and Macy’s. While factories no longer
run at full capacity, no mattress is
made now until a customer orders it.
Sealy’s manufacturing and
inventory strategy has been key to its
survival during the recession. While 2009
sales were 14% less than 2008 sales,
earnings rose more than $16 million.
Moreover, a large part of the earnings increase
was due to reductions in inventory costs, which
were lower by 12%, or nearly $8 million, in 2009.
Managers in industries with high fixed costs, like
manufacturing, must manage capacity levels and make decisions
about the use of available capacity. Managers must also decide on a
production and inventory policy (as Sealy did). These decisions and
the accounting choices managers make affect the operating
incomes of manufacturing companies. This chapter focuses on two
types of cost accounting choices:
1. The inventory-costing choice determines which manufacturing
costs are treated as inventoriable costs. Recall from Chapter 2
(p. 37), inventoriable costs are all costs of a product that are
regarded as assets when they are incurred and expensed as cost
of goods sold when the product is sold. There are three types of
inventory costing methods: absorption costing, variable costing,
and throughput costing.
2. The denominator-level capacity choice focuses on the cost allocation
base used to set budgeted fixed manufacturing cost rates.
There are four possible choices of capacity levels: theoretical
capacity, practical capacity, normal capacity utilization, and
master-budget capacity utilization.