296 | Exercises Chapter 7 EXERCISE 7-1 Variable and Absorption Costing Unit Product Costs [LO1] Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city’s crowded streets that it sells for 500 rupees. (Indian currency is denominated in rupees, denoted by R.) Selected data for the company’s operations last year follow: Units in beginning inventory. o Units produced... * 10,000 Units sols 8,000 Units in ending inventory 2,000 Variable costs per unit Direct materials . - R120 Direct labor. . : R140 Variable manufacturing overhead. R50 Variable seling and administrative... R20 Fixed costs Fixed manufacturing overhead... 600,000, Fixed selling and administrative 400,000 Reguted: 1. Assume that the company uses absorption costing. Compute the unit product cost for one bicycle, 2. Assume that the company uses variable costing. Compute the unit product cost for one bicycle EXERCISE 7-2 Variable Costing Income Statement; Explanation of Difference in Net Operating income {L02] Refer to the data in Exercise 7-1 for Shastri Bicycle. An absorption costing income statement prepared by the company’s accountant appears below: Sales (8,000 units R500 per unit)... ++. 4,000,000 Cost of goods sold Beginning inventory R ° ‘Add cost of goods manufactured (10,000 units x R_2_perunit).......... _3,700,000 Goods available for sale 3,700,000 Less ending inventory (2,000 units x R_2_per unit) 740,000 _ 2,960,000 Gross margin - 4,040,000 Seling and adminisvative expenses: Variable selling and administrative ........... 180,000 Fixed seling and administratve.............. 400,000 Net operating income Require: 1. Determine how much of the ending inventory of R740,000 above consists of fixed mamufaeturing overhead cost deferred in inventory to the next period. 2. Prepare an income statement for the year using the variable costing method, Explain the differ- ence in net operating income between the two costing methods, EXERCISE 7-3 Reconciliation of Absorption and Variable Costing Net Operating Incomes [LO3] High Tension Transformers, Ine, manufactures heavy-duty transformers for electrical switching stations. ‘The company uses variable costing for internal management reports and absorption costing for extersal reports to shareholders, creditors, and the goverment. The company has provided the following data: Inventories: Beginning (units) .... , 180 150 160 Ending (units)... - 150 160 200 Variable costing net operating income. . $292,400 $269,200 $251,800Variable Costing: A Tool for Management ‘The company’s fixed manufacturing overhead per unit was constant at $450 forall three years. Required 1, Determine each year's absorption costing net operating income. Present your answer inthe form ‘of a reconciliation report such as the one shown in Exhibit 7-6. 2. In Year 4, tae company’s variable costing net operating income was $240,200 and its absorption costing net operating income was $267,200. Did inventories increase or decrease during Year 4? How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4? EXERCISE 7-4 Evaluating Absorption and Variable Costing as Alternative Costing Methods [1.04] ‘The questions below pertain to two different scenarios involving a manufacturing company, In each scenario, the cost structure ofthe company is constant from year to year. Selling prices, unit variable costs, and total fixed costs are the same in every year. However, unit sales and/or unit production levels may vary from year to year. Required I. Consider the following data for scenario A: Variable costing net operating income 16.847 $18,847 $16,847 Absorption costing net operating income........... $16,847 $29,378 $6,018 4. Were unit sales constant from year to year? Explain, 5, What was the relation between unit sales and unit production levels in each year? For each ‘year, indicate whether inventories grew or shrank, 2. Consider the following data for scenario B Variable costing net operating income (loss) $16,847 ($18,153) ($53,153) Absorption costing net operating income Ste47 $17,583 $18,318 4, Were unit sales constant from year to year? Explain, +5, What was the relation between unit sales and unit production levels in each year? For each ‘year, indicate whether inventories grew or shrank, 3. Given the patterns of net operating income in scenarios A and B above, which costing method, variable costing ot absorption costing, do you believe provides a better reflection of economic reality? Explain EXERCISE 7-5 Variable Costing Unit Product Cost and Income Statement; Break-Even |LO1, LOZ] ‘CompuDesk, Inc., makes an oak desk specially designed for personal computers, The desk sels for $200, Data for last year’s operations follow: Units in beginning inventory 0 Units produced. 10,000 Units sold 8,000 Units in ending inventory 4,000 Variable costs per unt: Direct materials . $60 Direct labor: : : 30 Variable manufacturing overtiead 10 ‘Variable selling and administrative 20 Total variable cost perunit........ess.2. $120 Fixed costs: ved manufacturing overhead. $300,000 Fhxed selling and administrative 450,000 Total fixed costs $750,000298 Chapter 7 Reguredk 1. Assume thatthe company uses variable costing. Compute the unit product cost for one computer desk: 2. Assume that the company uses variable costing. Prepare a contribution format income statement for the year. 3. What is the company’s break-even poiat in terms of units sold? EXERCISE 7-6 Absorption Costing Unit Product Cost and Income Statement [LO1, LO2] Refer to the data in Exercise 7-5 for CompuDesk. Assume in this exercise that the company uses absorption costing. Require: 1. Compute the unit product cost for one computer desk 2. Prepare an income statement for the year EXERCISE 7-7 Variable and Absorption Costing Unit Product Costs and Income Statements (LO1, LO2] Maxwell Company manufactures and sels a single product, The following costs were incurred during, the company’s first year of operations: Variable costs per unit: Manufacturing Direct materials. , $18 Direct labor: s7 Variable manufacturing overhead 82 Variable soling and administrative... 35 Fixed costs per year: Fixed manufacturing overhead $160,000 Fixed selling and administrative expenses $110,000 uring the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company’s product is $50 per unit Required: 1. Assume that the company uses absorption costing 4, Compute the unit product cost ‘Prepare an income statement for the year Assume that the company uses variable costing: 4, Compute the unit product cost. 4 Prepare an income statement for the year EXERCISE 7-8 Inferring Costing Method; Unit Product Cost [LO1, LO4) Amcor, Inc, incurs the following costs to produce and sella single product. Variable costs per unit: Direct materials $10 Direct labor... sees a $5 Variable manufacturing overhead. $2 Variable selling and administrative expenses. $4 Fixed costs per year: Fixed manufacturing overhead. . 7 $90,000 Fixed selling and administrative expenses... $300,000 During the last year, 30,000 units were produced and 25,000 units were sold, The Finished Goods in- ventory account at the end of the year shows a balance of $85,000 for the 5,000 unsold units, Requredt 1. Is the company using absorption costing or variable costing to cost units in the Finished Goods inventory account? Show computations to support your answer. 2. Assume thatthe company wishes to prepare financial statements forthe year to issue to its stock- holders. 4. Is the $85,000 figure for Finished Goods inventory the correct amount to use on these state ‘ments for external reporting purposes? Explain, ‘4. At what dollar amount should the 5,000 units be carried in inventory for external reporting, purposes?Variable Costing: A Tool for Management 2 EXERCISE 7-9 Variable Costing Income Statement; Reconeiliation [LO2, LO3} ‘Morey Company has just completed its frst year of operations. The company’s absorption costing. ‘income statement for the year appears below: ‘Sales (40,000 units at $33.75 per unit) 7 5 $1,350,000 Cost of goods sold Boginning inventory $0 ‘Add cost of goods manufactured (60,000 units at $21 per unit) Goods available for sale. . Less ending inventory (10,000 uits at $24 per unit) Gross margin. ‘Seling and administrative expenses [Net operating income... ‘The company’s selling and administrative expenses consist of $300,000 per year in fixed ex- ppenses and $3 per unit sold in variable expenses. The company’s $21 per unit product cost given above is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($250,000 ~ 0,000 units) Unit product cost Required 1, Redo the company’s income statement in the contribution format using variable costing, 2, Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above. Problems PROBLEM 7-10 Variable Costing Income Statement; Reconciliation [LO2, LO3] During Denton Company's firs two years of operations, the company reported absorption costing net operating income as follows: Sales (at $50 per unit) {$1,000,000 $1,500,000 Cost of goods sold Beginning inventory eee 0 170,000 ‘Add cost of goods manufactured (at $34 per unit). +. __ 860,000 _ 850,000 ‘Goods avalable for sale. 850,000 1,020,000 Less ending inventory (at $34 per unit) 170,000 0 Cost of goods sold 1,020,000 Gross margin. 320,000 480,000 Seling and administrative expenses. a 310,000 340,000 Net operating income. sg $_ 140,000 “$3 per unit variable; $250,000 fixed each year.Chapter 7 ‘The company’s $34 unit product cost is computed as follows: Direct materials $8 Direct labor... 2-2... : . see 10 Variable manufacturing overhead 2 Fixed manufacturing overhead ($350,000 + 25,000 units) nee 14 Unit product cost. $34 Production and cost data for the two years are given below: Units produced... . 25,000 25,000 Units sole 20,000 30,000 Required: 1, Prepare a variable costing income statement for each year inthe contribution format, 2. Reconcile the absorption costing and variable costing net operating income figures for each year. PROBLEM 7-11 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income [L01, 02, L03) ‘Wiengot Antennas, Inc, produces and sells 2 unique type of TV antenna. The company has just opened. ‘anew plant to manufacture the antenna, and the following cost and revenue data have been provided forthe first month of the plant's operation in the form of a worksheet. SUBN SRY taag QE -| mos ree sUEEE ex, 8 rot Beginning inventory Units produced Units sold ‘Soling price per unit Seling and administrative expenses: Variable per unit $2 Fixed (total) $860,000 Manufacturing costs Direct materials cost per unit $18 Direct labor cost per unit s7 Variable manufacturing overhead cost per unit $2 Fixed manufacturing overhead cost (total) $640,000 » wh sheets (sheets {sheets / Le 1 Since the new antenna is unique in design, management is anxious to see how profitable it will be and has asked that an income statement be prepared for the month. Required: 1, Assume that the company uses absorption costing. 4, Determine the unit product cost. 6. Prepare an income statement for the month, 2. Assume thatthe company uses variable costing. 4a, Determine the unit product cost. . Prepare a contribution format income statement forthe month, 3. Explain the reason for any difference in the ending inventory balances under the two costing. ‘methods and the impact of tis difference on reported net operating income,Variable Costing: A Tool for Management PROBLEM 7-12 Comprehensive Problem with Labor Fixed (L01, L02, L03, LO4) ‘Advance Products, Inc. has just organized a new division to manufacture and sell specially designed tables using select hardwoods for personal computers. The division’s monthly costs are shown in the schedule below: ‘Manufacturing costs: Variable costs per unit Direct materials, $86 Variable manufacturing overhead ..... ° $4 Fixed manufacturing ovethead costs (total) $240,000 Seling and administrative costs Variable, 15% of sales Fixed (total), ‘$160,000 ‘Advance Products regards all ofits workers as fulltime employees and the company has a long- standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company {neludes its labor costs in its fixed manufacturing overhead. The tables sell for $250 each, ‘During the first month of operations, the following activity was recorded: Units produced.......... 4,000 Units sold... 22.2222. 3.200 Required 1. Compute the unit product cost under: 4. Absorption costing, 4, Variable costing Prepare an income statement forthe month using absorption costing. Prepare a contribution format income statement for the month using variable costing, 4, 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 as you negotiate with the bank? Why? 5, Reconcile the absorption costing and variable costing net operating income figures in (2) and @) above. PROBLEM 7-13 Absorption and Variable Costing; Production Constant, S {Lo1, Loz, Lo3, Loa) ‘Sandi Scott obtained a patent on a small electronic device and organized Scott Products, Inc., to pro- duce and sell the device. During the first month of operations, the device was very well received on the ‘market, so Ms. Scott looked forward toa healthy profit. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data, The statement follows: 5 Fluctuate $200,000 Sales (40,000 units) Variable expenses: Variable cost of goods sold” $80,000 Variable selling and administrative expenses Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative expenses: Not operating loss . 75,000 20,000 “Consists of direct materials, direct labor, and variable manufacturing overhead, eXcel