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Case 3 On December 30, a fire destroyed most of the accounting records of the Adams Division, a small one-product manufacturing division that uses standard costs and flexible budgets. All variances are written off as additions to (or deductions from) income; none are pro-rated to inventories. You have the task of reconstructing the records for the year. The general manager informs you that the accountant has been experimenting with both absorption costing and variable costing. The following information is available for the current year: Cash on hand, December 31 $10 b. Sales $128,000 Actual fixed indirect manufacturing costs 21,000 d. Accounts receivable, December 31 20,000 Standard variable manufacturing costs per unit 1 f. Variances from standard of all variable manufacturing costs $5,000 U g. Operating income, absorption-costing basis $14,400 h Accounts payable, December 31 18,000 i. Gross profit, absorption costing at standard (before deducting variances) 22,400 j. Total liabilities 100,000 k. Unfavorable budget variance, fixed manufacturing costs 1,000 U 1. Notes receivable from chief accountant 4,000 m. Contribution margin, at standard (before deducting variances) 48,000 Direct-material purchases, at standard prices 50,000 0. Actual selling and administrative costs (all fixed) 6,000 n. Required: Compute the following items (ignore income tax effects). 1. Operating income on a variable-costing basis. 2. Number of units sold. 3. Number of units produced. 4. Number of units used as the denominator to obtain fixed indirect cost application rate per unit on absorption-costing basis. 5. Did inventory (in units) increase or decrease? Explain. 6. By how much in dollars did the inventory level change (a) under absorption costing, (b) under variable costing? 7. Variable manufacturing cost of goods sold, at standard prices. 8. Manufacturing cost of goods sold at standard prices, absorption costing

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