Rafael Luis C.

Pamonag May 12, 2021

BSBA-2B MWF (4PM-5PM)
FM121: Financial Analysis and Reporting Prof: Mr. Francisco A. Baraquel

Problem #1
Last year, Airways Inc. had sales of 75,000 units and production of 100,000 units. Other
information for the year included:
Direct labor $ 187,000
Variable manufacturing overhead 100,000
Direct materials 150,000
Variable selling expenses 100,000
Fixed administrative expenses 100,000
Fixed manufacturing overhead 200,000

There was no beginning inventory. Required:

1. Compute the ending finished goods inventory under both absorption and variable
costing.

Formula: Ending Inventory (EI) = VMO- SALES

= 100,000 – 75,000
= 25,000 units

Total Variable costs (TVC) = DL+VMO+DM+VSE

= $187,000+$100,000+$150,000+$100,000
=$537,000

Variable cost per unit = Total Variable costs / Units Produce

= $537,000 / 100,000
= $5.37
EI under Absorption costing:
Formula:
𝐸𝐼
Absorption costing= (Variable cost per unit x EI) + (FMO x 𝑈𝑛𝑖𝑡 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑)

25,000 𝑢𝑛𝑖𝑡𝑠
= ($5.37 x 25,000 units) + ($200,000 x 100,000 𝑢𝑛𝑖𝑡𝑠)
= $134,250 + $50,000
= $184,250

EI under Variable costing:

Formula:
Variable costing= (Variable cost per unit x Produce unit)
= ($5.37 x 100,000)
= $537,000
 2. Compute the cost of goods sold under both absorption and variable costing.

COGS under Absorption costing:

Formula:
𝑆𝐴𝐿𝐸𝑆
Total Cost of Good Sold= (Variable cost per unit sold x SALES)+ (FMO unit sold x ) + ( FAE)
𝑈𝑛𝑖𝑡 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑
75,000
= ($5.37 x 75,000) + ($200,000 x ) + ($100,000)
100,000
= ($402,750 + $150,000 + $100,000)
= $652,750

COGS under Variable costing:

Formula:
Total Cost of Good Sold= (Variable cost per unit sold x SALES)+ (FMO) + ( FAE)
= ($5.37 x 75,000) + ($200,000) + ($100,000)
= ($402,750 + $200,000 + $100,000)
= $702,750

3. Prepare the income statement for both absorption and variable costing.

ABSORPTION INCOME STATEMENT

SALES ($5.37 x 75,000) $402,750
Less: Total Cost of Good Sold $652,750
Gross Loss ($250,000)
Less:
Selling and Administrative expense $200,000
Net Loss ($450,000)

VARIABLE INCOME STATEMENT

SALES ($5.37 x 75,000) $402,750
Less: Total Variable Cost $537,000
Contribution Margin 134,250
Less:
Fixed Costs $300,000
Net Loss ($165,750)
Problem #2
Brother Company sells its products for $66 each. The current production level is 25,000 units.
Only 20,000 units are expected to be sold.
Units manufacturing costs are:
Direct materials $ 12.00
Direct manufacturing labor 18.00
Variable manufacturing costs 9.00
Total fixed manufacturing costs 180,000.00
Marketing expenses $6.00 per unit plus $60,000 per year

Required:
1. Compute the ending finished goods inventory under both absorption and variable
costing.

Computation of units in ending inventory and direct material cost

Formula:
Units in ending inventory = Current production level – Units sold
= 25,000 units – 20,000 units
= 5,000 units

Direct material cost = (Units ending inventory) x (Direct material cost per unit)
= 5,000 units x $12
= $60,000

Computation of direct manufacturing labor cost

Formula:
Direct manufacturing labor cost = (Units in ending inventory) x (Direct labor cost per unit)
= 5,000 units x $18
= $90,000

Computation of variable manufacturing cost

Formula:
VMC = (Units in ending inventory) x (Variable manufacturing cost per unit)
= 5,000 units x $9
= $45,000
 Computation of fixed manufacturing cost

Formula:
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝑚𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡
Fixed manufacturing cost per unit =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑙𝑒𝑣𝑒𝑙
$180,000
=
25,000 𝑢𝑛𝑖𝑡𝑠
= $7.20 per unit

Fixed manufacturing cost = (Unit in ending inventory) x (Fixed manuf. Cost per unit)
= 5,000 units x $7.20
=$36,000

Computation of ending finished goods inventory (under absorption costing)

Formula:
Ending finished goods inventory (UAC) = (DMC) + (DMLC)+(VMC)+(FMC)
=$60,000 + $90,000+$45,000+$36,000
=$231,000

Computation of ending finished goods inventory (under variable costing)

Formula:
Ending finished goods inventory(UVC) = (DMC) + (DMLC)+(VMC)
=$60,000 + $90,000+$45,000
=$195,000

2. Compute the cost of goods sold under both absorption and variable costing.

The company sells the product for = $66 per unit.

Current Production = 25,000 units
Sales = 20,000 units

Required
Cost of goods sold under Absorption Costing and Variable Costing
Cost of goods Sold under Absorption Costing
Particulars Amount ($)
Direct Material ($ 12 × 25000) = 300,000
Direct Manufacturing labor ($ 18 × 25,000) = 450,000
Variable Manufacturing cost ($ 9 × 25,000) = 225,000
Fixed Manufacturing Cost = 180,000
Cost of Production of 25,000 units =1,155,000
Less :- Closing Stock (1,155,000 ÷ 25000 × 5000) = (231,000)
Cost of Goods Sold = 924,000
Add:- Variable Marketing Cost ($ 6 × 20,000) = 120,000
Fixed Marketing Cost = 60,000
Cost of Sales = 110,4000

COST OF GOODS SOLD = $924,000

 Cost of goods Sold under Variable Costing
Particulars Amount ($)
Direct Material ($ 12 × 25000) = 300,000
Direct Manufacturing labor ($ 18 × 25000) = 450,000
Variable Manufacturing cost ($ 9 × 25000) = 225,000
Variable Manufacturing Cost = 975,000
Less :- Closing Stock (975,000 ÷ 25000 × 5000) = (195,000)
Cost of Goods Sold = 780,000
Add:- Variable Marketing Cost ($ 6 × 20000) = 120,000
Fixed Marketing Cost = 60,000
Cost of Sales = 960,000

COST OF GOODS SOLD = $780,000

3. Prepare the income statement for both absorption and variable costing.

ABSORPTION INCOME STATEMENT

SALES ($66 x 20,000) $1,320,000
Less: Total Cost of Good Sold (12+18) x (20,000) (60,000)
Gross profit 720,000
Less:
Variable manufacturing overhead (9 x 20,000) (180,000)
Fixed manufacturing overhead (180,000)
Variable marketing (6 x 20,000) (120,000)
Fixed Marketing (60,000)
Net Income $180,000

VARIABLE INCOME STATEMENT

SALES ($66 x 20,000) $1,320,000
Less: Variable cost (9 x 20,000) (180,000)
Less: Variable marketing (6 x 20,000) (120,000)
Contribution Margin 1,020,000
Less:Fixed manufacturing overhead (180,000)
Less:Fixed Marketing (60,000)
Net Income $780,000