An Extreme Version of Variable Costing
Eli Goldratt Advocates That

question 16

Essay

An Extreme Version of Variable Costing
Eli Goldratt advocates that all manufacturing costs other than materials be treated as operating expenses for the period. Periodic profits would be calculated as: $$\begin{array} { | l | c | } \hline \text { Sales } & \mathrm { xxx } \\\hline \text { Less cost of material } & \mathrm { xxx } \\\hline \text { Less all nonmaterial operating expense } & \underline { \mathrm { xxx } } \\\hline \text { Net income } & \mathrm { xxx } \\\hline\end{array}$$ Operating data for last year are $$\begin{array} { | l | r | } \hline \text { Units produced } & 12,000 \\\hline \text { Unit sales } & 10,000 \\\hline \text { Material cost/unit produced } & \$ 0.45 \text { per unit } \\\hline \text { Labor cost/unit produced } & 0.35 \\\hline \text { Overhead/unit produced } & 0.38 \\\hline\end{array}$$ There is no beginning inventory.
Required:
a. Compare profits under absorption costing and Goldratt's method.
b. Evaluate Goldratt's proposal.

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