9-36 Absorption costing and production-volume variance alternative capacity bases. Planet Light First(PLF), a producer of energy-efficient light bulbs, expects that demand will increase markedly over thenext decade. Due to the high fixed costs involved in the business, PLF has decided to evaluate its financialperformance using absorption costing income. The production-volume variance is written off to cost of goodssold. The variable cost of production is $2.40 per bulb. Fixed manufacturing costs are $1,170,000 per year. Variableand fixed selling and administrative expenses are $0.20 per bulb sold and $220,000, respectively. Because its lightbulbs are currently popular with environmentally conscious customers, PLF can sell the bulbs for $9.80 each.PLF is deciding among various concepts of capacity for calculating the cost of each unit produced. Itschoices are as follows:Theoretical capacityPractical capacity900,000 bulbs520,000 bulbsNormal capacity260,000 bulbs (average expected output for the next three years)225,000 bulbs expected production this yearMaster budget capacity1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturingcost per unit.2. Suppose PLF actually produces 300,000 bulbs. Calculate the production-volume variance using eachlevel of capacity to compute the fixed manufacturing overhead allocation rate.3. Assume PLF has no beginning inventory. If this year's actual sales are 225,000 bulbs, calculate operat-ing income for PLF using each type of capacity to compute fixed manufacturing cost per unit.

Question
Asked Jan 14, 2020
18 views

Operating income effects of denominator-level choice and disposal of production-volume variance (continuation of 9-36). 1. If PLF sells all 300,000 bulbs produced, what would be the effect on operating income of using each type of capacity as a basis for calculating manufacturing cost per unit? 2. Compare the results of operating income at different capacity levels when 225,000 bulbs are sold and when 300,000 bulbs are sold. What conclusion can you draw from the comparison? 3. Using the original data (that is, 300,000 units produced and 225,000 units sold) if PLF had used the proration approach to allocate the production-volume variance, what would operating income have been under each level of capacity? (Assume that there is no ending work in process.)

9-36 Absorption costing and production-volume variance alternative capacity bases. Planet Light First
(PLF), a producer of energy-efficient light bulbs, expects that demand will increase markedly over the
next decade. Due to the high fixed costs involved in the business, PLF has decided to evaluate its financial
performance using absorption costing income. The production-volume variance is written off to cost of goods
sold. The variable cost of production is $2.40 per bulb. Fixed manufacturing costs are $1,170,000 per year. Variable
and fixed selling and administrative expenses are $0.20 per bulb sold and $220,000, respectively. Because its light
bulbs are currently popular with environmentally conscious customers, PLF can sell the bulbs for $9.80 each.
PLF is deciding among various concepts of capacity for calculating the cost of each unit produced. Its
choices are as follows:
Theoretical capacity
Practical capacity
900,000 bulbs
520,000 bulbs
Normal capacity
260,000 bulbs (average expected output for the next three years)
225,000 bulbs expected production this year
Master budget capacity
1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing
cost per unit.
2. Suppose PLF actually produces 300,000 bulbs. Calculate the production-volume variance using each
level of capacity to compute the fixed manufacturing overhead allocation rate.
3. Assume PLF has no beginning inventory. If this year's actual sales are 225,000 bulbs, calculate operat-
ing income for PLF using each type of capacity to compute fixed manufacturing cost per unit.
help_outline

Image Transcriptionclose

9-36 Absorption costing and production-volume variance alternative capacity bases. Planet Light First (PLF), a producer of energy-efficient light bulbs, expects that demand will increase markedly over the next decade. Due to the high fixed costs involved in the business, PLF has decided to evaluate its financial performance using absorption costing income. The production-volume variance is written off to cost of goods sold. The variable cost of production is $2.40 per bulb. Fixed manufacturing costs are $1,170,000 per year. Variable and fixed selling and administrative expenses are $0.20 per bulb sold and $220,000, respectively. Because its light bulbs are currently popular with environmentally conscious customers, PLF can sell the bulbs for $9.80 each. PLF is deciding among various concepts of capacity for calculating the cost of each unit produced. Its choices are as follows: Theoretical capacity Practical capacity 900,000 bulbs 520,000 bulbs Normal capacity 260,000 bulbs (average expected output for the next three years) 225,000 bulbs expected production this year Master budget capacity 1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit. 2. Suppose PLF actually produces 300,000 bulbs. Calculate the production-volume variance using each level of capacity to compute the fixed manufacturing overhead allocation rate. 3. Assume PLF has no beginning inventory. If this year's actual sales are 225,000 bulbs, calculate operat- ing income for PLF using each type of capacity to compute fixed manufacturing cost per unit.

fullscreen
check_circle

Expert Answer

Step 1
Accounting homework question answer, step 1, image 1
fullscreen
Step 2

1.

Accounting homework question answer, step 2, image 1
fullscreen
Step 3
Accounting homework question answer, step 3, image 1
fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Accounting for natural resources Donahue Oil Incorporated has an account titled Oil and Gas Properti...

A: Depletion: It refers to the process of proportionately distributing the cost of the extracting natur...

question_answer

Q: Accounting for an intangible asset On October 1, 2018, Modern Company purchased a patent for $153,60...

A: 1.

question_answer

Q: Outline the accounting procedures involved in applyingthe direct-financing method.

A: Click to see the answer

question_answer

Q: Explain how gains or losses on impaired assets shouldbe reported in income.

A: Impairment losses are reported under “other expenses and losses” section. Impairment losses are simi...

question_answer

Q: Differentiate between an originating temporary differenceand a reversing difference.

A: Click to see the answer

question_answer

Q: Manufacturing overhead, variance analysis. The Rotations Corporation is a manufacturer of centrifuge...

A: 1. 

question_answer

Q: Describe what is meant by posting, the fourth step in the processing cycle.

A: Accounting Cycle:Accounting cycle refers to the process of recording a business transaction in the b...

question_answer

Q: Pretax financial income for Lake Inc. is $300,000, and itstaxable income is $100,000 for 2018. Its o...

A: Click to see the answer

question_answer

Q: Explain the difference between permanent accounts and temporary accounts. Why does an accounting sys...

A: Temporary accounts (TA) are the account which is closed at the completion of the accounting period. ...