ACG 4361        

CHAPTER 9 STUDY PROBES SOLUTION


 

 1.  The following table summarizes annual production and sales for Anslaw Gears:

 

Units produced and sold                  

 

80,000

Sales price

 

$20/unit

Direct materials cost

 

$4/unit

Direct labor cost

 

$3/unit

Variable overhead cost

 

$2/unit

Total fixed manufacturing overhead cost

 

$500,000

Variable and administrative selling cost

 

$1/unit

Total fixed selling and administrative cost

 

$125,000

There is no inventory at the beginning of the year.

A.   Calculate income using the absorption costing method.

B.   Calculate income using the variable costing method.

A.     Absorption Costing Unit Product Costs

Direct materials

$ 4.00

 

Direct labor

3.00

 

Variable overhead

2.00

 

Fixed overhead

  6.25

     FOH per unit = $500,000 / 80,000 units

   Total

$15.25

 

 

Sales

$1,600,000

$20 per unit x 80,000 units

Variable mfg. costs

720,000

($4 + $3 + $2) x 80,000 units

Fixed overhead cost

  500,000

$6.25 x 80,000 units

   Gross margin

380,000

 

Variable selling & administrative

80,000

$1 80,000 units

Fixed selling & administrative

   125,000

 

Net operating income

$   175,000

 

 

B.      Variable Costing Unit Product Costs:

Direct material

$4.00

Direct labor

3.00

Variable overhead

  2.00

   Total

$9.00

 

Sales

$1,600,000

$20 per unit 80,000 units

Variable mfg. cost

720,000

($4 + $3 + $2) 80,000 units

Variable selling & administrative

     80,000

$1 80,000 units

   Contribution margin

800,000

 

Fixed overhead cost

500,000

 

Fixed selling & administrative

     125,000

 

Net operating Income

$  175,000

 

 


2. Lehne Company, which has only one product, has provided the following data concerning its most recent month of operations:

           

 

Selling price per unit

$170

 

Units in beginning inventory

500

 

Units produced

2,600

 

Units sold

3,000

 

Variable costs per unit:

 

 

Direct materials

$13.00

 

Direct labor

$29.00

 

Variable manufacturing overhead

$6.00

 

Variable selling and administrative

$10.00

 

Total fixed costs:

 

 

Fixed manufacturing overhead

$80,600

 

Fixed selling and administrative

$15,000

 

          The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Operating income under variable costing is $16,400.      

      

a.   How much is the unit product cost for the month under variable costing?

b.   How much is the unit product cost for the month under absorption costing?

c.   Reconcile the variable costing and absorption costing net operating incomes for the month.

a. & b. Unit product costs

 

Variable costing:

 

 

 Direct materials.

$13

 

 Direct labor

29

 

 Variable manufacturing overhead

   6

 

Unit product cost

$48

 

 

 

 

Absorption costing:

 

 

 Direct materials

$13

 

 Direct labor

29

 

 Variable manufacturing overhead

6

 

 Fixed manufacturing overhead*

 31

 

Unit product cost

$79

 *FOH = $80,600 / 2,600 = $31 per unit

C. Change in inventory units:

 Ending inventory (500 + 2,600 - 3,000)

100

 Beginning inventory

 500

Change in inventory

Decrease of 400

 

 

            Fixed mfg cost per unit x change in units = $31 x 400 = $12,400

     Reconciliation:

 

Variable costing net operating income

$16,400

 

Deduct fixed manufacturing overhead costs released from inventory under absorption costing

(12,400)

 

Absorption costing net operating income

$  4,000

 


3.  The following table summarizes annual production and sales for Feldman Incorporated:

 

Units produced

100,000

Units sold

80,000

Sales price

$20/unit

Direct materials cost

$4/unit

Direct labor cost

$3/unit

Variable overhead cost

$2/unit

Total fixed manufacturing overhead cost

$500,000

Variable and administrative selling cost

$1/unit

Total fixed selling and administrative cost

$160,000

Feldman held no inventory at the beginning of the year.

1.      Calculate income using the absorption costing method.

2.      Calculate income using the variable costing method.

3.      Show that the difference in income is due to the fixed overhead cost.

1.     Absorption Costing Unit Cost

Direct materials

$ 4

 

Direct labor

3

 

Variable overhead

2

 

Fixed overhead

    5

FOH per unit = $500,000 / 100,000 units

   Total

$14

 

 

Sales

$1,600,000

$20 per unit x 80,000 units

Variable mfg cost

720,000

($4 + $3 + $2) x 80,000 units

Fixed mfg overhead

400,000

$5 x 80,000 units

   Gross margin

480,000

 

Variable selling & administrative

80,000

$1 x 80,000 units

Fixed selling & administrative

 160,000

 

Net operating income

$ 240,000

 

 

2.     Variable Costing Unit Cost

Direct material

$4

Direct labor

3

Variable overhead

  2

   Total

$9

 

Sales

$1,600,000

$20 per unit x 80,000 units

Variable mfg cost

720,000

($4 + $3 + $2) x 80,000 units

Variable selling & administrative

80,000

$1 x 80,000 units

   Contribution margin

800,000

 

Fixed mfg overhead

500,000

 

Fixed selling & administrative

 160,000

 

Net operating income

$140,000

 

 

3.    

Absorption costing income

$240,000

 

Variable costing income

140,000

 

Difference

$100,000

 

 

 

 

Change in ending inventory units

20,000

100,000 – 80,000

Fixed overhead per unit

     $5.00

 

Reconciliation difference

$100,000

 

 


4.  Bjorni Inc. makes a single product, the Bjorn. Information for 2016 appears below:

Sales in units   

        142,000

Beginning inventory 3,500
Production in units         150,000
Variable production cost per unit    $1.10
Variable selling cost per unit      $0.30
Fixed production cost per year  $240,000
Fixed selling and administrative cost per year    $50,000
Selling price per unit            $4.00

A.   How much is the cost per unit of inventory under full costing?

 

         VC + FC = $1.10 + ($240,000/150,000) = $2.70

 

B.   How much is the contribution margin for the year under variable costing?                       

 

        Sales revenue - VC production - VC period

        = ($4*142,000) - ($1.10*142,000) - ($0.30*142,000) = $369,200

C.   How much fixed manufacturing overhead will be expensed in 2016 using full costing?       

         142,000*$1.60 = $227,200

 

D.   Prepare an income statement in good form using full costing for 2016. Show all calculations and label correctly.

 

 Sales revenue (142,000*$4)

 $568,000

 CGS:

 

   Variable mfg costs ($1.10*142,000)

 156,200

   Fixed mfg costs ($1.60*142,000)

 227,200

 Gross profit

$184,600

 Operating expenses:

 

   Variable selling expenses ($0.30*142,000)

42,600

   Fixed selling and admin costs

50,000

 Net operating income

 $92,000

 


5. Nations Manufacturing produces snow blowers. Costs involved in production are:

 

Direct material cost per unit $20
Direct labor cost per unit 12
Variable manufacturing overhead per unit 10
Fixed manufacturing overhead per year

$148,500

Operating income using variable costing is $84,000. The company has fixed selling and administrative costs of $150,000 per year. During the year, Nations produces 45,000 snow blowers and sells 48,000 snow blowers. There were 10,000 units in beginning inventory.

A.   In good form, prepare a reconciliation of net operating income.  

        Fixed mfg cost per unit: $148,500 / 45,000 = $3.30 per unit

        Change in inventory units: 48,000 - 45,000 = 3,000 decline

Variable costing operating income $84,000
Less fixed costs in inventory ($3.30*3,000) (9,900)
Absorption costing operating income $74,100

Fixed costs are subtracted because inventory in units declined from 10,000 to 7,000 units.

 

B.   How much is the cost of ending inventory using variable costing?                            

 

 7,000*($20 + $12 + $10) = $294,000


6.  Dolan Company developed the following information for 2015:

 

Total selling and administrative expenses:  
    Variable $30,000
    Fixed     $50,000
Units in beginning inventory  2,000
Units sold    24,000
Total direct materials used $75,000
Total direct labor cost   $95,000
Units produced  30,000
Total manufacturing overhead:  
    Variable  $100,000
    Fixed      $90,000

                                                                                    

(a)    How much is the amount of the cost of goods sold under the absorption costing approach?

(b)    How much is the cost of the ending inventory under the variable costing approach?

(c)    Which approach would show the greater income for 2015 and by how much?

 

 

Absorption Costing

 Variable Costing

Direct materials $75,000 $75,000
Direct labor 95,000 95,000
Variable manufacturing overhead 100,000 100,000
Fixed manufacturing overhead 90,000              0
Total manufacturing costs incurred $360,000 $270,000
     
Production in units 30,000 30,000
Production unit cost $12.00 $9.00

                                                                             

(a)    Cost of goods sold under absorption costing =  24,000 units x $12 = $288,000

 

(b)    Units in ending inventory = 2,000 + 30,000 - 24,000 = 8,000 units

        Cost of ending inventory under variable costing = 8,000 units x $9 =$72,000

 

(c)    Change in inventory units = 2,000 - 8,000 = 6,000 units increase

        Absorption costing income in 2015 would be greater by 6,000 units x $3 = $18,000

 


Multiple Choice Questions

 

1.    Absorption costing

         a.      expenses marketing costs as cost of goods sold.

         b.      treats direct manufacturing costs as a period cost.

         c.      includes  fixed manufacturing overhead as an inventoriable cost.

         d.      is required for internal reports to managers.

 


2.    Variable costing regards fixed manufacturing overhead as

         a.      an administrative cost.

         b.      an inventoriable cost.

         c.      a period cost.                    

         d.      a product cost.

 


3. The contribution-margin format of the income statement

         a.      is used with absorption costing.

         b.      highlights the lump sum of fixed manufacturing costs.

         c.      distinguishes manufacturing costs from nonmanufacturing costs.

         d.      calculates gross margin.

 


4.    The gross-margin format of the income statement

         a.      distinguishes between manufacturing and nonmanufacturing costs.

         b.      distinguishes variable costs from fixed costs.

         c.      is used with variable costing.

         d.      calculates contribution margin.

 


5.    If the unit level of inventory increases during an accounting period, then

         a.      less operating income will be reported under absorption costing than variable costing.

         b.      more operating income will be reported under absorption costing than variable costing.

         c.      operating income will be the same under absorption costing and variable costing.

         d.      the exact effect on operating income cannot be determined.

 


6  One possible means of determining the difference between operating income for absorption costing and variable costing is

         a.      by subtracting sales of the previous period from sales of this period.

         b.      by subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory.

         c.      by multiplying the number of units produced by the budgeted fixed manufacturing cost rate.

 


7.    When comparing the operating incomes between absorption costing and variable costing and beginning finished inventory exceeds ending finished inventory, it may be assumed that

         a.      sales increased during the period.

         b.      variable cost per unit is less than fixed cost per unit.

         c.      there is an unfavorable production-volume variance.

         d.      variable costing operating income exceeds absorption costing operating income.

 


8. Which of the following is not a product cost under full-absorption costing? 
   
A. Direct materials used in the current period
   
B. Rent for the warehouse used to store direct materials
    C. Salaries paid to the top management in the company
   
D. Vacation pay accrued for the production workers

Management salaries are period costs. They are not part of the cost of getting the product ready to sell.


 

True False Questions

 

1.  In absorption costing systems, costs on the income statement are classified by their function.

True.


2. Variable costing does not conform to GAAP because it does not match manufacturing costs with revenues.

True.


3. Absorption costing will produce a larger operating income than variable costing if inventory levels decrease. 

False. It will be smaller.


4.  Variable costing allows managers to manipulate income compared to full costing.  

False. Full costing allows more manipulation due to fixed costs being attached to units of product.


5. When variable costing is used, an income statement will show gross margin.

False.


6. Under variable costing, only the quantity of units sold drives operating income, the production level has no impact at all.

True.


7. Absorption costing is required by GAAP (Generally Accepted Accounting Principles) for external reporting.

True.


8.  A manager can decrease net income as reported under absorption costing by producing more product than is sold in a given period.

False.


9. The income under variable costing will never be the same as the income under absorption costing.

False.