ACC2002 Managerial Accounting Textbook Solution-Ch8

1

EXERCISE 8-15

Inventory calculations (units): Finished-goods inventory, January 1 ....................................................... 2,000 units Add: Units produced ................................................................................ 20,000 units Less: Units sold ....................................................................................... 21,000 units Finished-goods inventory, December 31 .................................................. 1,000 units 1. Variable costing: Inventoriable costs under variable costing: Direct material used ................................................................................. $ 600,000 Direct labor incurred ................................................................................. 300,000 Variable manufacturing overhead ............................................................ 200,000 Total ......................................................................................................... $1,100,000 Cost per unit produced = $1,100,000/20,000 units = $55 per unit Ending inventory: 1,000 units $55 per unit ......................................... $55,000

2. Absorption costing:

Predetermined fixed-overhead rate

= production planned

overhead ingmanufactur fixed =

units 000,20

000,420$

= $21 per unit

Difference in fixed overhead expensed under

absorption and variable costing =

rate

overhead-fixed

nedpredetermi

units in

inventory

in change

= (1,000 units) ($21 per unit) = $21,000

Difference in reported income:

Since inventory decreased during the year, income reported under absorption costing will be $21,000 lower than income reported under variable costing.

ACC2002 Managerial Accounting Textbook Solution-Ch8

2

EXERCISE 8-17

1. a. Inventory decreases by 3,000 units, so income is greater under variable costing.

b.

unit per rate

overhead Fixed =

000,20

000,200,2$ = $110

income reported

in Difference = $110 3,000 = $330,000

2. a. Inventory remains unchanged, so there is no difference in reported income under the two methods of product costing.

b. No difference.

3. a. Inventory increases by 2,000 units, so income is greater under absorption costing.

b.

unit per rate

overhead Fixed =

000,11

000,200,2$ = $200

income reported

in Difference = $200 2,000 = $400,000

ACC2002 Managerial Accounting Textbook Solution-Ch8

3

EXERCISE 8-18

1. Cost-volume profit graph:

2. Calculation of break-even point:

Break-even point = margin oncontributi unit

cost fixed

=

200$ 350$

000,200,2$

= 14,667 units (rounded)

3. Variable costing is more compatible with the cost-volume-profit chart, because it maintains the distinction between fixed and variable costs as does CVP analysis.

Absorption costing, in contrast, does not maintain the separation of fixed and variable costs. Fixed costs are unitized in the fixed overhead rate and inventoried as product costs along with variable manufacturing costs.

Break-even point: 14,667 units (rounded)

Total cost

Revenue

Dollars (in millions)

$5

$4

$3

$2

$1

Units (in thousands)

Fixed cost

($2,200,000)

5 10 15

ACC2002 Managerial Accounting Textbook Solution-Ch8

4

PROBLEM 8-23

1. Since the planned production volume was 100,000 units, actual production was also 100,000 units.

Beginning inventory ................................................................................. 0 units Production ................................................................................................ 100,000 units Ending inventory ...................................................................................... (20,000 ) units Sales ........................................................................................................ 80,000 units

Since inventory increased during the year, reported income is higher under absorption costing.

Difference in

reported income = inventory

in change

unit per

overhead fixed

$20,000 = 20,000 units units 100,000

overhead fixed

Solving this equation: fixed overhead = $100,000

Now we can compute the contribution margin:

Reported income under variable costing .................................................. $220,000 Fixed overhead ........................................................................................ 100,000 Total contribution margin ......................................................................... $320,000

Contribution margin per unit =

units in sales

margin oncontributi total

=

units 000,80

000,320$ = $4 per unit

Break-even point

in units = margin oncontributi unit

(overhead) cost fixed

=

unit per 4$

000,100$ = 25,000 units

ACC2002 Managerial Accounting Textbook Solution-Ch8

5

2. Profit-volume graph:

25,000

Break-even

point 25,000 units

Sales in units

Profit = $220,000 at

80,000 unit sales volume

Dollars

$250,000

$200,000

$150,000

$100,000

$50,000

$(50,000)

$(100,000)

$(150,000)

50,000 75, 000 100,000

Profit

0 Loss

ACC2002 Managerial Accounting Textbook Solution-Ch8

6

PROBLEM 8-24

Outback Corporation’s reported 20x1 income will be higher under absorption costing because actual production exceeded actual sales. Therefore, inventory increased and some fixed costs will remain in inventory under absorption costing which would be expensed under variable costing.

1. Beginning inventory (in units) ................................................................... 35,000 Actual production (in units) ...................................................................... 130,000

Available for sale (in units) ....................................................................... 165,000 Sales (in units) ......................................................................................... 125,000 Ending inventory (in units) ....................................................................... 40,000 Budgeted manufacturing costs: Direct material .......................................................................................... $1,680,000 Direct labor .............................................................................................. 1,260,000 Variable manufacturing overhead ............................................................ 560,000 Fixed manufacturing overhead ................................................................. 700,000

Total ..................................................................................................... $4,200,000

units) (in production planned Total

fixed) and (variable costs ingmanufactur budgeted Total =

000,140

000,200,4$

= $30 per unit

Value of ending inventory = quantity cost per unit = 40,000 units $30 per unit = $1,200,000

2. Budgeted variable manufacturing costs: Direct material .......................................................................................... $1,680,000 Direct labor .............................................................................................. 1,260,000 Variable manufacturing overhead ............................................................ 560,000 Total ......................................................................................................... $3,500,000

units) (in production planned Total

costs ingmanufactur variable budgeted Total =

000,140

000,500,3$

= $25 per unit

ACC2002 Managerial Accounting Textbook Solution-Ch8

7

Value of ending inventory = quantity cost per unit = 40,000 units $25 per unit = $1,000,000

3. Increase in inventory (in units) = production – sales = 130,000 units – 125,000 units = 5,000 units

Budgeted fixed manufacturing overhead per unit = units 000,140

000,700$

= $5 per unit

Difference in reported income

= budgeted fixed overhead per unit change in inventory (in units)

= $5 5,000 units = $25,000

Income reported under absorption costing will be higher than that reported under variable costing, because inventory increased during the year.

4. If Outback Corporation had adopted a JIT program at the beginning of 20x1:

a. It is unlikely that the company would have manufactured 5,000 more units than it sold. Under JIT, production and sales would be nearly equal.

b. Reported income under variable and absorption costing would most likely be nearly the same. Differences in reported income are caused by changes in inventory levels. Under JIT, inventory levels would be minimal. Therefore, the change in these levels would be minimal.

ACC2002 Managerial Accounting Textbook Solution-Ch8

8

PROBLEM 8-25

1. Cost per unit: (a) Absorption Costing (b) Variable Costing Direct material ............................... $35 ....................................................... $35 Direct labor .................................... 16 ....................................................... 16 Manufacturing overhead Variable ..................................... 10 ....................................................... 10 Fixed ($210,000 ÷ 30,000) ........ 7 Total absorption cost per unit….. $68 Total variable cost per unit .................................................................................. $61 2. a. STARS ABOVE LTD.

INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1 ABSORPTION COSTING

Sales revenue (27,000 at $95 per unit) .............................................. $2,565,000 Less: Cost of goods sold (27,000 units at

absorption cost of $68 per unit) ........................................................ 1,836,000 Gross margin ..................................................................................... 729,000 Less: Selling and administrative expenses: Variable (27,000 at $1 per unit) .............................................. 27,000 Fixed ...................................................................................... 230,000 Operating income .............................................................................. $ 472,000 b. STARS ABOVE LTD.

INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1 VARIABLE COSTING

Sales revenue (27,000 units at $95 per unit) ..................................... $2,565,000 Less: Variable expenses: Variable manufacturing costs

(27,000 units at variable cost of $61 per unit) ...................... 1,647,000 Variable selling and administrative costs

(27,000 units at $1 per unit) ................................................. 27,000 Contribution margin ............................................................................ 891,000 Less: Fixed expenses: Fixed manufacturing overhead ............................................... 210,000 Fixed selling and administrative costs .................................... 230,000 Operating income .............................................................................. $ 451,000 3. Change in

inventory (in units)

predetermined fixed overhead

rate =

absorption-costing income minus variable-costing

income 3,000 unit increase $7 = $21,000

ACC2002 Managerial Accounting Textbook Solution-Ch8

9

4. If Stars Above had implemented JIT and installed a flexible manufacturing system at the beginning of 20x1, it is unlikely that reported income would have differed by as great a magnitude. Under this scenario, production and sales would have been nearly the same. As a result, reported income under variable and absorption costing would have been nearly equal. Differences in reported income are caused by significant changes in inventory levels, which do not occur under JIT because inventory is minimal.

PROBLEM 8-29

1. a. Absorption-costing income statements:

Year 1 Year 2 Year 3

Sales revenue (at $50 per case) .............................................................. $4,000,000 $3,000,000 $4,500,000 Less: Cost of goods sold (at absorption cost of $42 per case*) .......................................................... 3,360,000

2,520,000

3,780,000

Gross margin ........................................................................................... $ 640,000 $ 480,000 $ 720,000 Less: Selling and administrative expenses: Variable (at $1 per case) .............................................................. 80,000 60,000 90,000 Fixed ............................................................................................ 75,000 75,000 75,000 Operating income .................................................................................... $ 485,000 $ 345,000 $ 555,000 *The absorption cost per case is $42, calculated as follows:

production Planned

overheadingmanufactur fixed Budgeted +

case per cost

ingmanufactur variable

000,80

000,800$ + $32

$10 + $32 = $42

b. Variable-costing income statements:

ACC2002 Managerial Accounting Textbook Solution-Ch8

10

Year 1 Year 2 Year 3

Sales revenue (at $50 per case) .............................................................. $4,000,000 $3,000,000 $4,500,000 Less: Variable expenses: Variable manufacturing costs (at variable cost of $32 per case) 2,560,000

1,920,000

2,880,000

Variable selling and administrative costs (at $1 per case) ................................................................ 80,000

60,000

90,000

Contribution margin .................................................................................. $1,360,000 $1,020,000 $1,530,000 Less Fixed expenses: Fixed manufacturing overhead ..................................................... 800,000 800,000 800,000 Fixed selling and administrative expenses ................................................................................... 75,000

75,000

75,000

Operating income .................................................................................... $ 485,000 $ 145,000 $ 655,000

2. Reconciliation:

Year

Reported Income Difference

in Reported Income

Change in Inventory (in units)

Predetermined Fixed

Overhead Rate*

Difference In Fixed Overhead Expensed Under Absorption and

Variable Costing Absorption

Costing Variable Costing

1 $485,000 $485,000 -0- -0- $10 0 2 345,000 145,000 $200,000 20,000 10 $200,000 3 555,000 655,000 (100,000 ) (10,000 ) 10 (100,000)

*Predetermined fixed manufacturing overhead rate = 000,80

000,800$

3. a. In year 4, the difference in reported operating income will be $100,000, calculated as follows:

Change in

inventory (in units)

Predetermined fixed overhead

rate

(10,000) $10 = $(100,000)

Income reported under absorption costing will be lower, because inventory will decline during year 4.

b. Over the four-year period, the total of all reported operating income will be the same under absorption and variable costing. This result will occur because inventory does not change over the four-year period. It starts out at zero on January 1 of year 1, and it ends up at zero on December 31 of year 4.