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PHL 201
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Tsogbadral Galaabaatar
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Chapter 15: Measuring and Assigning Costs for Income State117ts Chapter 15 Measuring andAssigning Costs for Income Statements LEARNING OBJECTIVES Chapter 15 addresses the following objectives: LO1 Prepare absorption and variable costing income statements and reconcile the resulting net incomes. LO2 Discuss the factors that affect the choice of production volume measures for allocating fixed overhead. LO3 Prepare absorption and variable costing income statements considering beginning inventory balances, and evaluate the impact of inventory on income. LO4 Prepare throughput costing income statement and evaluate absorption, variable, and throughput costing income. These learning objectives (LO1 through LO4) are cross-referenced in the textbook to individual exercises and problems. © 2012 John Wiley and Sons Canada, Ltd. 118 Cost Management QUESTIONS 15.1 The three methods are similar because they assign some costs to inventory as product costs, and expense other costs as period costs. The three methods differ in the categories that are used for product and period costs. Details of these categorizations follow. Absorption costing allocates all production costs, both fixed and variable, to units as product costs so cost of goods sold and inventory on the balance sheet include fixed manufacturing costs. Cost of goods sold is subtracted from revenue to arrive at gross margin, and then other nonmanufacturing expenses are subtracted to arrive at operating income. Variable costing assigns direct costs (direct labour and direct materials) and variable overhead costs to inventory and variable cost of goods sold. Variable cost of goods sold and all other non-manufacturing variable costs are subtracted from revenue to arrive at contribution margin. All fixed costs, both manufacturing and non-manufacturing, are then subtracted from contribution margin to arrive at operating income. Throughput costing assigns only direct materials costs to inventory and throughput cost of goods sold. Throughput cost of goods sold is subtracted from revenue to arrive at throughput margin. All other costs are considered period costs and deducted from throughput margin to arrive at operating income. Uses of the three methods are different, also. Absorption costing income statements meet GAAP and are used by shareholders and other external stakeholders. Variable costing income statements generally do not meet GAAP and are only available for internal reporting. Information from these reports is used in decision-making. Throughput accounting income statements provide information for very short-term decisions and are especially helpful when capacity constraints exist. 15.2 The allocated fixed manufacturing overhead that is added (if production is greater than sales) or subtracted (if production is less than sales) from finished goods is the reconciliation amount between variable versus absorption costing. 15.3 The volume variance arises because of differences between actual volumes and budgeted volumes used to allocate fixed manufacturing overhead. Under variable costing all fixed manufacturing overhead is treated as a period expense; there are no allocations of fixed manufacturing overhead to inventory or variable cost of goods sold. Hence, there will be no volume variances. 15.4 Under variable costing, all fixed manufacturing overhead is treated as an expense of the period, regardless of how many units were produced or sold; income will vary only with the number of units sold, the level of production has no effect. Under absorption costing, fixed manufacturing overhead is first assigned to product; the amount of fixed overhead that appears on the income statement depends on unit sales. Income depends upon both the level of production and the level of sales. © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Statements 119 15.5 Eventually all of the units are sold under either method, so eventually all of the fixed manufacturing cost will be expensed under either method. Under variable costing, it is expensed during the period it is incurred, whereas under absorption costing, a portion of fixed manufacturing cost is inventoried and expensed when the inventory is sold rather than during the period it was incurred. 15.6 A variable cost increases proportionately with volume. Variable costing is a method of calculating income. 15.7 Unless the organization is not-for-profit, none. For most on-going, profit-seeking firms, denominator volume should exceed breakeven volume because the firm plans to be operating at volumes greater than breakeven. 15.8 The fixed manufacturing overhead of the current period will be shown in its entirety as an expense if variable costing is used. If absorption costing is used, some of it will be assigned to the units added to inventory, so that the fixed manufacturing overhead included in cost of goods sold will be less than the total fixed manufacturing overhead that is expensed on the variable costing income statement. 15.9 Both IFRS and GAAP require absorption costing to match production-related expenses to revenues. 15.10 This can be accomplished through the use of an adjusting journal entry at the end of the period. The objective is to distribute or allocate the fixed manufacturing overhead of the period between inventories on hand (WIP and FG) and cost of goods sold. 15.11 A joint cost may be either fixed or variable and a separable cost may be either fixed or variable. Both variable and absorption costing can be applied to joint product situations. Under variable costing, the joint costs are first categorized as fixed or variable and then listed on the income statement under the headings of variable or fixed production costs. Under absorption costing, the common and separable costs are considered product costs and assigned to inventory. 15.12 Under absorption costing, managers could manipulate earnings during a period by producing more inventory than is sold. As inventory on the balance sheet increases, the amount of fixed overhead expense allocated to the units in inventory also increases, while expense for cost of goods sold decreases because the fixed overhead is spread across and increasingly large number of units, some of which are not sold. 15.13 Supply-based capacity levels measure the amount of capacity that is available for production. Theoretical capacity and practical capacity are supply based. Demand-based capacity levels measure the amount of capacity needed to meet sales volumes. Normal capacity and budgeted capacity are demand based. 15.14 Theoretical capacity is the maximum number of units that would be produced under continuous, uninterrupted production over 365 days per year. Practical capacity is the upper capacity limit taking into account regularly scheduled times for production and © 2012 John Wiley and Sons Canada, Ltd. 120 Cost Management planned downtimes for holidays, maintenance, and any other scheduled interruptions in production. Normal capacity is an average use of capacity across time under normal circumstances. Budgeted or expected capacity is the planned use of capacity in the next period. Theoretical capacity and practical capacity are supply-based capacity levels that depend on the amount of capacity available for production. Normal capacity and budgeted or expected capacity are demand-based capacity levels that measure the amount of capacity needed to meet sales volumes. 15.15 In the financial statements, volume variances that are immaterial are allocated to cost of goods sold. When the volume variance is large and favorable, the variance is prorated among cost of goods sold and ending inventory. If production is below normal capacity, the volume variance is closed to cost of goods sold to avoid increasing the amount of fixed cost in inventory on the balance sheet. © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Statements 121 MULTIPLE-CHOICE QUESTIONS The following information pertains to Questions 15.16 and 15.17: Vintage Co. made 4,000 units of a product during its first year of operations and sold 3,000 units for $600,000. There was no ending work-in-process inventory. Total costs were $600,000: Direct materials and direct labour $250,000 Manufacturing overhead (50% fixed) $200,000 Marketing and administrative costs (100% variable) $150,000 15.16 The cost of the 1,000 units of finished goods ending inventory under variable costing is: a) $150,000 b) $125,000 c) $112,500 d) $87,500 e) $62,500 Ans: D ( $250,000 + ($200,000 *50%) )/4000 * 1000 = $87,500 15.17 The cost of the 1,000 units of finished goods ending inventory under absorption costing is: a) $150,000 b) $125,000 c) $112,500 d) $62,500 e) $25,000 Ans: C ( $250,000 + $200,000 )/4000 * 1000 = $112,500 15.18 In Company LL, the fixed factory overhead per unit is $5, and the fixed selling administration charges are $11. This year, the company produced and sold 100,000 units of product. The company uses the LIFO method of accounting for its inventory. What would be the difference in income reported by the company if it used variable costing instead of absorption costing? a) $ 0 b) $ 500,000 c) $1,100,000 d) $1,600,000 Ans: A Since there is no ending inventory all fixed costs are reported on the income statement under both methods. © 2012 John Wiley and Sons Canada, Ltd. 122 Cost Management 15.19 How does the accounting treatment of selling and administration costs differ between absorption and variable costing if more units are produced than are sold? a) The variable portion is added to the cost of ending inventory based on a pro rata portion of units produced to those sold. b) The fixed portion is added to the costs of ending inventory based on a pro rata portion of units produced to those sold. c) There is no difference in the treatment. d) Both fixed and variable portions are added to the cost of ending inventory based on a prorata portion of units produced to those sold. Ans: C 15.20 Which of the following statements is true about the variable cost method? a) It is always inappropriate for performing a profitability analysis. b) It is useful for determining the price of a product for a special order. c) It is always useful when fixing the price for a long period. d) It is helpful for performing target costing. Ans: B © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Statements 123 EXERCISES 15.21 Absorption and Variable Income - Famous Desk Company A and B. First list all pertinent information: Revenue = 220 desks * $300 = $66,000 Variable production costs = 220 desks * $80 = $17,600 Variable selling and administrative costs = 220 desks * $30 = $6,600 Fixed selling and administrative = $6,000 Fixed overhead absorbed into inventory under normal production Beginning Inventory 100 units with variable cost of $80 per desk and absorption cost of $146.67 per desk $146.67 - $80 = $66.67 fixed costs per desk Fixed overhead volume variance = $10,000 – (200 desks x $66.67) = $3,334 overapplied, which is closed to COGS Variable Costing Absorption Costing Revenue $66,000 Revenue $66,000 Variable costs: Cost of goods sold Production (17,600) 220 desks x ($80 + $66.67) (32,267) Selling (6,600) Volume variance 3,334 Contribution Margin 41,800 Gross Margin 37,067 Fixed costs: Selling and administrative Production (10,000) ($6,600 + $6,000) (12,600) Admin and Sales (6,000) Operating income $24,467 Operating income $25,800 Double-check calculations: Difference in operating income = 20 units x $66.67 = $1,333 (fixed overhead brought into income statement under absorption costing from units produced in prior periods) Difference in operating income = $25,800 - $24,467 = $1,333. © 2012 John Wiley and Sons Canada, Ltd. 124 Cost Management 15.22 Absorption and Variable Income, Reconcile Incomes - Rock Crusher Corp. A sample spreadsheet showing the calculations for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/canada/eldenburg). A. Variable costing income statement VARIABLE COSTING Variable cost per unit produced A100 $5.00 A300 $2.50 Revenue $240,000 Variable costs: Production: A100 $15,000 A300 10,000 (25,000) Selling (35,000) Contribution margin 180,000 Fixed costs: Production: (100,000) Selling and administrative (60,000) Operating income $20,000 Computation details for variable production cost per unit: A100: $20,000/4,000 tons = $5 per ton A300: $15,000/6,000 tons = $2.50 per ton B. Absorption costing income statement: ABSORPTION COSTING Fixed production cost per ton $10.00 Total production cost per ton: A100 $15.00 A300 $12.50 Revenue $240,000 Cost of goods sold: A100 $45,000 A300 50,000 (95,000) Gross margin 145,000 Selling and administrative: Variable $35,000 Fixed 60,000 (95,000) Operating income $50,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Statements 125 Calculation details for cost of goods sold: Fixed production cost per ton = $100,000/10,000 tons = $10 per ton Variable production cost per ton was calculated in Part A Cost of goods sold: A100 [($10+$5) x 3,000] $45,000 A300 [($10+$2.50) x 4,000] 50,000 Total $95,000 C. The difference in income resides in inventory. There was no beginning inventory, but there were 3,000 tons (10,000 tons produced – 7,000 tons sold) with $10 of fixed production cost per ton absorbed into inventory on the balance sheet under absorption costing. The difference in income = $50,000 - $20,000 = $30,000, and the fixed production cost in inventory is 3,000 x $10 = $30,000. 15.23 Absorption and Variable Inventory and Income, Reconciliation - Start-Up Firm A and B. Units in ending inventory: Units beginning inventory 0 Units produced 1,000 Units sold (850) Units ending inventory 150 Variable Costing Absorption Costing Revenue (850 units × $89) $75,650 Revenue (850 units × $89) $75,650 Variable costs: Cost of goods sold Production (850 units × $40) (34,000) 850 units × ($40 + $10) (42,500) Selling (850 units × $9) (7,650) Contribution Margin 34,000 Gross Margin 33,150 Fixed costs: Selling and administrative Production (10,000) ($25,000 + $9 × 850 units) (32,650) Selling and administrative (25,000) Operating Income (Loss) $(1,000) Operating Income $ 500 Ending inventory Ending inventory ($40 × 150 units) $6,000 [$40+($10,000/1,000)]×150 unit$7,500 © 2012 John Wiley and Sons Canada, Ltd. 126 Cost Management C. With no beginning inventory, the reconciliation of variable costing to absorption costing income is affected by only ending inventory: Variable costing operating income (loss) $(1,000) Fixed manufacturing overhead added to ending inventory under absorption costing [(150 units × ($10,000/1,000 units)] 1,500 Absorption costing operating income $ 500 15.24 Absorption and Variable Inventory and Income, Reconciliation Calculations for both costing methods: Selling price: $200,000 revenue last year / 5,000 units sold last year = $40 per unit Variable manufacturing cost: $40,000/5,000 units produced = $8 per unit Units in ending inventory = 5,000 units produced – 4,500 units sold = 500 units Variable selling and administration cost: $30,000/5,000 units sold last year = $6 per unit A. Variable costing (1) Ending inventory: $8 variable manufacturing cost per unit * 500 units = $4,000 (2) Variable costing income statement Revenue ($40 *4,500 units) $180,000 Variable costs: Manufacturing costs ($8 * 4,500 units) 36,000 Selling and administration($6 * 4,500 units) 27,000 Contribution margin 117,000 Fixed costs: Manufacturing costs 60,000 Selling and administration 50,000 Operating Income $ 7,000 B. Absorption costing Fixed production cost allocation rate: $60,000/5,000 units = $12 per unit Absorption cost per unit = $8 variable manufacturing cost per unit + $12 fixed manufacturing cost per unit = $20 per unit Note: No information is provided about any capacity levels other than actual production volume, so these calculations assume that actual costing is used. (1) Ending inventory: $20 absorption cost per unit × 500 units = $10,000 (2) Absorption Costing Income Statement Revenue ($40 *4,500 units) $180,000 Cost of goods sold ($20 * 4,500 units) 90,000 Gross margin 90,000 Selling and administration[$50,000 + ($6 * 4,500 units)] 77,000 Operating Income $ 13,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Statements 127 C. With no beginning inventory, the reconciliation of variable costing to absorption costing income is affected by only ending inventory: Variable costing operating income $ 7,000 Fixed manufacturing overhead added to ending inventory under absorption costing ($12 × 500 units) 6,000 Absorption costing operating income $13,000 15.25 Absorption and Variable Income – Vintage Co. A. Total variable manufacturing costs = $250,000 + $190,000(.55) = $354,500 Variable manufacturing cost per unit = $354,500/4,000 = $88.625 Cost of ending finished goods inventory = 1,000 × $88.625 = $88,625 B. Under absorption costing, fixed manufacturing overhead would be included in ending finished goods inventory, but it would not be included under variable costing. Therefore, net profit would increase by the following amount: Variable manufacturing overhead / total units produced * ending inventory =($190,000 * 45%)/4,000 * 1,000 = $21,375 decrease in COGS under absorption costing = $21,375 increase in operating income Alternative calculation: Net profit under absorption costing: Revenue – [Total production costs / units produced * units sold] – selling and administrative = $600,000 - [($250,000 + $190,000) /4,000 * 3,000] - $150,000 = $600,000 - $330,000 - $150,000 = $120,000 Net profit under variable costing: Revenue – [Variable production costs/units produced * units sold – fixed production costs – selling and administrative = $600,000 - [($250,000+($190,000*55%)]/4,000*3,000] - ($190,000*45%) - $150,000 = $600,000 - $265,875 - $85,500 - $150,000 = $98,625 Difference = $120,000 - $98,625 = $21,375 increase © 2012 John Wiley and Sons Canada, Ltd. 128 Cost Management 15.26 Absorption and Variable Income – The Wye Co. Ltd. A. Which income statement was prepared using actual absorption costing? Under actual absorption costing, cost of goods sold is calculated as the actual rate * actual inputs used for both direct and indirect costs. Therefore, no variances would be calculated and the income statement is E. B. Which income statement was prepared using standard variable costing? Under standard variable costing, cost of goods sold is calculated as the standard variable cost * the standard inputs allowed for actual outputs. Therefore, there may be variable cost variances but no fixed cost variances and the income statement is B. C. How many units of product RGW were actually produced during the year? Operating income statement D includes all variance therefore it is standard absorption costing. COGS $378,000 / $42 = 9,000 units Operating income statement B (i.e. standard variable costing) $514,000 Operating income statement D (i.e. standard absorption costing) 508,000 Fixed overhead in ending inventory $6,000 $6,000 / $6 standard fixed overhead per unit = 1,000 ending inventory units Number of units sold 9,000 Number of units produced 10,000 15.27 Absorption and Variable Costing Income – Hamilton Limited A. Variable costs = $9 + $12 + $15 + $6 = $42 Profit/loss = 70,000 units* ($72 - $42) - $1,800,000 - $600,000 = $2,100,000 - $2,400,000 = $300,000 loss B. 100,000 units sold - 70,000 units produced = 30,000 units in inventory Inventory under absorption costing includes a portion of fixed manufacturing costs, whereas no fixed manufacturing costs are inventoried under variable costing. Therefore, income would be 30,000 * $18 = $540,000 higher under absorption costing than under variable costing. ($300,000) + $540,000 = $240,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Statements 129 15.28 Throughput Inventory and Income, Reconciliation Continuation of 15.24 A. Throughput costing Direct cost per unit: $25,000/5,000 units produced = $5 per unit Other variable manufacturing costs per unit: ($40,000 – $25,000) /5,000 units produced = $3 per unit (1) Ending inventory: $5 direct cost per unit × 500 units = $2,500 (2) Throughput Costing Income Statement Revenue ($40 × 4,500 units) $180,000 Direct material costs ($5 × 4,500 units) 22,500 Throughput contribution 157,500 Other costs: Manufacturing costs [$60,000 + ($3 *5,000 units)] 75,000 Selling and administration[$50,000 + ($6 * 4,500 units)] 77,000 Operating Income $ 5,500 B. With no beginning inventory, the reconciliation of throughput costing to variable costing is affected by only ending inventory: Throughput costing operating income $5,500 Non-material variable manufacturing costs added to ending inventory under variable costing ($3 × 500 units) 1,500 Absorption costing operating income $7,000 15.29 Absorption and Variable Inventory and Income - Plains Irrigation A. The value of inventory is higher when absorption costing is used because some fixed manufacturing overhead is allocated to inventory to match revenue with expense at the time of sale. If there is fixed manufacturing overhead, the value of inventory under absorption costing will always be higher than under variable costing. B. To identify the costing method that would result in higher income, first calculate the change in inventory during October under both methods: October inventory added under absorption costing ($2,598-$1,346) $1,252 October inventory added under variable costing ($1,647-854) 793 Difference $ 459 Because $459 more cost was assigned to inventory under absorption costing, operating income during October would be higher by $459 under absorption than under variable costing. © 2012 John Wiley and Sons Canada, Ltd. 130 Cost Management 15.30 Absorption, Variable, and Throughput Inventory and Income - Asian Iron A. 1. Under variable costing: Total variable production cost = (NT$2,300 + 3,300 + 2,800) = NT$8,400 Variable cost per unit = NT$8,400/10,500 = NT$0.80 per unit Units in ending inventory = 10,500 – 9,400 = 1,100 units Ending inventory = NT$0.80 x 1,100 units = NT$880 2. Under absorption costing: Fixed manufacturing overhead = NT$8,250/10,500 units = NT$0.7857 per unit Total cost per unit = NT$0.80 + NT$0.7857 = NT$1.5857 Ending inventory = NT$1.5857 x 1,100 units = NT$1,744 3. Under throughput costing: Total direct materials cost per unit = NT$2,300/10,500 units = NT$0.21905 Ending inventory = NT$0.21905 x 1,100 units = NT$241 C. 1, 2, 3 Variable Costing Absorption Costing Throughput Costing Revenue NT$32,900 Revenue NT$32,900 Revenue NT$32,900 Variable costs: Cost of goods sold Direct materials Production (NT$1.5857 x 9,400) (14,906) (NT$0.21905 x 9,400) (2,059) (NT$0.80 x 9,400) (7,520) Gross margin 17,994 Throughput margin 30,841 Selling (940) Selling and admin. Operating expenses (a) (29,850) Contribution margin 24,440 (NT$940 + 14,560) (15,500) Operating income NT$ 991 Fixed costs: Operating income NT$ 2,494 Production (8,250) Selling and admin. (14,560) Operating income NT$ 1,630 (a) NT$(3,300 + 2,800 + 940 + 8,250 + 14,560) = NT$29,850 Double-check computations for absorption versus variable costing: There were no beginning inventories. Therefore, the change in inventory is equal to the ending inventory (calculated in Part A). Inventory under absorption costing NT$1,744 Inventory under variable costing 880 Difference in inventory NT$ 864 Difference in operating income - NT$2,494 - NT$1,630 NT$ 864 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Statements 131 Double-check computations for absorption versus throughput costing: Inventory under absorption costing NT$1,744 Inventory under throughput costing 241 Difference in inventory NT$1,503 Difference in operating income - NT$2,494 - NT$991 NT$1,503 C. It is first necessary to calculate the revenue and variable costs per unit: Revenue per unit = NT$32,900/9,400 = NT$3.50 Variable production cost per unit = NT$0.80 Variable selling cost per unit = NT$940/9,400 = NT$0.10 Revenue (12,110 x $3.50) NT$42,385 Variable costs: Production (12,110 x NT$0.80) (9,688) Selling (12,110 x NT$0.10) (1,211) Contribution margin 31,486 Fixed costs: Production (8,250) Selling and administrative (14,560) Operating income NT$ 8,676 15.31 Calculations Using Balance Sheet Data – A Manufacturing Firm A. Balance Sheet 2 has higher unit costs in inventory, so it must be an absorption costing statement. B. Assuming that costs per unit did not decrease, the decrease in total cost of inventory from January 1 to January 31 indicates that more units were sold than produced. C. Difference between variable costing income and absorption costing income: Fixed costs in beginning absorption inventory ($38,000 – $17,000) $21,000 Fixed costs in ending absorption inventory ($19,000 – $8,000) 11,000 Variable costing income higher than absorption costing income $10,000 15.32 Calculations Using Income Statement Data A. Absorption costing will have the larger cost per unit for cost of goods sold, so Income Statement 2 must be the absorption costing statement and Income Statement 1 must be the variable costing statement. B. Absorption costing income is higher than variable costing income, so the quantity of units in inventory must have increased during the period. Thus, production exceeded sales. © 2012 John Wiley and Sons Canada, Ltd. 132 Cost Management C. The difference between the two income statements is the treatment of fixed manufacturing overhead costs. Under absorption costing, manufacturing overhead cost per unit is included in cost of goods sold. Under variable costing, the total amount of manufacturing overhead costs incurred during the current period is included in other expenses. Thus, the total amount of fixed overhead can be calculated from the difference in other expenses shown on the two income statements: $4,180 – $3,100 = $1,080 Note that fixed overhead cannot be derived by comparing cost of goods sold because some of the fixed overhead will be deferred into ending inventory under absorption costing. The amount deferred this period is: $1,080 – ($4,032 – 3,000) = $48 15.33 Absorption, Variable, and Throughput Income, Reconcile Incomes - Happy Bikers Motorcycle Company A, B, C. Variable Costing Absorption Costing Throughput Costing Revenue (a) $150,000 Revenue (a) $150,000 Revenue (a) $150,000 Variable costs: Cost of goods sold (d) (105,000) Raw materials (g) (30,000) Production (b) (45,000) Volume variance (e) 26,667 Throughput margin 120,000 Selling (c) (3,750) Gross margin 71,667 Operating expenses (h) (101,750) Contribution margin 101,250 Selling and admin. (f) (43,750) Operating income $ 18,250 Fixed costs: Operating income $ 27,917 Production (40,000) Selling and admin. (40,000) Operating income $ 21,250 Calculation details: (a) Revenue = 15 motorcycles * $10,000 = $150,000 (b) Variable production costs = 15 motorcycles * ($2,000 + $1,000) = $45,000 (c) Variable selling and administrative costs = 15 motorcycles * $250 = $3,750 (d) Absorption cost of goods sold: Normal capacity = 10 motorcycles per month Estimated fixed overhead per motorcycle = $40,000/10 = $4,000 Total fixed and variable production cost per unit = $4,000 + $2,000 + $1,000 = $7,000 Cost of goods sold = 15 motorcycles* $7,000 = $105,000 (e) Volume variance: Fixed production overhead $ 40,000 Allocated overhead (18 motorcycles * $4,000) 72,000 Overapplied overhead $(32,000) Because the volume variance is material relative to actual production costs, it will be prorated between cost of goods sold and ending inventory. The portion allocated to cost of goods sold is: $32,000 * (15/18 motorcycles) $(26,667) (f) Total selling and administrative expense = $40,000 + 15 motorcycles * $250 = $43,750 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Sta133ents (g) Total raw materials = 15 motorcycles * $2,000 = $30,000 (h) Total operating expenses: Direct labour and variable overhead (18 motorcycles * $ 18,000 Fixed production costs 40,000 Variable selling and administrative (15 motorcycles * $253,750 Fixed selling and administrative 40,000 Total $101,750 D. Here is a schedule to reconcile the three income statements. Recall that inventory increased during the month by 3 units (18 motorcycles manufactured – 15 motorcycles sold). Throughput costing operating income $18,250 Direct labour and variable overhead costs added to ending variable costing inventory (3 motorcycles * $1,000) 3,000 Variable costing operating income 21,250 Fixed overhead costs allocated to ending absorption costing income (after the volume variance adjustment, this is equal to actual fixed overhead cost per unit) [3 motorcycles x ($40,000/18)] 6,667 Absorption costing operating income $27,917 15.34 Variable and Absorption Costing, Multiyear Analysis – LeFiell Manufacturing A sample spreadsheet showing the calculations for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/canada/eldenburg). A. and B. Below are the income statements produced using the spreadsheet. 2010 2011 2012 Units Sold 14,000 15,000 16,000 Units Produced 15,000 15,000 15,000 $500,00 Fixed Production Costs 0 $500,000 $500,000 7 Variable production costs per unit 75 75 5 20 Selling price per unit 200 200 0 Fixed selling and administrative expenses 100,000 100,000 100,000 Absorption Costing 2010 2011 2012 $2,800,0 $3,000,0 $3,200,0 Revenue (a) 00 00 00 1,516,66 1,625,00 1,733,33 Cost of Goods Sold (b) 7 0 3 Gross Margin $1,283,3 $1,375,0 $1,466,6 © 2012 John Wiley and Sons Canada, Ltd. 134 Cost Management 33 00 67 Selling and Administrative 100,000 100,000 100,000 $1,183,3 $1,275,0 $1,366,6 Operating Income 33 00 67 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income135atements Variable Costing 2010 2011 2012 $2,800,0 $3,000,0 $3,200,0 Revenue (a) 00 00 00 1,050,00 1,125,00 1,200,00 Variable Production Costs (c) 0 0 0 $1,750,0 $1,875,0 $2,000,0 Contribution Margin 00 00 00 Fixed Costs: Production 500,000 500,000 500,000 Selling and Administrative 100,000 100,000 100,000 $1,150,0 $1,275,0 $1,400,0 Operating Income 00 00 00 Calculations Details: (a) Revenue = units sold x $200 (b) Absorption Cost of Goods Sold: * Fixed Production Cost per unit = $500,000 / $33.333 15,000 units= 33 Total Production Cost per unit = $75 + $33.33333 = $108.33333 Absorption cost of Goods Sold = $108.33 x units sold (c ) Variable Production Costs = $75 x units sold *Since fixed overhead costs and production were constant each month the fixed overhead production cost per unit was calculated using the 15,000 units produced each month. Ending Inventory Value: 2010 2011 2012 Absorption Costing $108.3333 x units remaining in inventory $108,333 2010 = 1,000 units .33 $108,333 2011 = 1,000 units .33 2012 = 0 units $0 Variable Costing $75 x units remaining in $75,000. $75,000. inventory 00 00 $0 C. © 2012 John Wiley and Sons Canada, Ltd. 136 Cost Management Difference in Operating Income 2010 2011 2012 $1,183,3 $1,275,0 $1,366,66 Absorption Costing Income 33 00 7 1,150,00 1,275,00 Variable Costing Income 0 0 1,400,000 Difference in Operating Income 33,333 0 (33,333) Difference in Change in Inventory Absorption costing: $108,333 $108,333 $ Ending Inventory .33 .33 0 108,333. 108,333.3 Beginning Inventory 0 33 3 108,333. (108,333. Increase (decrease) 33 0 33) © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income 137tements Variable Costing: $75,000. $75,000. $ Ending Inventory 00 00 0 75,000.0 Beginning Inventory 0 0 75,000.00 75,000.0 (75,000.0 Increase (decrease) 0 0 0) 33,333.3 (33,333.3 Difference 3 0 3) The net income under the absorption costing method is higher in 2010 because a portion of the fixed production costs were allocated to ending inventory and therefore showed on the balance sheet reducing costs on the income statement. In 2012 the net income was lower under absorption costing because the costs that were previously allocated to inventory were now brought into cost of goods sold and absorbed in the income statement. In 2011 the net incomes were the same because production and sales were equal and the higher inventory costs carried over to the balance sheet again. Once the entire inventory is sold the combined net incomes over the 3 years will be equal. The combined net income for the 3 year period was $ 3,825,000 under both methods. 15.35 Throughput Costing, Multiyear Approach – LeFiell Manufacturing (Continued) A sample spreadsheet showing the calculations for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/canada/eldenburg). A and B: Below is the income statement produced using the spreadsheet. 2010 2011 2012 14,0 15,0 16,0 Units Sold 00 00 00 15,0 15,0 15,0 Units Produced 00 00 00 Fixed Production Costs $500,000 $500,000 $500,000 Variable production costs per unit 75 75 75 2 2 2 Selling price per unit 00 00 00 Fixed selling and administrative 100,0 100,0 100,0 expenses 00 00 00 Direct materials per unit 50 50 50 Throughput Costing Revenue (a) $2,800,00 $3,000,00 $3,200,00 © 2012 John Wiley and Sons Canada, Ltd. 138 Cost Management 0 0 0 700,0 750,0 800,0 Direct material costs (b) 00 00 00 $2,100,00 $2,250,00 $2,400,00 Throughput contribution 0 0 0 Other costs: 875,0 875,0 875,0 Other production costs (c) 00 00 00 Selling and administrative 100,0 100,0 100,0 expenses (d) 00 00 00 $1,125,00 $1,275,00 $1,425,00 Operating Income 0 0 0 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income St139ments Calculations Details (a) Revenue = units sold x $200 (b) Direct material costs = units sold x $50 (c ) Other Production Costs = [($75 - 50) x units produced] + $500,000 (d) Selling and administrative expenses = $100,000 Ending Inventory Value: Throughput Costing Direct materials per unit x units remaining in inventory $50,000.0 2010 = 1,000 units 0 $50,000. 2011 = 1,000 units 00 2012 = 0 units - Difference in Operating Income 2010 2011 2012 $1,125,00 $1,275,0 $1,425,0 Throughput Costing Income 0 00 00 1,150,0 1,275,0 1,400,0 Variable Costing Income (15.34) 00 00 00 (25,0 25,0 Difference in Operating Income 00) - 00 Difference in Change in Inventory Throughput costing: 50,000. 50,000. Ending Inventory 00 00 - 50,000. 50,000. Beginning Inventory - 00 00 50,000. (50,000. Increase (decrease) 00 - 00) Variable Costing: 75,000. 75,000. Ending Inventory 00 00 - 75,000. 75,000. Beginning Inventory - 00 00 75,000. (75,000. Increase (decrease) 00 - 00) Difference (25,000. 25,000. © 2012 John Wiley and Sons Canada, Ltd. 140 Cost Management 00) - 00 The net income under the variablecosting method is higher in 2010 because a portion of the variable production costs were allocated to ending inventory and therefore showed on the balance sheet reducing costs on the income statement. In 2012 the net income was lower under variable costing because the costs that were previously allocated to inventory were now brought into cost of goods sold and absorbed in the income statement. In 2011 the net incomes were the same because production and sales were equal and the higher inventory costs carried over to the balance sheet again. Once the entire inventory is sold the combined net incomes over the 3 years will be equal. The combined net income for the 3 year period was $ 3,825,000 under both methods. 15.36 Variable and Absorption Costing, Multi-year Approach – MacHine Company A sample spreadsheet showing the calculations for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/canada/eldenburg). A. and B. 2010 2011 2012 5, 6, Units Sold 5,000 500 000 6, 5, Units Produced 5,500 000 000 $200, $200,00 Fixed Production Costs $200,000 000 0 Variable production costs per unit 55 55 55 Selling price per unit 175 175 175 Fixed selling and administrative 50, 50, expenses 50,000 000 000 Absorption Costing 2010 2011 2012 $875,000 $962,500. $1,050,000 Revenue (a) .00 00 .00 456,818. 487,348.4 Cost of Goods Sold (b) 18 8 563,333.33 $418,181 $475,151. $486,666.6 Gross Margin .82 52 7 50,000.0 50,000. Selling and Administrative 0 50,000.00 00 $368,181 $425,151. $436,666.6 Operating Income .82 52 7 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income 141tements Variable Costing 2010 2011 2012 $875,000 $962,500. $1,050,000 Revenue (a) .00 00 .00 275,000. 302,500.0 Variable Production Costs (c) 00 0 330,000.00 $600,000 $660,000. $720,000. Contribution Margin .00 00 00 Fixed Costs: 200,000. 200,000.0 Production 00 0 200,000.00 50,000.0 Selling and Administrative 0 50,000.00 50,000.00 $350,000 $410,000. $470,000.0 Operating Income .00 00 0 Calculations Details: 2010 2011 2012 (a) Revenue = units sold x $175 (b) Absorption Cost of Goods Sold: *Fixed Production Cost per unit (allocated based on actual production) = $200,000 / actual production 36.3636 each year 4 33.33333 40.00000 Total Production Cost per unit 91.3636 = $55 + fixed prod cost per unit 4 88.33333 95.00000 **Absorption cost of Goods Sold 2010 = units sold x Total prod 456,818.1 cost/unit 8 2011 = 500 u (end inv in 2007) x $91.36364 + 5,000 u x 487,348.4 $88.33333 8 2012 = 1,000 u (end inv in 2008) x $88.33333 + 5,000 u 563,333.3 x $95 3 (c) Variable Production Costs = $55 x units sold *Since fixed overhead costs and production were not constant each month the fixed overhead production cost per unit was calculated using the actual units produced each month. Alternatively the average could have been calculated based on a normal capacity but this information was not given in the question. **Since the production costs are not the same each year, the cost of goods sold must take into account that the ending inventory from the prior year has a different cost than the current year production. Since the company uses a FIFO costing system the assumption was © 2012 John Wiley and Sons Canada, Ltd. 142 Cost Management made that the beginning inventories were sold first at last year’s cost and then the remaining units sold were from current year’s production. Ending Inventory Value: 2010 2011 2012 Absorption Costing = total production cost / unit x units remaining in inventory $45,681.8 2010 = 500 units x $91.36364 2 $88,333.3 2011 = 1,000 units x $88.33333 3 2012 = 0 units $ 0 Variable Costing $55 x units remaining in $27,500.0 $55,000.0 inventory 0 0 $ 0 C. Difference in Operating Income 2010 2011 2012 $368,181. $425,151. $436,666. Absorption Costing Income 82 52 67 350,000.0 410,000.0 470,000.0 Variable Costing Income 0 0 0 (33,333.3 Difference in Operating Income 18,181.82 15,151.52 3) Difference in Change in Inventory Absorption costing: $45,681.8 $88,333.3 $ Ending Inventory 2 3 0 Beginning Inventory 0 45,681.82 88,333.33 (88,333.3 Increase (decrease) 45,681.82 42,651.52 3) Variable Costing: Ending Inventory 27,500.00 55,000.00 0 Beginning Inventory 0 27,500.00 55,000.00 (55,000.0 Increase (decrease) 27,500.00 27,500.00 0) (33,333.3 Difference 18,181.82 15,151.52 3) © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income143atements The net income under the absorption costing method is higher in 2010 and 2011 because a portion of the fixed production costs were allocated to ending inventory and therefore showed on the balance sheet reducing costs on the income statement. In 2012 the net income was lower under absorption costing because the costs that were previously allocated to inventory were now brought into cost of goods sold and absorbed in the income statement. In 2012 the net income was lower using absorption costing by an amount equal to the two previous years when the net income was higher using absorption costing. Once the entire inventory is sold the combined net incomes over the 3 years will be equal. The combined net income for the 3 year period was $1,230,000 under both methods. 15.37 Throughput Costing, Multiyear Approach – MacHine Company (Continued) A sample spreadsheet showing the calculations for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/canada/eldenburg). A. and B. 2010 2011 2012 5,0 5,5 6,0 Units Sold 00 00 00 5,5 6,0 5,0 Units Produced 00 00 00 $200,0 $200,0 $200,0 Fixed Production Costs 00 00 00 Variable production costs per unit 55 55 55 1 1 1 Selling price per unit 75 75 75 Fixed selling and administrative 50,0 50,0 50,0 expenses 00 00 00 Direct materials per unit 20 20 20 Throughput Costing $875,000. $962,500. $1,050,000 Revenue (a) 00 00 .00 100,000. 110,000. 120,000. Cost of Materials (b) 00 00 00 $775,000. $852,500. $930,000. Throughput Margin 00 00 00 392,500. 410,000. 375,000. Other Production Costs (c) 00 00 00 50,000. 50,000. 50,000. Selling and Administrative 00 00 00 Operating Income $332,50 $392,50 $505,000 © 2012 John Wiley and Sons Canada, Ltd. 144 Cost Management 0.00 0.00 .00 Variable Costing (15.36) $875,000. $962,500. $1,050,000 Revenue (a) 00 00 .00 275,000. 302,500. 330,000. Variable Production Costs (d) 00 00 00 $600,000. $660,000. $720,000.0 Contribution Margin 00 00 0 Fixed Costs: 200,000. 200,000. 200,000. Production 00 00 00 50,000. 50,000. 50,000. Selling and Administrative 00 00 00 $350,00 $410,000 $470,000. Operating Income 0.00 .00 00 Calculations Details (a) Revenue = units sold x selling price per unit (b) Throughput Cost of Materials = $20 x units sold (c) Throughput Other Production Costs Fixed Production Cost + (Variable cost per unit - direct materials per unit) x units produced (d ) Variable Production Costs = $55 x units sold Ending Inventory Value: Throughput Costing = materials cost per unit x units remaining in inventory $10,000. 2010 = 500 units x $20 00 $20,000. 2011 = 1,000 units x $20 00 2012 = 0 units - Variable Costing $55 x units remaining in $27,500.0 $55,000. inventory 0 00 - Difference in Operating Income 2010 2011 2012 Throughput Costing Income $332,500. $392,500. $505,000.0 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income S145ements 00 00 0 350,000. 410,000. 470,000. Variable Costing Income 00 00 00 (17,500. (17,500. 35,000. Difference in Operating Income 00) 00) 00 Difference in Change in Inventory Throughput costing: 10,000. 20,000. Ending Inventory 00 00 - 10,000. 20,000. Beginning Inventory - 00 00 10,000. 10,000. (20,000.0 Increase (decrease) 00 00 0) Variable Costing: 27,500. 55,000. Ending Inventory 00 00 - 27,500. 55,000. Beginning Inventory - 00 00 27,500. 27,500. (55,000.0 Increase (decrease) 00 00 0) (17,500. (17,500. 35,000. Difference 00) 00) 00 The net income under the variable costing method is higher in 2010 and 2011 because a portion of the direct materials production costs were allocated to ending inventory and therefore showed on the balance sheet reducing costs on the income statement. In 2012 the net income was lower under variable costing because the costs that were previously allocated to inventory were now brought into cost of goods sold and absorbed in the income statement. In 2012 the net income was lower using variable costing by an amount equal to the two previous years when the net income was higher using variable costing. Once the entire inventory is sold the combined net incomes over the 3 years will be equal. The combined net income for the 3 year period was $1,230,000 under both methods. © 2012 John Wiley and Sons Canada, Ltd. 146 Cost Management PROBLEMS 15.38 Absorption and Variable Costing Income Statements, Reconciliation of Net Incomes – Okanagan Company It is useful to set out the given information in the following format prior to addressing the requirements (there are no WIP inventories). Absorption Costing Variable Costing Sales $900,000 Sales $900,000 COGS Variable costs Beginning FG ? Manufacturing ? + COGM ? + SG&A 0 − Ending FG ? = Total variable costs ? − COGS ? Contribution margin 360,000 Gross margin $162,000 Fixed costs manufacturing 132,000 SG&A (all fixed) 42,000 Fixed costs SG&A 42,000 Operating profit $120,000 Operating profit $186,000 A. 1) From the information given in the variable costing income statement, total variable cost of goods sold = Sales – CM = $900,000 – 360,000 = $540,000. There are no variable SG&A expenses. Given that unit variable manufacturing cost is $6, total units sold are: $540,000 / 6 = 90,000. 2) From the absorption costing income statement: COGS = Sales – Gross margin = $900,000 − $162,000 = $738,000. Since 90,000 units were sold, the product cost per unit is $738,000 / 90,0000 = $8.20 3) Unit fixed costs are $8.20 − $6 = $2.20. Since total fixed costs are $132,000 in 2009, production must be $132,000 / 2.2 = 60,000 units. B. and C. Production and sales quantities are provided for this part. The product cost of manufacturing can thus be determined and the income statements constructed. (b) (c) Absorption Costing Variable Costing Sales $900,000 Sales $900,000 COGS Variable costs Beginning FG 246,0002 Manufacturing 540,000 (A1) + COGM 492,0001 + SG&A 0 © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Statements 147 − Ending FG 03 = Total variable costs 540,000 − COGS 738,000 (A2) Contribution margin 360,000 Gross margin $162,000 Fixed costs manufacturing 132,000 SG&A (all fixed) 42,000 Fixed costs SG&A 42,000 Operating profit $120,000 Operating profit $186,000 Notes: 1COGM = 60,000 * $8.20 = $492,000. See A3 and A2 above 2 Beginning FG = COGS – COGM = $738,000 − $492,000 = $246,000 represents the difference between beginning FG and ending FG. Thus Units in beginning inventory – Units in ending inventory = $246,000 / $8.2 = 30,000 units 3Ending FG = 30,000 beginning inventory units + 60,000 units produced – 90,000 units sold = 0 units D. Reconciliation Absorption costing operating profit $120,000 + FC released from beginning inventory (30,000 * $2.20) 66,000 − FC held back in ending inventory (0 * $2.20 0 = Variable costing operating profit $186,000 15.39 Absorption and Variable Costing Income Statements, Reconciliation of Net Incomes – Hermione Corporation A. Absorption costing income statement HERMIONE CORPORTATION Pro-forma Income Statement — Absorption Costing Basis Year Ended December 31, 2012 Sales (96,000 * $12.00) $1,152,000 Costs of goods sold Beginning inventory (4,000 * $5.00) $ 20,000 Variable manufacturing cost (100,000 * $7.50) $750,000 Fixed overhead, manufacturing 80,000 Cost of goods manufactured 830,000 Cost of goods available for sale $850,000 Ending inventory [8,000 * ($7.50+($80,000/100,000)] (66,400) Cost of goods sold 783,600 Gross margin 368,400 Variable selling and administrative (96,000 * $1.00) $ 96,000 Fixed selling and administrative 55,000 Total selling and administrative 151,000 Net income $ 217,400 © 2012 John Wiley and Sons Canada, Ltd. 148 Cost Management Variable costing income statement HERMIONE CORPORTATION Pro-forma Income Statement — Variable Costing Basis Year ended December 31, 2012 Sales $1,152,000 Costs of goods sold Beginning inventory $ 20,000 Variable manufacturing cost 750,000 Variable manufacturing cost of goods available for sale 770,000 Variable cost of manufacturing in ending inventory (60,000) Variable cost of goods sold $710,000 Variable selling and administrative 96,000 Total variable cost 806,000 Contribution margin $ 346,000 Fixed overhead, manufacturing $80,000 Fixed selling and administrative 55,000 Total fixed costs 135,000 Net income $ 211,000 Calculations Ending inventory 4,000 purchased units + 100,000 manufactured units – 96,000 sold units 8,000 units Reconciliation Absorption costing net income (NI) – Variable costing NI = Fixed cost in ending inventory – Fixed cost in beginning inventory $217,400 - $211,000 = $6,400 8,000 units x 0.80 = $6,400 Note: Fixed manufacturing costs per unit = $80,000/100,000 = $0.80 There are no fixed costs in beginning inventory since it was purchased from an outside supplier. Those units were not manufactured. © 2012 John Wiley and Sons Canada, Ltd. Chapter 15: Measuring and Assigning Costs for Income Statements 149 15.40 Absorption and Variable Costing Income Statements – KopyKat Company A. The following calculations will be used in the solution. i) Units in beginning and ending inventory October November Beginning inventory 10,000 units 20,000 units Production 25,000 ---- Good available for sale 35,000 20,000 Sales 15,000 20,000 Ending inventory 20,000 0 ii) Product cost per unit September October November Variable manufacturing $ 18 1
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