Problem A. Dexter Corporation produces and sells a single product, a wooden hand loom for weaving 4.

4. Assume that the company uses absorption costing. Compute the unit product cost for one
small items bicycle.
such as scarves. Selected cost and operating data relating to the product for two years are given below: 5. Assume that the company uses variable costing. Compute the unit product cost for one bicycle.
Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . $50
The absorption costing income statement prepared by the company’s accountant for last year appears
Manufacturing costs: below:
Variable per unit produced: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R4,000,000
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $11 Cost of goods sold . . . . . . . . . . . . . . . . . . . . 2,960,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . 1,040,000
Variable manufacturing overhead . . . . . . . . . . . $3 Selling and administrative expense . . . . . . . . 560,000
Fixed manufacturing overhead per year . . . . . . . . $120,000 Net operating income . . . . . . . . . . . . . . . . . . R 480,000
Required:
Selling and administrative expenses: 6. Determine how much of the ending inventory consists of fixed manufacturing overhead cost
Variable per unit sold . . . . . . . . . . . . . . . . . . . . . . $4 deferred in inventory to the next period.
Fixed per year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,000 7. Prepare an income statement for the year using variable costing. Explain the difference in net
Year 1 Year 2 operating income between the two costing methods.
Units in beginning inventory . . . . . . . . . . . . . 0 2,000
Units produced during the year . . . . . . . . . . . 10,000 6,000 Problem C. High Tension Transformers, Inc., manufactures heavy-duty transformers for electrical
Units sold during the year . . . . . . . . . . . . . . . 8,000 8,000 switching stations. The company uses variable costing for internal management reports and absorption
Units in ending inventory . . . . . . . . . . . . . . . . 2,000 0 costing for external reports to shareholders, creditors, and the government. The company has provided
the following data:
Required: Year 1 Year 2 Year 3
1. Assume the company uses absorption costing. Inventories:
a. Compute the unit product cost in each year. Beginning (units) . . . . . . . . . . . . . . . . . . . . 180 150 160
b. Prepare an income statement for each year. Ending (units) . . . . . . . . . . . . . . . . . . . . . . 150 160 200
2. Assume the company uses variable costing. Variable costing net operating income . . . . . $292,400 $269,200 $251,800
a. Compute the unit product cost in each year. The company’s fixed manufacturing overhead per unit was constant at $450 for all three years.
b. Prepare an income statement for each year. Required:
3. Reconcile the variable costing and absorption costing net operating incomes. 8. Determine each year’s absorption costing net operating income.
9. In Year 4, the company’s variable costing net operating income was $240,200 and its
Problem B. Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on absorption costing net operating income was $267,200. Did inventories increase or decrease
the city’s crowded streets that it sells for 500 rupees. (Indian currency is denominated in rupees, during Year 4? How much fixed manufacturing overhead cost was deferred or released from
denoted by R.) inventory during Year 4?
Selected data for the company’s operations last year follow:
Units in beginning inventory . . . . . . . . . . . . . . . . . 0 Problem D. Nickelson Company manufactures and sells one product. The following information
Units produced . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 pertains to each of the company’s first three years of operations:
Units sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Variable costs per unit: Variable costs per unit:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . R120 Manufacturing:
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . R140 Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $25
Variable manufacturing overhead . . . . . . . . . . . R50 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16
Variable selling and administrative . . . . . . . . . . R20 Variable manufacturing overhead . . . . . . . . . . . $5
Fixed costs: Variable selling and administrative . . . . . . . . . . . . $2
Fixed manufacturing overhead . . . . . . . . . . . . . R600,000 Fixed costs per year:
Fixed selling and administrative . . . . . . . . . . . . R400,000 Fixed manufacturing overhead . . . . . . . . . . . . . . . $300,000
Required: Fixed selling and administrative expenses . . . . . . $180,000
 18. Reconcile the absorption costing and variable costing net operating incomes in (2) and (3)
During its first year of operations Nickelson produced 60,000 units and sold 60,000 units. During its above.
second year of operations it produced 75,000 units and sold 50,000 units. In its third year, Nickelson
produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $56 per F. Blanko Corporation has the following results for the first three years of its operation
unit. The Company did not have any under or over applied overhead during the three periods. There were no
Required: changes in the selling price and the company’s cost structure.
10. Compute the company’s break-even point in units sold.
Required: Find the missing amounts as indicated by the numbers
11. Assume the company uses variable costing:
a. Compute the unit product cost for year 1, year 2, and year 3. Absorption Costing
b. Prepare an income statement for year 1, year 2, and year 3. Year 1 Year 2 Year 3
12. Assume the company uses absorption costing:
Sales ? ? ?
a. Compute the unit product cost for year 1, year 2, and year 3.
b. Prepare an income statement for year 1, year 2, and year 3. Cost of sales 19 231,000.00 29
13. Compare the net operating income figures that you computed in requirements 2 and 3 to the Gross profit ? ? ?
break-even point that you computed in requirement 1. Which net operating income figures seem
Operating expenses 58,000.00 24 30
counterintuitive? Why?
Operating inc (loss) 14,000.00 25 30,000.00
Product E. Advance Products, Inc., has just organized a new division to manufacture and sell
Variable Costing
specially designed tables using select hardwoods for personal computers. The division’s monthly costs
are shown in the schedule below: Year 1 Year 2 Year 3
Manufacturing costs: Sales 20 ? 300,000.00
Variable costs per unit: Variable Cost
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $86
Variable manufacturing overhead . . . . . . . . . . $4 Cost of sales 88,000.00 26 110,000.00
Fixed manufacturing overhead costs (total) . . . . $240,000 Selling and admin 21 11,000.00 31
Selling and administrative costs: Contribution margin ? ? ?
Variable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15% of sales
Fixed (total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000 Fixed cost 22 150,000.00 ?
Advance Products regards all of its workers as full-time employees and the company has a long- Operating inc (loss) (6,000.00) 27 30,000.00
standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company
Production ? 28 32
includes its labor costs in its fixed manufacturing overhead. The tables sell for $250 each.
Sales 23 ? 10,000.00
During the first month of operations, the following activity was recorded:
Units produced . . . . . . . . . . 4,000 G. Based on your answers from letter F
Units sold . . . . . . . . . . . . . . 3,200 33. How much is ending inventory in Year 1 using variable costing?
34. How much is ending inventory in Year 2 using absorption costing?
Required: 35. How much is ending inventory in units in Year 3?
14. Compute the unit product cost under:
a. Absorption costing.
b. Variable costing.
15. Prepare an income statement for the month using absorption costing.
16. Prepare a contribution format income statement for the month using variable costing.
17. Assume that the company must obtain additional financing. As a member of top
management, which of the statements that you have prepared in (2) and (3) above would you
prefer to take with you to negotiate with the bank? Why?