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    Mavis Company - Variable versus absorption costing

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    1. Variable costing versus absorption costing. The Mavis Company uses an absorption- costing system based on standard costs. Total variable manufacturing cost, including direct material cost, is $3 per unit; the standard production rate is 10 units per machine- hour. Total budgeted and actual fixed manufacturing overhead costs are
    $420,000. Fixed manufacturing overhead is allocated at $7 per machine- hour ($ 420,000/60,000 machine- hours of denominator level). Selling price is $5 per unit. Variable operating ( non- manufacturing) cost, which is driven by units sold, is $ 1 per unit. Fixed operating ( non- manufacturing) costs are $ 120,000. Beginning inventory in 2009 is 30,000 units; ending inventory is 40,000 units. Sales in 2009 are 540,000 units. The same standard unit costs persisted throughout 2008 and 2009. For simplicity, assume that there are no price, spending, or efficiency variances.

    **-Prepare an income statement for 2009 assuming that the production- volume variance is written off at year- end as an adjustment to cost of goods sold.
    - The president has heard about variable costing. She asks you to recast the 2009 statement as it would appear under variable costing.
    - Explain the difference in operating income as calculated in requirements 1 and 2.
    -Graph how fixed manufacturing overhead is accounted for under absorption costing. That is, there will be two lines: one for the budgeted fixed manufacturing overhead ( which is equal to the actual fixed manufacturing overhead in this case) and one for the fixed manufacturing overhead allocated. Show how the production- volume variance might be indicated in the graph.
    -Critics have claimed that a widely used accounting system has led to undesirable buildups of inventory levels. (a) Is variable costing or absorption costing more likely to lead to such buildups? Why?
    (b) What can be done to counteract undesirable inventory buildups?

    2. Contribution approach, relevant costs. Air Frisco has leased a single jet aircraft that it operates between San Francisco and Fijian Islands. Only tourist-class seats are available on its planes. An analyst has collected the following information:

    Seating capacity per plane: 360 passengers
    Average # of passengers per flight: 200 passengers
    Average one-way fare: $500
    Variable fuel costs: $14,000 per flight
    Food/beverage service costs: $20 per passenger
    Commission to travel agents paid by Air Frisco: 8% of fare
    Fixed annual lease costs allocated to each flight: $53,000 per flight
    Fixed ground-services(maintenance, check in, baggage handling) costs allocated to each flight: $7,000 per flight
    Fixed flight-crew salaries allocated to each flight: $4,000

    NOTE: Assume that fuel costs are unaffected by the actual number of passengers on a flight.

    **-Calculate the total contribution margin from passengers that Air Frisco earns on each one-way flight between San Francisco and Fiji. -The Market Research Department of Air Frisco indicates that lowering the average one- way fare to $ 480 will increase the average number of passengers per flight to 212. On the basis of financial considerations alone, should Air Frisco lower its fare? Show your calculations.
    -Travel International, a tour operator, approaches Air Frisco with the possibility of chartering its air-craft. The terms of charter are as follows: ( a) For each one- way flight, Travel International will pay Air Frisco $ 74,500 to charter the plane and to use its flight crew and ground- service staff; ( b) Travel International will pay for fuel costs; and ( c) Travel International will pay for all food costs. On the basis of financial considerations alone, should Air Frisco accept Travel International's offer? Show your calculations. What other factors should Air Frisco consider in deciding whether to charter its plane to Travel International?"

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    Solution Summary

    Variable versus absorption costing for Mavis Company is examined.