profit after the variable costs have been covered. Contribution margin is a measure of contribution as a percentage of the sales price. 180 Section C Classifications of Costs Fixed Costs Fixed costs are costs that do not change as the level of production changes - within a relevant range. The relevant range is the range of production in which the cost is fixed. This means that within the relevant range, an increase in the units produced will not cause an increase in the total fixed costs. Fixed costs are best described by looking at a factory as an example. A factory has the capacity to produce a certain number of units. As long as production is between 0 and that number of units, the cost for the factory will remain unchanged. However, once the level of production exceeds the capacity of the factory, the company will need to build (or otherwise acquire) a second factory. This will increase the fixed costs as the company moves to another relevant range. Within the relevant range of production the total fixed costs will remain unchanged, but the fixed costs per unit will decrease as the level of production increases. Note: Over a large enough time period, all costs will behave like variable costs. In the short term, some costs may be fixed (such as a factory), but over a longer period of time, the company may be able to change its factory situation so that the factory cost also becomes variable. Mixed Costs In reality, many costs are a combination of fixed and variable elements. These are mixed costs. Mixed costs may be semi-variable costs or semi-fixed costs. A semi-variable cost has both a fixed component and a variable component. There is a basic fixed amount that must be paid regardless of activity, even if there is no activity. And added to that fixed amount is an amount which varies with activity. Utilities are an example. Some basic utility expenses are required just to maintain a factory building, even if no production is taking place. Electric service, water service, and other utilities usually must be continued. So that basic amount is the fixed component of utilities. If production begins (or resumes), the cost for utilities increases by a variable amount, depending upon the production level. But the fixed amount does not change. Another example of a semi-variable cost is a salesperson who receives a base salary plus a commission for each sale made. The base salary is the fixed component of the salespersons salary, and the commission is the variable component. A semi-fixed cost is fixed over a given, small range of activity, and above that level of activity, the cost suddenly jumps. It stays fixed again for a while at the higher range of activity, and when the activity moves out of that range, it jumps again. A semi-fixed cost moves upward in a step fashion, staying at a certain level over a small range and then moving to the next level quickly. All fixed costs behave this way, and a wholly fixed cost is also fixed only as long as activity remains within the relevant range. However, a semi-fixed cost is fixed over a smaller range than the relevant range of a wholly fixed cost. An example of a semi-fixed cost is the nursing staff in a hospital. If the hospital needs one nurse for every 25 patients, then each time the patient load increases by 25 patients, one additional nurse will be hired and total nursing salaries will jump by the additional nurses salary. That is in contrast to administrative staff salaries at the same hospital, which might remain fixed until the patient load increases by 250 patients, at which point an additional admitting clerk would be needed. The administrative staff salaries are wholly fixed costs (over the relevant range), whereas the nursing staff salaries are semi-fixed costs. The difference between a semi-variable and a semi-fixed cost is that the semi-variable cost starts out at a given base level and moves upward smoothly from there as activity increases. A semi-fixed cost moves upward in steps. 181 Classifications of Costs CMA Part 1 Production vs. Period Costs In addition to the classification of costs based on their behavior as production changes, costs can also be classified based on their purpose. The main distinction of costs that are based on purpose is that of Production (or Product) Cost vs. Period Cost. It is important to know this. Note: Period costs can be fixed or variable, and production costs can be fixed or variable. So these different classifications are not mutually exclusive from each other. Product Costs or Inventoriable Costs Product costs (also called inventoriable costs) are those costs that go directly into the production process, without which the product could not be made. Product costs are transferred to each unit and will be carried on the balance sheet as inventory when production is completed. When the item is sold, the cost will be transferred from the balance sheet to the income statement where it is classified as cost of goods sold, which is an expense. The main types of product costs are: 1) materials (both direct and indirect); 2) labor (both direct and indirect); and 3) manufacturing overhead (both fixed and variable). These different product costs can be combined and given different names as outlined in the tables below. You need to know what types of costs are included in the different classifications. Note: This definition of product cost is in accordance with financial reporting purposes. However, there are also other types of product costs for pricing and other purposes, and we will take a look at those later in this section. Types of Product Costs This table includes the main costs that are incurred in the production process. Direct labor These are the costs of labor that can be directly traced to the production of a unit. Direct material These are the materials that are directly put into the finished product. The costs Assembly line workers are direct labor costs for a manufacturing company, and the compensation of an auditor is direct labor for an auditing firm. included in the direct material cost are all of the costs associated with acquiring it - the item itself, shipping, insurance and taxes, among others. Common examples of direct materials are plastic and components. Manufacturing These are the companys costs related to the production process that are not direct overhead material or direct labor, but are necessary costs of production. Examples are indirect Indirect labor Indirect labor is the labor that is part of the overall production process but doesnt Indirect material Similar to indirect labor, indirect materials are materials that are not the main labor, indirect materials, rework costs, electricity and other utilities, depreciation of plant equipment, and factory rent. come into direct contact with the product. The maintenance department is a common example. Indirect labor is a manufacturing overhead cost. components of the finished goods. Examples are glue, screws and nails and other materials that may not even be physically incorporated into the finished good (machine oils, lubricants, and miscellaneous supplies). Indirect materials are a manufacturing overhead cost. 182 Section C Classifications of Costs Groupings of Product Costs The five main types of product costs in the previous table can be further combined to create different cost classifications. The three classifications that you need to be aware of are in the following table. Prime costs Prime costs are the costs of direct material and direct labor. These are the direct Manufacturing Manufacturing costs include the prime costs and manufacturing overhead costs applied. These are all of the costs that need to be incurred in order to actually inputs. Conversion costs Conversion costs include manufacturing overhead (both fixed and variable) produce the product. This does not include selling or administrative costs, which are period costs. and direct labor. These are the costs that are required to convert the direct materials into the final product. Period Costs, or Nonmanufacturing Overheads Period costs, as compared to product costs, are not involved in the production of the product. Even if these costs were not incurred the product could still be manufactured. Period costs are usually expensed when they are incurred. The number of period costs is almost unlimited because period costs include essentially everything other than the product costs (all costs have to be either a product cost or a period cost). These include selling and administration costs as well as other similar departments costs. Period costs can be variable, fixed or mixed, but they are not included in the calculation of cost of goods sold or cost of goods manufactured (both of these are covered later). As stated above, for financial reporting purposes, these costs are expensed to the income statement as they are incurred. However, for internal decision-making, some period costs may be allocated to the production departments and then to the individual units. This is done so that the company can set a price for each product that covers all of the costs the company incurs. We will discuss this type of allocation in the topic of Service Cost Allocation. The number of classifications of period costs that a company can use on its income statement will depend upon that company. Examples include general and administrative, selling, accounting, depreciation (of nonproduction facilities), and so on. 183 Classifications of Costs CMA Part 1 Other Costs and Cost Classifications In addition to all of the costs and classifications listed above, there are some more types of costs with which a candidate must be familiar. opportunity An opportunity cost is the contribution to income that is lost by not using a limited costs resource in its best alternative use. When calculating the opportunity cost, it includes only the expenditures that would not be made in the other available alternatives and/or the contribution that would have been earned if an alternative decision had been made. Any time that money is Invested or used to purchase something, there is lost return from the next best use of that money. Often times, that lost return is interest. If the money had not been used to purchase inventory, for example, it could have been deposited in a bank and earned interest. The lost interest can only be calculated for the time period during which the cash flows are different between the two options. Carrying These are the costs that the company incurs when it carries inventory. Carrying costs costs include: rent and utilities related to storage; insurance and taxes on the inventory; costs Sunk costs These are costs that have already been incurred and cannot be recovered. Sunk costs are of employees who manage and protect the inventory; damaged or stolen inventory; the lost opportunity cost of having money invested in inventory; and other storage costs. Because storage does not add value to the items themselves, storage costs are expensed on the income statement as incurred. They are not included in inventory (in other words, they are not included in the balance sheet). irrelevant in the decision-making process because of the fact that they have already been incurred and no present or future decision can change that fact. Committed Committed costs are costs for the companys infrastructure. They are costs required to costs establish and maintain the readiness to do business. Examples would be intangible assets such as a franchise and fixed assets such as property, plant and equipment. They are fixed costs that are usually on the balance sheet as assets and become expenses in the form of amortization and depreciation. Discretionary These are costs that may or may not be spent, at the decision of a manager. In the short costs term, discretionary costs will not cause an adverse effect on the business if they are not incurred, but in the long run they do need to be spent. These are cost decisions that are made periodically and are not closely related to input or output decisions. Furthermore, the value added and the benefits obtained from spending the money cannot be precisely defined. Advertising, research and development (R&D) and employee training are usually given as examples of discretionary costs. Discretionary costs may be fixed costs, variable costs, or mixed costs. Marginal These are the costs necessary to produce one more unit. costs Engineered Engineered costs are costs that have a definite physical relationship to the activity base or costs measure. They result from activities that have well defined cause and effect relationships between inputs and outputs and between costs and benefits. Direct materials and direct labor are engineered costs, as are indirect resources that vary with product specifications and production volume. The value added by activities associated with engineered costs is fairly clear and easy to measure. Engineered costs are variable costs in their cost behavior. Imputed An imputed cost is a cost that does not exist but is needed for use in a decision-making costs process. Interest or a cost of capital is often an imputed cost. For example, in a loan that does not have a stated interest rate, an interest rate will often be imputed to determine the cost of the loan. This imputed rate is assumed, and is based on the market rate or rates for similar loans. It does not exist, but is necessary for use in decision-making. 184 Section C Classifications of Costs Note: When overtime must be worked, the overtime premium (this is the amount that the wage increases for overtime work) that is paid to the workers is considered to be factory overhead. However, if the need to work overtime is the result of a specific job or customer request, the premium should be charged to that specific job and not included in the overall amount to allocate. The following information is for the next four Questions: The estimated unit costs for a company using absorption (full) costing and planning to produce and sell at a level of 12,000 units per month are as follows. Cost Item Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling Fixed selling Question 94: Estimated conversion costs per unit are: a) $35 b) $41 c) $48 d) $67 Question 95: Estimated prime costs per unit are: a) $73 b) $32 c) $67 d) $52 Question 96: Estimated total variable costs per unit are: a) $38 b) $70 c) $52 d) $18 Question 97: Estimated total costs that would be incurred during a month with a production level of 12,000 units and a sales level of 8,000 units are: a) $692,000 b) $960,000 c) $948,000 d) $932,000 Estimated Unit Cost $32 20 15 6 3 4 (CMA Adapted) 185 Classifications of Costs CMA Part 1 Cost of Goods Sold (COGS) and Cost of Goods Manufactured (COGM) Now that we have looked at all of the different classifications of costs and their different behaviors, we will turn our attention to using these different costs in accounting calculations. We will examine the calculation of the cost of goods sold (COGS) and the cost of goods manufactured (COGM). Though these two items are somewhat similar, they are very different in one key respect. COGS is an external reporting figure and it will be reported on the income statement. It is the cost of producing the units that were actually sold during the period. COGM, on the other hand, is an internal number and is not reported on either the balance sheet or the income statement. It represents the cost of the goods that were completed during the period. COGM is, however, used in the calculation of the cost of goods sold for a company that produces its own inventory. The calculation of both numbers is looked at in more detail below. The process of calculating the cost of producing an item is a very important one for any company. It is critical that the cost that is calculated represents the complete cost of production. If the company does not calculate the cost of production correctly, it will charge a price for the product that will be incorrect. The result will be either low sales if the price is too high or low profits if the price is too low. Additionally, as we have already covered, it is this production cost that will be included in the balance sheet as the value of inventory when the item is completed. When the item is sold, these costs will be transferred to the income statement as cost of goods sold. Costs that are not production costs are period costs, and they are generally expensed as incurred (for example: carrying costs, general and administrative costs, and so on). Due to this need to determine the cost of production accurately, the information that accountants provide to management regarding the costs of the company is crucial. Furthermore, it is beneficial to provide this information quickly and often, so that the company can make any necessary corrections to pricing as soon as possible. Calculating Cost of Goods Sold COGS represents the cost to produce or purchase the units that were sold during the period. It is perhaps the largest individual expense item on the income statement. As such, it is important that this amount is calculated accurately. COGS is calculated using the following formula: + Purchases or cost of goods manufactured = Cost of Goods Sold This written formula is a simplification of what is actually occurring in reality in that it assumes all of the units were either sold during the period or were still in ending inventory. This does not always happen in reality because units may be damaged, stolen or lost. However, for the Part 2 Exam, this formula is sufficient. Beginning finished goods inventory Ending finished goods inventory 186 Section C Classifications of Costs Calculating Cost of Goods Manufactured The COGM represents the cost of the units completed and transferred out of work-in-process during the period. For a manufacturing company this amount will be part of the cost of goods sold calculation. COGM does not include the cost of work that was done on units that were not finished during the period. COGM is calculated using the following formula: + Direct Labor Used + Manufacturing Overhead Apolied = Manufacturing Costs Incurred During the Period + Beginning Work-in-process Inventory = Cost of Goods Manufactured * Direct Materials Used = Beginning Direct Materials Inventory + Purchases + Transportation-In - Net Returns - Ending Direct Materials Inventory As was the case with the COGS formula above, this formula simplifies reality because it assumes that all items of inventory are either used or are in ending inventory. In reality some of the inventory may have been lost, damaged or otherwise not used, and therefore it is not in ending inventory. However, for the purposes of the Exams, this formula is sufficient. Direct Materials Used* Ending Work-in-process Inventory 187 Variable and Absorption Costing CMAPart 1 Variable and Absorption Costing Variable and absorption costing are simply two different ways of determining the cost of production and presenting the income statement. Despite the fact that these are often presented as opposite to each other, there are only two differences between them that you need to know about, which are: 1) The treatment of fixed factory overhead costs (for example, factory rent), and 2) The presentation on the income statement of different costs. Note: All other costs except for fixed factory overheads are treated in the same manner under both of these methods, but they may be reported in a different manner on the income statement. We will first look at the difference in the treatment of fixed factory overheads under each of these two methods, and then we will look at the income statement presentation under each method. Fixed Factory Overheads Under Variable Costing Under variable costing (also called direct costing), fixed factory overheads are a period cost that are expensed in the period when they are incurred. This means that no matter what the level of sales, all of the fixed factory overheads will be expensed in the period when incurred. Fixed Factory Overheads Under Absorption Costing Under absorption costing, fixed factory overhead costs are allocated to the units produced during the period according to some predetermined ratio and are therefore a product cost. Under the absorption method, the profit of a company is influenced by the difference in the level of production and the level of sales. When the level of production is higher than the amount of sales, some of the fixed manufacturing overhead costs from this period are included in the balance sheet as inventory at the year-end. As a result, these costs that are in inventory are not included in the income statement as an expense. We will look at this in more detail on the following page. For external reporting purposes, GAAP requires the use of absorption costing. However, many accountants feel that variable costing is a better tool to use for analysis, and therefore variable costing is often used internally. (Job-order costing, process costing and activity-based costing can be used for external purposes.) Note: It is important to remember that the only difference in the profit between these two methods relates to the treatment of fixed factory overheads. Under absorption costing, fixed factory overhead costs are included, or absorbed, into the product cost. Under variable costing, they are excluded because they are not a variable cost. Question 98: Which of the following statements is true for a firm that uses variable costing? a) The cost of a unit of product changes because of changes in the number of manufactured units. b) Profits fluctuate with sales. c) An idle facility variation is calculated. d) Product costs include direct (variable) administrative costs. (CMA Adapted) 188 Section C Variable and Absorption Costing Effects of Changing Inventory Levels It is most certain that these two methods (variable and absorption) will calculate different amounts of income or loss for the same period of time because in using them, different items are included in the product cost (inventoried), and different amounts are expensed in the period. In addition to giving different amounts of profit, these two methods will also give different values for ending inventory. The differences between these methods arise when inventory levels change during a period, meaning that the level of sales did not equal the level of production. Only when production and sales are equal in a period (meaning that there is no change in inventory levels and everything that was produced was sold) will there not be a difference between the incomes reported under these two methods. This is because all of the fixed factory overheads were expensed as a period cost under the variable method, and all of the fixed factory overheads were sold and included in cost of goods sold under the absorption method. Production Greater than Sales (Inventory Increases) If production is greater than sales, then the income calculated under the absorption method is greater because some of the fixed factory overheads were inventoried under this method. Similarly, this will mean that the ending inventory value will be greater using the absorption method because of the fixed factory overhead costs that were inventoried. Sales Greater than Production (Inventory Decreases) If production is lower than sales, then the variable method will give a greater income because the only fixed factory overheads included as an expense in this period were those that were incurred during the year. Because sales were greater than production, it was necessary to sell some of the products that were produced in previous years. This means that under the absorption method, some of the fixed factory overhead costs that had been inventoried in previous years will now be expensed in the current period. Note: You should recognize that over a long period of time, the total income that will be presented under both methods will be essentially the same. In the long term these two methods do not differ in total income (because in the long term the company will not produce more than it can sell and therefore sales will equal production). Rather, the difference between them will appear in the allocation of income to the different periods within that longer time period. The following table outlines the effect of changing inventory levels (production compared to sales) under the two methods: Production = Sales Absorption = Variable Production> Sales Absorption> Variable Production < Sales Absorption < Variable Note: Ending inventory under absorption costing will always be higher than ending inventory under variable costing, because there are more costs in each unit under absorption costing, and the number of units in ending inventory are the same under both methods. There will always be some fixed costs in ending inventory under absorption costing that will not be in ending inventory under variable costing. 189 Variable and Absorption Costing CMAPart 1 Income Statement Presentation As mentioned earlier, there is also a difference in the presentation of the Income Statement with these two methods. The Income Statement under Absorption Costing Under absorption costing we will calculate a gross margin by subtracting all variable and fixed manufac turing costs (this being COGS) from revenue. All variable and fixed nonproduction costs are then subtracted from the gross margin to calculate net income. The pro forma income statement under absorption costing looks as follows: = Gross margin Sales revenue (Cost of goods sold) - made up of variable and fixed manufacturing costs (Variable nonmanufacturing costs) (Fixed non manufacturing costs) = Operating Income The Income Statement under Variable (Direct) Costing Under variable costing we will calculate a manufacturing contribution margin by subtracting all variable manufacturing costs from revenue. From this manufacturing contribution margin, we subtract nonmanufac turing variable costs to arrive at the contribution margin. All fixed costs (manufacturing and non manufacturing) are then subtracted from contribution margin to calculate net income. The pro forma income statement under variable costing looks as follows: = Manufacturing contribution margin = Contribution Margin Sales revenue (Variable manufacturing costs) (Variable nonmanufacturing costs) (Fixed manufacturing costs) (Fixed non manufacturing costs) = Operating Income Note: This cosmetic difference between the two methods does not change the effect of the treatment of fixed manufacturing overheads under the different methods. But, you need to know that the absorption method determines a gross margin and the variable method calculates a contribution margin. This is demonstrated in the example (and the answer to the example) on the following page. 190 Section C Variable and Absorption Costing While absorption costing is required for external reporting (the GAAP financial statements), it is generally thought that variable costing is better for internal uses. Some of the reasons that variable costing is believed superior for internal purposes are: • By not including fixed costs in the calculation of cost to produce, companies are able to make better and more informed decisions about profitability and product mix. • Operating income is directly related to sales levels and is not influenced by changes in inventory levels due to production or sales variances. This prevents managers from being able to hide costs on the balance sheet by increasing production, thus moving more of the fixed factory overheads to the balance sheet as inventory. Under absorption costing, a manager can increase profits simply by producing more units. • The use of variance analysis required with absorption costing may be tedious and confusing because of the different way the costs are reported. • The impact of fixed costs on profit is obvious and visible under variable costing because they are on the income statement and listed as costs. • It is easier to determine the contribution to fixed costs made by a division or product - and thereby helps determine if the product or division should be discontinued. 191 Variable and Absorption Costing CMAPart 1 Example: Hardy Corp. uses the FIFO method to track inventory. The records for Hardy include the following information : Inventory � � Beginning balance, in units -0- 4,200 Production 12.000 10,000 Available for sale 12,000 14,200 Less units sold ( 7,800) (12,QQQ) Ending balance, in units 4.200 2,200 mbll[ iOm[mil:tilio Sales ($2.10 per unit) $16,380 $25,200 Variable mfg. costs ($.90/unit) 10,800 9,000 Fixed mfg. costs 5,000 5,400 Variable selling and admin. costs 2,250 3,750 Fixed selling and admin. costs 2,250 3,750 Required : Prepare the income statement for 2008 and 2009 using both the absorption and the variable methods of costing. (The solution follows.) 2008 Absorption Sales revenue 2008 Variable Sales revenue Manuf. Cont. Margin Gross Margin Contribution Margin Operating Income 2009 Absorption Sales revenue $ Operating Income 2009 Variable Sales revenue $ Manuf. Cont. Margin Gross Margin Contribution Margin Operating Income $ Operating Income $ 192 Section C Variable and Absorption Costing Answer to the Variable/Absorption Costing Example 2008 Income Statements Absorption Costing Variable (Direct) Sales $ 16,380 Sales $ 16,380 Variable Mfg Costs 7,020 Variable Mfg Costs (7,020) Fixed Mfg Costs 3,250 Manuf Cant Margin $ 9,360 COGS (10,270) Less: Variable S&A (2,250) Contribution margin 7,110 Gross margin 6,110 S&A expenses (4,500) Less: Fixed mfg. costs (5,000) Fixed S&A (2,250) Operating income $ 1.610 Operating income $ (140) 2009 Income Statements Absorption Costing Variable (Direct) Sales $ 25,200 Sales $ 25,200 Variable Mfg Costs 10,800 Variable Mfg Costs (10,800) Fixed Mfg Costs 2008 Fixed Mfg Costs 2009 COGS (16,762) Contribution margin 10,650 Gross margin 8,438 Less: Fixed mfg. costs (5,400) S&A expenses (7,500) Fixed S&A (3,750) Operating income $ 938 Operating income $ 11500 Manufacturing 1 1,750 Contribution margin 14,400 m 4,212 Variable S&A (3,750) 1 Beginning inventory for 2009 was 4,200 units, and those units were produced during 2008. Each unit had $.4167 of fixed manufacturing cost attached to it ($5,000 fixed manufacturing costs in 2008 + 12,000 units produced in 2008). Since the company uses FIFO, those units were the first units sold in 2009. 4,200 units x $.4167 of fixed manufacturing cost per unit = $1,750 of fixed manufacturing cost from 2008 production that was sold in 2009. m A total of 12,000 units were sold in 2009. As noted above, 4,200 of those units came from 2008s production. That means the remainder, or 12,000 - 4,200 = 7,800 units, came from 2009s production. Fixed manufacturing cost per unit during 2009 was $5,400 fixed manufacturing costs + 10,000 units produced, or $.54 per unit. So the fixed manufacturing cost included in the units that were sold from 2009s production is $.54 x 7,800 = $4,212.
Posted on: Sat, 16 Nov 2013 04:53:38 +0000