3. By increasing production so that it exceeds sales, inventories will be
built up. This will have the effect of deferring fixed manufacturing over-
head in the ending inventory. How much fixed manufacturing overhead
must be deferred in this manner? The managers are suggesting an arti-
ficial boost to earnings of $328,000 since at the current rate of sales,
profit will only be $1,672,000 and they want to hit the target profit of
$2,000,000.
The amount of production, Q, required to defer $328,000 can be deter-
mined as follows:
Units in beginning inventory .. 0
Plus units produced ... Q
Units available for sale ... Q
Less units sold ... 400,000
Units in ending inventory ... Q – 400,000
Fixed manufacturing
overhead per unit = $6,888,000
Q
Case 7-19 (continued)
Fixed manufacturing Fixed manufacturing Number of
overhead deferred = overhead rate × units added
in inventory per unit to inventory
$6,888,000
$328,000 = × (Q - 400,000)
$328,000 × Q = $6,888,000 × (Q - 400,000)
$328,000 × Q = $6,888,000 × Q - $6,888,000 × 400,000
$6,560,000 × Q = $6,888,000 × 400,000
Q = 420,000 units
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