The Write Way manufactures double sided pens- a pen on one side, a highlighteron the other. As the accounting manager, Shade is responsible for presenting three different versions of the company's income statement to the rest of the management team at year-end. Team members are very familiar with absorbtion costing, as they have been evaluating gross margin amounts and percentages for years. They are lesss keen on how fixed-MOH impacts the income statment, so Shade gathers the following current information. The information includes three possible capacity levels for calculating the fixed-MOH rate. Shade also notes there are no price or efficiency variances this period. Any fixed-MOH volume variase is written off to COGS.Theoretical level - 80,000 units Practical level - 60,000 units Normal level - 50,000 units Actual production - 65,000 units Sales Volume - 60,000 units Budgeted fixed-MOH cost - $240,000 Budgeted DM cost - $2.25 per unit Budgeted DL cost -$1.30 per unit Budgeted variable- MOH cost - $0.40 per unit Selling price - $15.00 per unit a. Calculate the fixed-MOH volume variance for each possible capacity level this year; specify amount and sign. b. Prepare partial income statements through gross margin for each denominator level. c. Calculate the difference in income from each denominator level to the next, and explain any income differences. d. If Shade needs to report on how well the company utilized its capacity, what would she say if the company uses the theoretical level? The practical level? The normal level? e. What gross margin percentage is earned under teh theoretical level? practical level? normal level? Should the denominator level affect the price the company charges for its product? Explain

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter18: Activity-based Costing

Section: Chapter Questions

Problem 3CMA: Young Company is beginning operations and is considering three alternatives to allocate...

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The Write Way manufactures double sided pens- a pen on one side, a highlighteron the other. As the accounting manager, Shade is responsible for presenting three different versions of the company's income statement to the rest of the management team at year-end. Team members are very familiar with absorbtion costing, as they have been evaluating gross margin amounts and percentages for years. They are lesss keen on how fixed-MOH impacts the income statment, so Shade gathers the following current information. The information includes three possible capacity levels for calculating the fixed-MOH rate. Shade also notes there are no price or efficiency variances this period. Any fixed-MOH volume variase is written off to COGS.
Theoretical level - 80,000 units

Practical level - 60,000 units

Normal level - 50,000 units

Actual production - 65,000 units

Sales Volume - 60,000 units

Budgeted fixed-MOH cost - $240,000

Budgeted DM cost - $2.25 per unit

Budgeted DL cost -$1.30 per unit

Budgeted variable- MOH cost - $0.40 per unit

Selling price - $15.00 per unit

a. Calculate the fixed-MOH volume variance for each possible capacity level this year; specify amount and sign.

b. Prepare partial income statements through gross margin for each denominator level.

c. Calculate the difference in income from each denominator level to the next, and explain any income differences.

d. If Shade needs to report on how well the company utilized its capacity, what would she say if the company uses the theoretical level? The practical level? The normal level?

e. What gross margin percentage is earned under teh theoretical level? practical level? normal level? Should the denominator level affect the price the company charges for its product? Explain

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