1F 1D 1 $684,000

2T 2B 2 $6,885,000
3T 3C 3 absorption by $81,000
4F 4B
5F 5B 4 $87
6T 6B 5 $101
7F 7B 6 $189,100
8T 8D 7 $170,800
9T 9A 8 $252,900
10 F 10 A 9 $164,700
11 T 11 C 10 $3,300
12 T 12 A 11 $6,100
13 T 13 C
14 T 14 C 12 The unit product cost under variable costing can be determined by subtracting the fixed
15 T 15 a factory overhead rate per unit from the unit product cost under absorption costing.
16 F 16 D Cost of goods sold, Year 1 $42,000
17 F 17 B Divided by number of units sold ÷ 7,000 units
18 F 18 A Absorption costing unit product cost $6 per unit
19 F 19 D
20 F 20 Absorption costing unit product cost $6
Less fixed portion  2
Variable costing unit product cost $4

13 Year 1 Year 2
Sales $70,000 $90,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory 0 4,000
Add variable manufacturing
 32,000  32,000
costs @ $4
Goods available for sale 32,000 36,000
Less ending inventory @ $4    4,000           0
Variable cost of goods sold 28,000 36,000
Variable selling and
 21,000  27,000
administrative @ $3
Total variable expenses  49,000  63,000
Contribution margin  21,000  27,000
Less fixed expenses:
Factory overhead 16,000 16,000
Selling and administrative*    4,000    4,000
Total fixed expenses  20,000  20,000
Net operating income $  1,000 $  7,000

* Year 1: $25,000 – $3 × 7,000 = $4,000

14 Year 1 Year 2
Variable costing net operating income $1,000 $7,000
Add fixed factory overhead deferred in
inventory under
2,000
absorption costing (1,000 units × $2 per
unit)
Less fixed factory overhead released
from inventory under absorption             (2,000)
costing (1,000 units × $2 per unit)
Absorption costing net operating
$3,000 $5,000 2000
income

15 Variable costing income statement

Sales $143,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory $           0
Add variable manufacturing
 103,200
costs
Goods available for sale 103,200
Less ending inventory    17,200
Variable cost of goods sold 86,000
Variable selling and
     7,000     93,000
administrative
Contribution margin 50,000
Less fixed expenses:
Fixed manufacturing overhead 38,400
Fixed selling and administrative      4,000     42,400
Net operating income $     7,600

16 b.      Absorption costing income statement

Sales $143,000
Less cost of goods sold:
Beginning inventory $           0
Add cost of goods manufactured  141,600
Goods available for sale 141,600
Less ending inventory    23,600  118,000
Gross margin 25,000
Less selling and administrative
expenses:
Variable selling and administrative 7,000
Fixed selling and administrative      4,000    11,000
Net operating income $  14,000

17 Advantages:
Can be used in CVP-analysis and other
management accounting tools
Classifies cost both based on behavior
and function .
Does not defer fixed OH thus, is unbias
with profit computation..
Disdvantages:
Not allowed in financial reporting.
Favors functional presentation of cost

If the company want to know how

many units they should sell next period
to achieve their target profit which is
possible through the CVP technique,
they should use Variable Costing. CVP
uses the rules of variable costing in
analysing the relationship of the price,
cost and volume of products.

18 $10,000 and $17,500

19 $0 and $15,000
20 7,500
 T or F
1F C 47.8
2F B 20,000
3F A
4T C P30
5F B P36
6T D P118
7F D
8F B
9T C A,B,C
10 F A
11 F D BCA
12 T A
13 T D Oddete.a. & b.
14 T D Product X Product Y
15 T Sales value after further processing $55,400  $53,000
Costs of further processing   20,300    14,300
Benefit of further processing 35,100  38,700
Less: Sales value at split-off point   36,000    36,000
Net advantage (disadvantage) $    (900) $  2,700

c. & d.
Minimum selling price at split-off $35,100 $38,700

Benjamin Company produces products C, J, and R from a joint production process. Each product may be sold at the split-off point or processed further. Joint

Additional sales
values and costs if
processed further

Sales
Units Sales Added
Product values at
Produced values costs*
split-off

C 6,000 $75,000 $100,000 $20,000

J 9,000 $70,000 $115,000 $36,000

R 4,000 $46,500  $55,000 $10,000

*All variable and traceable to the products involved.

Required:
Which products should be processed beyond the split-off point?

Level: Medium LO: 6

Answer:

Product
C J R
Sales value after further processing $100,000 $115,000 $  55,000 

Sales value after split-off     75,000     70,000     46,500 

Added sales value from processing 25,000 45,000 8,500 
Net gain (loss) from further processing $    5,000 $    9,000 $  (1,500)

Products C and J should be processed beyond the split-off point. Product R should be sold at split-off. Joint production costs are not relevant to the decision t
Lou Yi
17 10,000
18 5,000
Clint
19 23,000
20 52
 Let's Check 1 Let's Check 2 Let's Analyze
1F C
2T A
3F D
4T A B
5T D
6T A
7T D
8F B
9T A
10 T B
11 T C
12 T A
13 T C
14 T C
15 F B
16 F PREFERENCE NOT SCREENING A
17 T D
18 T D
19 T D
20 T C
21 T A $45,000 * 3.4976 = $157,392
22 T A Net cash flow = $10,000 - $6,000 - $2,000
23 T B
24 T C $15,000/($100,000/2) = 30%
25 F A Annual depreciation = $50,000 Tax savings = $20,000
Use PV of Annuity table 10 years, 12%; Constant = 5.6502
$20,000 * 5.6502 = $113,004
26 C
27 D
28 B
29 D
30 D
 $5,000/$2,000 = 2.50 years

Tax savings = $20,000

; Constant = 5.6502
Magsaysay
1 Cash flow Year Amount Discount factor Present value
Investment 0 $(100,000)  1.00   $(100,000) 
Working cap. 0 $(200,000)  1.00   -200,000
Cash inflow 1 100,000  .8621  86,210
Cash inflow 2 150,000  .7432  111,480
Cash inflow 3 200,000  .6407  128,140
Cash inflow 4 200,000  .5523  110,460
Working cap. 4 200,000  .5523  110,460
Net present value $246,750

2 After the first two years, $250,000 of the original $300,000 investment would be recouped. It
would take one-quarter of the third year ($50,000/$200,000) to recoup the last $50,000. Thus,
the payback period is 2.25 years.
Quirino
3 The present value of the $12,000 annuity is found by multiplying $12,000 by the annuity discount factor associ

From the information on the profitability index, it is known that the present value of the cash inflows is 1.0395

4 By dividing $40,000 by the annual cash inflow of $12,000, it is determined that the discount factor associated w

Sta. Ana
5 Cost savings per year $5,000  Cash Discount factor
Maintenance per year   (700) $30,000 1
Net cash flows per year $4,300    4,300 5.5348
Net present value of investment

6 Payback equals $30,000/$4,300 = 6.976 years

Ponciano
7 Year Cash flow Discount factor Present value
1 $150,000  1.0000  $(150,000.00) 
1  32,000 0.9009  28,828.80
2  57,000 0.8116  46,261.20
3   5,000 0.7312   3,656.00
4  28,000 0.6587  18,443.60
5  16,000 0.5935   9,496.00
6   3,000 0.5346   1,603.80
7  15,000 0.4817   7,225.50
7  70,000 0.4817   33,719.00 
Net present value $   (766.10)
 8 Profitability index equals present value of cash flows divided by investment: $149,233.90/$150,000 = .995

9 Payback period is 6.11 years, computed as follows:

Year Cash Flow Cumulative Cash Flow

1 $32,000 $ 32,000 
2  57,000  89,000
3   5,000  94,000
4  28,000 122,000
5  16,000 138,000
6   3,000 141,000
7  85,000 226,000

$150,000 - $141,000 = $9,000/$85,000 = .11

10

The project is quantitatively unacceptable(REJECT) because it has a negative NPV, a less-than-one PI, and a p
years. However, the NPV and PI are extremely close to being acceptable. Because the new machine will pr
production, the investment may be desirable if additional qualitative factors are considered such as improve
customer satisfaction, goodwill generated, improved product quality and reliability, and a desire to be in the fo
capability. XYZ may want to attempt to quantify these benefits and reevaluate the machine's acceptabili
Claveria
11 Revenue $100,000 
- cash expenses  (60,000)
Annual inflow $ 40,000 

12 PV inflow $40,000 ´ 4 $179,764 

PV outflow $160,000 ´ -160,000
NPV = $ 19,764  YES

13 IRR factor = $160,000/$40,000 = 4.0 which is approximately 23% YES

14 Payback = $160,000/$40,000 = 4 yrs. NO

15 $179,764/$160,000 = 1.123525 YES

nnuity discount factor associated with 6 percent interest for four years: $12,000 ´ 3.4651 = $41,581.20.

of the cash inflows is 1.03953 times the initial investment. Thus, the initial investment is $41,581.20/1.03953 = $40,000.

e discount factor associated with the IRR is 3.3333. This discount factor is associated with an interest rate that lies between 7 and 8 perce

Present value
$(30,000.00)
  23,799.64 
$ (6,200.36)
 233.90/$150,000 = .995

V, a less-than-one PI, and a payback period of over six

ause the new machine will provide XYZ zero-defect
e considered such as improved competitive position,
y, and a desire to be in the forefront of manufacturing
te the machine's acceptability as an investment.
953 = $40,000.

that lies between 7 and 8 percent. Using interpolation, the IRR is computed to be approximately 7.72 percent.
Let's Check
1 MARKETING
2 MANAGERIAL/OPERATIONAL
3 FINANCIAL
4 MARKETING
5 MARKETING
6 MANAGERIAL/OPERATIONAL
7 TECHNICAL
8 BUSINESS DESCRIPTION
9 BUSINESS DESCRIPTION
10 MANAGERIAL/OPERATIONAL
11 FINANCIAL
12 TECHNICAL
13 TECHNICAL
14 FINANCIAL
15 MANAGERIAL/OPERATIONAL
16
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