9-28 Variable and absorption costing, sales, and operating-income changes. Candyland uses standard costing to produce a particularly popular type of candy. Candylands president, Jack McCay, was unhappy after reviewing the income statements for the first three years of business. He said, I was told by our accountantsand in fact, I have memorizedthat our breakeven volume is 25,000 units. I was happy that we reached that sales goal in each of our first two years. But heres the strange thing: In our first year, we sold 25,000 units and indeed we broke even. Then in our second year we sold the same volume and had a significant, positive operating income. I didnt complain, of course ... but heres the bad part. In our third year, we sold 10% more candy, but our operating income dropped by nearly 90% from what it was in the second year! We didnt change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances ... so whats going on?!

Absorption Costing 2016

Cost of goods sold:

Sales (units) Revenues

Beginning inventory Production

Available for sale Deduct ending inventory

Adjustment for production-volume variance Cost of goods sold

Gross margin

Selling and administrative expenses (all fixed) Operating income

Beginning inventory Production (units) Sales (units)

Ending inventory

Variable manufacturing cost per unit Fixed manufacturing overhead costs

Fixed manuf. costs allocated per unit produced $ 25,000

$2,000,000 0

1,825,000 1,825,000 0 0

1,825,000 175,000 175,000

$

0 0

25,000 25,000 0

13

$1,500,000 $

60 $ 2017 25,000

$2,000,000 0

2,007,500 2,007,500 (182,500) (150,000) 1,675,000 325,000 175,000

$ 150,000 0

27,500 25,000 2,500 13

$1,500,000 $

60 2018 27,500 $2,200,000

182,500 1,825,000 2,007,500 0 0

2,007,500 192,500 175,000

$ 17,500

2,500 25,000 27,500 0

$ 13

$1,500,000 $

60