5. a. Under JIT, production is geared strictly to sales. Therefore, the com-
pany would have produced only enough units during September to
meet sales needs. The computation is as follows:
Units sold during September ... 80,000
Less units in inventory at the beginning of the month... 25,000
Units produced during September under JIT... 55,000
Although not asked for in the question, a move to JIT during Sep-
tember would have resulted in an even deeper loss for the month.
The reason is that producing only 55,000 units (rather than 60,000
units, as in the problem) would have resulted in $35,000 more in un-
derapplied overhead (see the computation below), or a loss of
$135,000 instead of a loss of $100,000 for the month.
© The McGraw-Hill Companies, Inc., 2006. All rights reserved.
Solutions Manual, Chapter 7 385
Case 7-18 (continued)
Units produced during September... 60,000
Units that would have been produced under JIT ... 55,000
Decrease in production ... 5,000
Fixed manufacturing overhead rate per unit... × $7
Increased loss for the month... $35,000
b. Starting with the next quarter, there will be little or no difference be-
tween the income reported under variable costing and the income re-
ported under absorption costing. With no inventories on hand, fixed
manufacturing overhead cost is not shifted between periods under
absorption costing.
c. With no inventories available for deferral of fixed manufacturing
overhead costs to other periods, it would not be possible to show a
profit under absorption costing if sales were less than the break-even
level. As stated in part (5b) above, profits (and losses) will be the
same under both costing methods.
Case 7-19 (120 minutes)
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