absorption costing and production volume variance alternative 268566

Absorption costing and production volume variance alternative capacity bases Earth’s Best Light (EBL), 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, EBL 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 $2.70 per bulb. Fixed manufacturing costs are $1,015,000 per year. Variable and fixed selling and administrative expenses are $0.40 per bulb sold and $200,000, respectively. Because its light bulbs are currently popular with environmentally conscious customers, EBL can sell the bulbs for $9.60 each.

EBL is deciding among various concepts of capacity for calculating the cost of each unit produced. Its choices are as follows:

Theoretical capacity 725,000 bulbs

Practical capacity 406,000 bulbs

Normal capacity 290,000 bulbs (average expected output for the next three years)

Master budget capacity 175,000 bulbs expected production this year

Required

1. Calculate the inventoriable cost per unit using each level of capacity to compute fixed manufacturing cost per unit.

2. Suppose EBL actually produces 250,000 bulbs. Calculate the production volume variance using each level of capacity to compute the fixed manufacturing overhead allocation rate.

3. Assume EBL has no beginning inventory. If this year’s actual sales are 175,000 bulbs, calculate operating income for EBL using each type of capacity to compute fixed manufacturing cost per unit.