Problem 8: Variable Costing And Absorption Costing In 935231

Problem 8 35variable Costing And Absorption Costing Incometenley Compa

Tenley Company produces and sells wooden pallets used for moving and stacking materials. The operating costs for the past year include various expenses associated with production and selling. During the year, the company produced 300,000 pallets and sold 306,500 units at a price of $9 each. There was an opening inventory of 11,300 pallets, with costs remaining consistent from the previous year. The company utilizes an actual costing system for product costing.

The assignment involves calculating several financial metrics related to costing and income. First, determine the per-unit inventory cost reported on Tenley's balance sheet at year-end, considering it includes production costs and the amount of inventory remaining. Find the number of units in ending inventory and the total cost of this inventory. The per-unit cost must be rounded to the nearest cent.

Next, compute the variable-costing operating income for the year. Additionally, analyze what the absorption-costing and variable-costing incomes would be if the company had sold 296,700 pallets during the year. Provide the two different operating income figures under these conditions.

Paper For Above instruction

The analysis of costing methods—variable costing and absorption costing—is fundamental in managerial and financial accounting, providing insights into a company's income statement, inventory valuation, and overall profitability. In the context of Tenley Company's operations, these two methods can produce differing results in net income due to their treatment of fixed manufacturing overhead costs. This paper elucidates the calculation of inventory costs, the determination of operating income under both costing methods, and explores how changes in sales volume influence net income figures.

Determining Per-Unit Inventory Cost and Ending Inventory

Under absorption costing, all manufacturing costs—variable and fixed—are included in inventory costs. Conversely, variable costing includes only variable manufacturing costs in inventory valuation. Given that the costs have not changed from the previous year, and knowing the total fixed manufacturing costs, we can calculate the per-unit costs for inventory validation.

The total manufacturing costs for the year can be broken down into variable and fixed components. Assuming the provided costs include both, the per-unit fixed manufacturing overhead can be derived by dividing the total fixed costs by the total units produced (300,000 pallets). The total production cost per unit is then the sum of variable cost per unit and fixed overhead per unit.

Assuming the per-unit variable costs are known from the data (for example, variable manufacturing overhead and direct materials), the per-unit inventory cost—reported on the balance sheet—comprises these variable costs plus an allocated share of fixed manufacturing overhead. The ending inventory consists of units remaining unsold, which is the beginning inventory plus production minus sales.

Calculations show that the units in ending inventory are: 11,300 (beginning inventory) + 300,000 (produced) - 306,500 (sold) = 4,800 units remaining at year-end.

The total cost of ending inventory is then: per-unit inventory cost × units in ending inventory. The per-unit amount is rounded to the nearest cent, considering the accumulation of fixed overhead and variable costs.

Calculating Operating Income Under Variable Costing

The variable-costing operating income is computed by subtracting total variable costs from sales revenue. This includes variable production costs, variable selling, and administrative expenses, excluding fixed manufacturing overhead (treated as period costs). The calculation involves:

• Sales revenue = units sold × selling price ($9)
• Variable production cost per unit × units sold
• Variable selling and administrative expenses

The fixed manufacturing overhead is expensed in full under variable costing, impacting operating income accordingly.

Impact of Sales Volume on Absorption and Variable Costing Income

If the sales decrease to 296,700 pallets, the operating income figures under absorption and variable costing will differ due to different treatments of fixed manufacturing overhead. Under absorption costing, fixed overhead costs are allocated to inventory, thus affecting gross margin depending on inventory levels. Under variable costing, fixed overhead is expensed fully during the period, simplifying the analysis but possibly leading to different net income figures.

Conclusion

Understanding the nuances between variable and absorption costing is vital for managerial decision-making, particularly for assessing product profitability, pricing strategies, and inventory management. The calculations for Tenley Company exemplify these concepts, illustrating how different accounting approaches impact financial statements and business insights.

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