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

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.