Cost Accounting Case Study: Chapter $5$ Variable $($Direct$)$ and Absorption $($Full$)$ Costing

Case Study Overview:

Company: Swift Manufacturing

Product: Widgets

Swift Manufacturing produces a single product called "widgets." The company uses a traditional costing system and is currently analyzing its costing method to determine profitability and efficiency. The management is comparing two costing methods: Variable $($Direct$)$ Costing and Absorption $($Full$)$ Costing. The data provided below will help you analyze these two methods.

Data for the Month of August

Item

Amount

Units produced

$10,000$ units

Units sold

$8,000$ units

Selling price per unit

$$50$

Variable manufacturing costs per unit:

$$

$-$ Direct materials

$$8$

$-$ Direct labor

$$5$

$-$ Variable manufacturing overhead

$$3$

Total fixed manufacturing overhead

$$60,000$

Variable selling and administrative costs per unit

$$4$

Total fixed selling and administrative costs

$$30,000$

Swift Manufacturing uses an inventory system that values finished goods at the end of the month. The beginning inventory for August was zero.

Tasks:

You are tasked with preparing income statements under both Variable $($Direct$)$ Costing and Absorption $($Full$)$ Costing methods and answering questions to evaluate which method provides better insights for decision$-$making.

Questions:

Income Statement Preparation

Prepare an income statement using the Variable $($Direct$)$ Costing method. What is the total contribution margin?

$$

Prepare an income statement using the Absorption $($Full$)$ Costing method. What is the gross profit?

$$

$$

What is the value of the ending inventory under Variable Costing?

$$

$$

What is the value of the ending inventory under Absorption Costing?

$$

$$

Analysis of Differences Between Costing Methods

Why is there a difference in net income between Variable Costing and Absorption Costing?

How is fixed manufacturing overhead treated under Absorption Costing?

How is fixed manufacturing overhead treated under Variable Costing?

Explain why net income can differ between the two methods when production exceeds sales.

Impact on Decision$-$Making

Which costing method provides more accurate information for short$-$term decision$-$making? Why?

Which costing method might be better for long$-$term decision$-$making? Why?

In which situation would the Absorption Costing method be more suitable than the Variable Costing method?

How does inventory valuation under the two methods impact the financial statements?

Break$-$even Analysis

Using Variable Costing, calculate the break$-$even point in units.

Using Absorption Costing, how would the allocation of fixed manufacturing overhead to each unit affect the break$-$even analysis?

Would the break$-$even point differ if the company increased production to $15,000$ units but still sold only $8,000$ units? Explain.

Cost Behavior and Profit Planning

How do changes in production levels affect net income under Absorption Costing?

If Swift Manufacturing increased its sales to $12,000$ units, how would this impact net income under Variable Costing compared to Absorption Costing?

Assume the company$$s fixed manufacturing overhead increased to $$75,000.$ How would this change impact unit costs under both costing methods?