Chapter 8 All Questions-comm 305

 Brief Exercises Identif  BE8-1 y costs as product costs or period costs under variabl e costing .

Determine whether whether each of the following costs would be classified as product costs or period costs under a variable-costing variable-costing system: Product Cost

Period Cost

Commission fees for salespersons Glue for wooden chairs—variable Fabric for T-shirts Labour costs for producing TVs Factory rent expense—fixed Factory utility costs—variable Car mileage for salespersons Administrative expenses—fixed Administrative Internet connection fees Wages—assembly line

Identify whether each of the following costs would be classified as product costs or BE8-2 Determine whether costs as period costs under an absorption-costing absorption-costing system. product Product Cost Period Cost costs or Commission fees for salespersons period costs Glue for wooden chairs—variable under Fabric for T-shirts absorption costing. Labour costs for producing TVs Factory rent expense—fixed Factory utility costs—variable Car mileage for salespersons Administrative expenses—fixed Administrative Internet connection fees Wages—assembly line

Identify *BE8-3 costs as product costs or period costs under throughpu t costing.

Determine whether whether each of the following costs would be classified as product costs or period costs under a throughput-costing throughput-costing system. Product Cost

Period Cost

Commission fees for salespersons Glue for wooden chairs—variable Fabric for T-shirts Labour costs for producing TVs Factory rent expense—fixed Factory utility costs—variable Car mileage for salespersons Administrative expenses—fixed Administrative Internet connection fees Wages—assembly line

Calculate BE8-4 Large Orange Company produces basketballs. It incurred the following costs during the product year: costs Direct materials $28,980 under Direct labour 51,060 variable costing. Fixed manufacturing overhead 20,000 Variable manufacturing overhead

64,840

Selling costs

42,000

What is the total product cost for the company under variable costing? Calculate BE8-5 Information for Large Orange Company is given in BE8-4 BE8-4.. What is the total product cost for product the company under absorption costing? costs under absorption costing. Calculate BE8-4.. What is the total product *BE8-6 Information for Large Orange Company is given in BE8-4 product costs cost for the company under throughput costing? under throughput costing. Determine the *BE8-7 Burns Manufacturing incurred the following costs during the year: direct materials, $20 manufacturin per unit; direct labour, $12 per unit; variable manufacturing overhead, $15 per unit; g cost per unit variable selling and administrative costs, $8 per unit; fixed manufacturing manufacturing overhead, under the $120,000; and fixed selling and administrative costs, $10,000. Burns produced 12,000 three costing units and sold 10,000 units. Determine the manufacturing cost per unit under (a) approaches. absorption costing, (b) variable costing, and (c) throughput costing. Prepare a BE8-8 During 2012, Rafael Corp. produced 50,000 units and sold 40,000 for $15 per unit. variableVariable manufacturing manufacturing costs were $6 per unit. Annual fixed manufacturing overhead was costing $80,000 ($2 per unit). Variable selling and administrative administrative costs were $2 per unit sold, and income fixed selling and administrative administrative expenses were $20,000. Prepare a variable-costing income statement. statement.

Prepare a *BE8-9 normalcosting income statement.

Information for Rafael Corp. is given in BE8-8 BE8-8.. Suppose the accountant for Rafael Corp. uses normal costing and uses the budgeted volume of 50,000 units to allocate the fixed overhead rate rather than the actual production volume of 40,000 units. The company expenses production volume variance to cost of goods sold in the accounting accounting period in which it occurs. (a) Calculate the manufacturing cost per unit. (b) Prepare a normal-costing income statement for the first month of operation. (c) Reconcile the difference in net income between the absorption-costing absorption-costing and normal-costing methods. Prepare an BE8-10 Information for Rafael Corp. is given in BE8-8 BE8-8.. (a) Prepare an absorption-costing absorption-costing income absorptionstatement. (b) Reconcile the difference between the net income under variable costing and costing the net income under absorption costing. That is, show a calculation that explains what income causes the difference in net income between the two approaches. statement and reconcile the difference in net income under the two approaches . Determine BE8-11 Caspian Company produced 20,000 units and sold 18,000 during the current year. Under net income absorption costing, net income was $25,000. Fixed overhead was $190,000. Determine Determine under the net income under variable costing. variable costing.

Do It! Review Calculate D8-12 Fresh Air Products manufactures and sells a variety of camping products. Recently the total company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales product data for the first month of operations are shown below: cost and Beginning inventory 0 units prepare an Units produced 12,000 income Units sold 10,000 statement using Manufacturing Costs absorptio Fixed overhead $108,000 n costing. Variable overhead

$3 per unit

Direct labour

$12 per unit

Direct material

$30 per unit

Selling and administrative costs Fixed Variable

$200,000 $4 per unit sold

The portable cooking unit sells for $110. Management is interested in the opening month's results and has asked for an income statement.  Instructions

Assuming the company uses absorption costing: (a) Calculate the manufacturing cost per unit. (b) Prepare an absorption-costing income statement for the first month of operation. Calculate D8-13 Information for Fresh Air Products is given in D8-12. total  Instructions product cost and (a) Assuming the company uses variable costing: prepare an 1. Calculate the manufacturing cost per unit. income statemen 2. Prepare a variable-costing income statement for the first month of operation. t using variable costing. (b) Reconcile the difference in net income between the absorption-costing and variablecosting methods.

Calculate*D8-14 Information for Fresh Air Products is given in D8-12. total  Instructions product cost and (a) Assume the company uses normal costing and uses the budgeted volume of 13,500 units prepare to allocate the fixed overhead rate rather than the actual production volume of 12,000 an units. The company expenses production volume variance to cost of goods sold in the income accounting period in which it occurs. Do the following: statemen t using 1. Calculate the manufacturing cost per unit. normal costing. 2. Prepare a normal-costing income statement for the first month of operation.

(b) Reconcile the difference in net income between the absorption-costing and normalcosting methods. Calculate *D8-15 Information for Fresh Air Products is given in D8-12. total  Instructions product cost and (a) Assuming the company uses throughput costing: prepare an income 1. Calculate the manufacturing cost per unit. statement using 2. Prepare a throughput-costing income statement for the first month of operation. throughput costing. (b) Reconcile the difference in net income between the variable-costing and throughputcosting methods.

Exercises Calculate *E8-16 total product cost and prepare an income statement using variable costing and throughpu t costing.

Wu Equipment Company manufactures and distributes industrial air compressors. The following data are available for the year ended December 31, 2012. The company had no beginning inventory. In 2012, it produced 1,500 units but sold only 1,200 units. The unit selling price was $4,500. Costs and expenses were as follows: Variable costs per unit Direct materials

$ 800

Direct labour

1,500

Variable manufacturing overhead

300

Variable selling and administrative expenses

70

Annual fixed costs and expenses Manufacturing overhead

$1,200,000

Selling and administrative expenses

100,000

 Instructions

Prepare income statement s under absorptio n costing and variable costing.

(a) Calculate the manufacturing cost of one unit of product using variable costing. (b) Prepare a 2012 income statement for Wu Company using variable costing. (c) Calculate the manufacturing cost of one unit of product using throughput costing. (d) Prepare a 2012 income statement for Wu Company using throughput costing. (e) Reconcile the difference between variable-costing and throughput-costing net income. E8-17 Asian Windows manufactures a hand-painted bamboo window shade for standard-size windows. Production and sales data for 2012 are as follows: Variable manufacturing costs Fixed manufacturing costs

$40 per shade $100,000

Variable selling and administrative expenses Fixed selling and administrative expenses

$9 per shade $250,000

Selling price

$90 per shade

Units produced

10,000 shades

Units sold

8,500 shades

 Instructions

(a) Prepare an income statement using absorption costing.

(b) Prepare an income statement using variable costing.

Calculate E8-18 Information for Asian Windows is given in E8-17. total  Instructions product cost and (a) Assume the company uses normal costing and uses the budgeted volume of 8,000 units prepare an to allocate the fixed overhead rate rather than the actual production volume of 10,000 income units. The company expenses production volume variance to cost of goods sold in the statement accounting period in which it occurs. Do the following: using normal 1. Calculate the manufacturing cost per unit. costing. 2. Prepare a normal-costing income statement for 2012.

(b) Reconcile the difference in net income between the absorption-costing and normalcosting methods. Calculate E8-19 Bob's Company builds custom fishing lures for sporting goods stores. In its first year of the operations, 2012, the company incurred the following costs: product Variable cost per unit cost and prepare an Direct materials $ 6.50 income Direct labour 2.75 statement under Variable manufacturing overhead 5.75 variable Variable selling and administrative expenses 3.90 costing. Fixed costs for year Fixed manufacturing overhead Fixed selling and administrative expenses

$285,000 240,100

Bob's Company sells the fishing lures for $25. During 2012, the company sold 80,000 lures and produced 95,000 lures.  Instructions

(a) Assuming the company uses variable costing, calculate Bob's manufacturing cost per unit for 2012. (b) Prepare a variable-costing income statement for 2012. Calculate E8-20 Information for Bob's Company is provided in E8-19. the  Instructions product cost and (a) Assuming the company uses absorption costing, calculate Bob's manufacturing cost per

prepare an income statement under absorptio n costing.

unit for 2012. (b) Prepare an absorption-costing income statement for 2012.

Calculate *E8-21 Information for Bob's Company is provided in E8-19. the product  Instructions(a) Assume the company uses normal costing and uses the budgeted volume cost and of 93,860 units to allocate the fixed overhead rate rather than the actual prepare an production volume of 95,000 units. The company expenses production income volume variance to cost of goods sold in the accounting period in which statement it occurs. Do the following: under 1. Calculate the manufacturing cost per unit. normal costing. 2. Prepare a normal-costing income statement for 2012.

(b) Reconcile the difference in net income between the absorption-costing and normal-costing methods. Calculate E8-22 Empey Manufacturing produces towels to be sold as souvenirs at sporting events the product throughout the world. Assume that units produced equalled units sold in 2012. The cost under company's variable-costing income statement is as follows: absorption EMPEY MANUFACTURING costing Income Statement and Year Ended December 31, 2012 variable Variable Costing costing, prepare an Sales (260,700 units) $521,400 absorption Variable cost of goods sold $255,486 -costing income Variable selling expenses 31,284 statement, Variable administrative expenses 36,498 323,268 and compare Contribution margin 198,132 the Fixed manufacturing overhead 96,459 usefulness of the Fixed selling expenses 38,500 variableFixed administrative expenses 42,625 177,584 costing format Net income $ 20,548 versus the Unit selling price $ 2.00 absorption -costing Variable costs per unit format.

EMPEY MANUFACTURING Income Statement Year Ended December 31, 2012 Variable Costing Direct material

$

0.26

Direct labour

$

0.34

Variable overhead

$

0.38

Variable selling expenses

$

0.12

Variable administrative expenses

$

0.14

 Instructions(a) Calculate the manufacturing cost per towel

under variable costing. (b) Calculate the manufacturing cost per towel under absorption costing. (c) Prepare an absorption-costing income statement for Empey Manufacturing. (d) Explain why there is or is not a difference in the net income amounts in the two income statements. (e) Explain why Empey Manufacturing Company might want to prepare both an absorption-costing income statement and a variable-costing income statement. Determine the E8-23 Ortiz Company produced 10,000 units during the past year but sold only 8,500 of the ending units. The following additional information is also available: inventory Direct materials used $70,000 under variable costing; Direct labour incurred 30,000 determine Variable manufacturing overhead 25,000 whether absorption or Fixed manufacturing overhead 40,000 variable Fixed selling and administrative expenses 70,000 costing would result in a Variable selling and administrative expenses 10,000 higher net There was no work in process inventory at the beginning of the year. Ortiz did not have income. any beginning finished goods inventory either.  Instructions

(a) Calculate Ortiz Company's finished goods inventory cost on December 31 under variable costing. (b) Determine which costing method, absorption or variable, would show a higher net income for the year. By what amount? Calculate the E8-24 Hardwood Inc. produces mostly wooden crates used for shipping products by ocean manufacturin freighter. In 2012, Hardwood incurred the following costs: g cost under Wood used $54,000 absorption and variable Nails (considered insignificant and a variable expense) 350 costing and Direct labour 37,000 explain the difference. Utilities for the plant: $2,000 each month, plus $0.50 for each kilowatt hour used each month

Rent expense for plant for year

21,400

Assume Hardwood used an average of 500 kilowatt hours per month over the past year.  Instructions

(a) Calculate Hardwood's total manufacturing cost if it uses a variable-costing approach. (b) Calculate Hardwood's total manufacturing cost if it uses an absorption-costing approach. (c) Determine the reason for the difference between manufacturing costs under these two costing approaches.

Calculate the *E8-25 manufacturin g cost under absorption, variable, and throughput costing and explain the differences.

During its second year of operations, TGS Corporation produced 3,000 units and sold 2,800 units at $60 each. The beginning inventory comprised 100 units, and costs were unchanged from the previous year. Costs incurred during the second year were as follows: Direct materials per unit produced Direct labour per unit produced Variable overhead per unit produced Variable selling and administrative costs per unit sold Total fixed production overhead Total fixed selling and administrative costs  Instructions

(a) Reconcile TGS's income based on absorption costing and variable costing. (b) Reconcile TGS's income based on variable costing and throughput costing.

$

8 9 12 3

18,000 6,000

Problems: Set A Calculate *P8-26A the product cost; prepare income statements under variable costing, absorption costing, and throughput costing; and reconcile the differences .

Blue Mountain Products manufactures and sells a variety of camping products. Recently, the company opened a new plant to manufacture a lightweight, self-standing tent. Cost and sales data for the first month of operations (June 2012) are as follows: Manufacturing costs Fixed overhead

$200,000

Variable overhead

$4 per tent

Direct labour

$16 per tent

Direct material

$40 per tent

Beginning inventory

0 tents

Tents produced Tents sold

10,000 9,000

Selling and administrative costs Fixed Variable

$400,000 $6 per tent sold

The tent sells for $150. Management is interested in the opening month's results and has asked for an income statement.  Instructions

(a) Assuming the company uses absorption costing:

1. Calculate the manufacturing cost per unit. 2. Prepare an absorption-costing income statement for the month of June 2012.

(b) Assuming the company uses variable costing: 1. Calculate the manufacturing cost per unit. 2. Prepare a variable-costing income statement for the month of June 2012.

(c) Reconcile the difference in net income between the absorption-costing and variablecosting methods. (d) Assuming the company uses throughput costing: 1. Calculate the manufacturing cost per unit. 2. Prepare a throughput-costing income statement for the month of June 2012.

(e) Reconcile the difference in net income between the variable-costing and throughputcosting methods.

Prepare P8-27A income statements under absorption costing and variable costing for a company with beginning inventory.

AFN Company produces plastic that is used for injection-moulding applications such as gears for small motors. In 2012, the first year of operations, AFN Company produced 8,000 tonnes of plastic and sold 6,000 tonnes. In 2013, the production and sales results were exactly reversed. In each year, the selling price per tonne was $2,500; variable manufacturing costs were 15% of the sales price for the units produced; variable selling expenses were 20% of the selling price of the units sold; fixed manufacturing costs were $3.2 million; and fixed administrative expenses were $600,000.  Instructions

(a) Prepare comparative income statements for each year using variable costing. (Use the format from Illustration 8-5.) (b) Prepare comparative income statements for each year using absorption costing. (Use the format from Illustration 8-4.) (c) Reconcile the differences in the income from operations each year under the two costing approaches. (d) Comment on the effects that the production and sales levels have on net income under the two costing approaches.

Prepare P8-28A absorptionand variablecosting income statements, reconcile the differences between absorptionand variablecosting income statements when sales and production

Basic Electric Motors is a division of Basic Electric Products Corporation. The division manufactures and sells an electric switch used in a wide variety of applications. During the coming year, it expects to sell 200,000 units for $8 per unit. Ester Madden is the division manager. She is considering producing either 200,000 or 250,000 units during the period. Other information is as follows: Division Information for 2012 Beginning inventory Expected sales in units

0 200,000

Selling price per unit

$8

Variable manufacturing cost per unit

$3

Fixed manufacturing cost (total)

$500,000

Fixed manufacturing overhead costs per unit Based on 200,000 units

$2.50

per unit (

)

levels change, and discuss the usefulness of absorption costing versus variable costing.

Division Information for 2012 Based on 250,000 units

$2.00

per unit (

Based on 200,000 units

$5.50

per unit ( fixed)

Based on 250,000 units

$5.00

per unit (

$0.50

per unit

)

Manufacturing cost per unit

Variable selling and administrative expenses Fixed selling and administrative expenses (total)

)

$12,000

 Instructions

(a) Prepare an absorption-costing income statement, with one column showing the results if 200,000 units are produced and one column showing the results if 250,000 units are produced. (b) Prepare a variable-costing income statement, with one column showing the results if 200,000 units are produced and one column showing the results if 250,000 units are produced. (c) Reconcile the difference in the net incomes under the two approaches and explain what causes this difference. (d) Discuss the usefulness of the variable-costing income statements versus the absorption-costing income statements for decision-making and for evaluating the manager's performance.

Prepare an *P8-29A income statement under variable costing, absorption costing, and throughput costing and reconcile the differences; discuss the usefulness of

Alta Products Ltd. has just created a new division to manufacture and sell DVD players. The facility is highly automated and thus has high monthly fixed costs, as shown in the following schedule of budgeted monthly costs. This schedule was prepared based on an expected monthly production volume of 2,000 units. Manufacturing costs Variable costs per unit Direct materials

$

30

Direct labour

40

Variable overhead

10

Total fixed overhead

70,000

Selling and administrative costs Variable

6% of sales

absorption costing versus variable costing.

Fixed

$

50,000

During August 2012, the following activity was recorded: Units produced

2,000

Units sold

1,700

Selling price per unit

$ 175

 Instructions

(a) Prepare an income statement for the month ended August 31, 2012, under absorption costing. (b) Prepare an income statement for the month ended August 31, 2012, under variable costing. (c) Reconcile the absorption costing and variable costing income figures for the month. (d) Prepare an income statement for the month ended August 31, 2012, under throughput costing. (e) Reconcile the variable-costing income and throughput-costing income figures for the month. (f) What are some of the arguments in favour of using variable costing? What are some of the arguments in favour of using absorption costing? (adapted from CGA-Canada)

Calculate *P8-30A Information for Alta Products Ltd. is provided in P8-29A. the product  Instructions cost and prepare an (a) Assume the company uses normal costing and uses the budgeted volume of 2,500 income units to allocate the fixed overhead rate rather than the actual production volume of statement 2,000 units. The company expenses production volume variance to cost of goods under sold in the accounting period in which it occurs. Do the following: normal costing. 1. Calculate the manufacturing cost per unit. 2. Prepare a normal-costing income statement for the month ended August 31,

2012. (b) Reconcile the difference in net income between the absorption-costing and normal-

costing methods.

Calculate P8-31A Amanjeet Chinmayi left her job as the production manager of a medium-sized firm two product years ago to join a new firm that was manufacturing a revolutionary type of fitness cost, equipment. Amanjeet was made the general manager at the start of operations, and the prepare firm seemed to be doing extremely well. The president was extremely pleased with the income company's first-year performance and, at the beginning of the second year, promised statements Amanjeet a $20,000 bonus if the company's net income were to increase by 25% in year under 2. variable During year 2, Amanjeet sold 25% more units than she had in year 1 and was so costing and confident that she would receive her bonus that she bought non-refundable airline tickets absorption to Europe for her husband Leo, her three sons, and herself. costing, At the end of year 2, Amanjeet received the income statement, and it showed that the and company's income had decreased from year 1 even though it had sold considerably more reconcile

the difference when sales and production levels change.

units. Amanjeet did not get along very well with the accountant and felt that he had deliberately distorted the financial statements for year 2. Amanjeet received the following reports: Year 1

Year 2

Production (in units)

6,000

3,000

Sales (in units)

4,000

5,000

Unit selling price

$ 500

$

500

$

$

300

Unit costs Variable manufacturing Variable selling

300 20

20

Fixed manufacturing

180,000

210,000

Fixed selling

100,000

140,000

$2,000,000

$2,500,000

1,320,000

1,770,000

Gross margin

680,000

730,000

Selling expenses

180,000

240,000

$ 500,000

$ 490,000

Income Statement—(FIFO)

Sales Cost of goods sold

Net income  Instructions

(a) Prepare variable-costing income statements for years 1 and 2. (b) For years 1 and 2, reconcile the differences between the net income as determined by the income statements you have prepared in part (a) and the income statements prepared by the accountant. (c) Explain to Amanjeet why she lost her $20,000 bonus. Which income statement more accurately measures performance? Why? (adapted from CGA Canada)

Calculate *P8-32A the product cost; prepare income statements under variable costing, absorption costing, and

Xantra Corp. is a manufacturer of specialty in-line skates. The operating results for 2012 are as follows: Units produced

20,000

pairs

Units sold

18,000

pairs

Selling price

$200

Production information:

Direct materials Direct labour

$1,000,000 750,000

per pair

throughput costing; and reconcile the differences .

Variable manufacturing overhead

450,000

Fixed manufacturing overhead

800,000

Variable marketing costs

180,000

Fixed marketing costs

200,000

There was no beginning finished goods inventory.  Instructions

(a) Prepare an absorption-costing income statement. (b) Prepare a variable-costing income statement. (c) Reconcile the net incomes under absorption costing and variable costing. (d) Calculate the break-even point in sales units (pairs of skates) under the current cost structure. (e) Prepare a throughput-costing income statement. (f) Reconcile the net incomes under throughput costing and variable costing. (adapted from CGA Canada) Calculate *P8-33A Information for Xantra Corp. is provided in P8-32A. the  Instructions product cost and (a) Assume the company uses normal costing and uses the budgeted volume of 25,000 prepare an pairs to allocate the fixed overhead rate rather than the actual production volume of income 20,000 pairs. The company expenses production volume variance to cost of goods statement sold in the accounting period in which it occurs. Do the following: under normal 1. Calculate the manufacturing cost per unit. costing. 2. Prepare a normal-costing income statement for 2012.

(b) Reconcile the difference in net income between the absorption-costing and normalcosting methods.

Explain P8-34A Sun Company, a wholly owned subsidiary of Guardian, Inc., produces and sells three variable main product lines. At the beginning of 2011, the president of Sun Company presented costing the budget to the parent company and accepted a commitment to contribute $15,800 to and Guardian's consolidated profit in 2012. The president was confident that the year's profit absorption would exceed the budget target, since the monthly sales reports had shown that sales for costing the year would be 10% more than what had been predicted in the budget. The president is and both disturbed and confused when the controller presents an adjusted forecast as at reconcile November 30, 2012, indicating that profits will be 11% under budget. The two forecasts

the difference s when sales and production levels change.

are presented below: SUN COMPANY Forecasts of Operating Results January 1, 2012

November 30, 2012

Sales

$268,000

$294,800

Cost of sales

212,000*

233,200

56,000

61,600

0

(6,000)

Actual gross margin

56,000

55,600

Selling expenses

13,400

14,740

Administrative expenses

26,800

26,800

Total operating expenses

40,200

41,540

$ 15,800

$ 14,060

Gross margin Overapplied (underapplied) fixed manufacturing overhead

Earnings before tax

There have been no sales price changes or product-mix shifts since the January 1, 2012, forecast. Variable costs have remained constant throughout the year. The only cost that has varied in the income statement is the underapplied manufacturing overhead. This happened because the company worked only 16,000 machine hours during 2012 (budgeted machine hours were 20,000) as a result of a shortage of raw materials when its main supplier was closed by a strike. Fortunately, Sun Company's finished goods inventory was large enough to fill all sales orders received.  Instructions

(a) Analyze and explain why profit has declined in spite of increased sales and control over costs. (b) What plan, if any, could Sun Company adopt during December to improve the reported profit at year end? Explain your answer. (c) Explain and illustrate how Sun Company could use a different internal cost reporting procedure that would not result in the confusing effect of the procedure it currently uses.

Prepare P8-35A income statements under variable costing and absorption costing and reconcile the differences when sales and production levels change; discuss the usefulness of absorption costing versus variable costing.

The Daniels Tool & Die Corporation has been in existence for a little over three years. The company's sales have been increasing each year as it builds a reputation. The company manufactures dies to its customers' specifications and therefore uses a job-order cost system. Factory overhead is applied to the jobs based on direct labour hours—the absorption-costing (full) method. Overapplied or underapplied overhead is treated as an adjustment to Cost of Goods Sold. The company's income statements and other data for the last two years are as follows: DANIELS TOOL & DIE CORPORATION 2011–2012 Comparative Income Statements  

2011

Sales

2012

$840,000

$1,015,000

25,000

18,000

Cost of goods manufactured

548,000

657,600

Total available

573,000

675,600

18,000

14,000

555,000

661,600

36,000

14,400

Cost of goods sold

591,000

676,000

Gross profit

249,000

339,000

Selling expenses

82,000

95,000

Administrative expenses

70,000

75,000

152,000

170,000

$ 97,000

$ 169,000

Cost of goods sold Finished goods, January 1

Finished goods, December 31 Cost of goods sold before overhead adjustment Underapplied factory overhead

Total operating expenses Operating income

Daniels Tool & Die Corporation Inventory Balances January 1, 2011

December 31, 2011

December 31, 2012

Raw material

$22,000

$30,000

$10,000

Work in process

$40,000

$48,000

$64,000

1,335

1,600

2,100

$25,000

$18,000

$14,000

1,450

1,050

820

Direct labour hours Finished goods Direct labour hours

Daniels used the same predetermined overhead rate in applying overhead to its production orders in both 2011 and 2012. The rate was based on the following estimates: Fixed factory overhead

$ 25,000

Variable factory overhead

$155,000

Direct labour hours

25,000

Direct labour costs

$150,000

In 2011 and 2012, the actual direct labour hours used were 20,000 and 23,000, respectively. Raw materials put into production were $292,000 in 2011 and $370,000 in 2012. The actual fixed overhead was $42,300 for 2011 and $37,400 for 2012, and the planned direct labour rate was the direct labour achieved. For both years, all of the administrative costs were fixed. The variable portion of the selling expenses results from a 5% commission that is paid as a percentage of the sales revenue.  Instructions

(a) For the year ended December 31, 2012, prepare a revised income statement for Daniels Tool & Die Corporation using the variable-costing method. (b) Reconcile the difference in operating income between Daniels Tool & Die Corporation's 2012 absorption-costing income statement and the revised 2012 income statement prepared under variable costing. (c) Describe both the advantages and disadvantages of using variable costing.

Problems: Set B Calculate *P8-36B the product cost; prepare an income statement under variable costing, absorption costing, and throughput costing; and reconcile the differences .

SpongeFun Products manufactures and sells a variety of swimming products. Recently, the company opened a new plant to manufacture a lightweight, inflatable boat. Cost and sales data for 2012 are shown below: Manufacturing costs Fixed overhead costs Variable overhead

$150,000 $5

per boat

Direct labour

$10

per boat

Direct materials

$10

per boat

Beginning inventory

0

Boats produced

50,000

Boats sold

46,000

boats

Selling and administrative costs Fixed Variable

$300,000 $8

per boat sold

The boat sells for $60. Management is interested in the first year's results and has asked for an income statement.  Instructions

(a) Assuming the company uses absorption costing: 1. Calculate the production cost per unit. 2. Prepare an income statement for 2012.

(b) Assuming the company uses variable costing: 1. Calculate the production cost per unit. 2. Prepare an income statement for 2012.

(c) Reconcile the difference in net income between the absorption-costing and variablecosting methods. (d) Assuming the company uses throughput costing: 1. Calculate the manufacturing cost per unit.

2. Prepare a throughput-costing income statement for 2012.

(e) Reconcile the difference in net income between the variable-costing and throughputcosting methods.

Calculate *P8-37B Information for SpongeFun Products is provided in P8-36B. the  Instructions product cost and (a) Assume the company uses normal costing and uses the budgeted volume of 60,000 prepare an units to allocate the fixed overhead rate rather than the actual production volume of income 50,000 units. The company expenses production volume variance to cost of goods statement sold in the accounting period in which it occurs. Do the following: under normal 1. Calculate the manufacturing cost per unit. costing. 2. Prepare a normal-costing income statement for 2012.

(b) Reconcile the difference in net income between the absorption-costing and normalcosting methods. Prepare P8-38B Zaki Metal Company produces the steel wire that is used for the production of paper clips. income In 2012, the first year of operations, Zaki produced 60,000 km of wire and sold 50,000 statement km. In 2013, the production and sales results were exactly reversed. In each year, the s under selling price per kilometre was $120; variable manufacturing costs were 25% of the sales absorptio price of the units produced; variable selling expenses were $9 per kilometre sold; fixed n costing manufacturing costs were $1.5 million; and fixed administrative expenses were $300,000. and  Instructions variable costing (a) Prepare comparative income statements for each year using variable costing. (Use the for a format from Illustration 8-5.) company (b) Prepare comparative income statements for each year using absorption costing. (Use with the format from Illustration 8-4.) beginning (c) Reconcile the differences for each year in income from operations under the two inventory. costing approaches. (d) Comment on the effects that the production and sales levels have on net income under the two costing approaches.

Prepare P8-39B Harrison Pumps is a division of Liverpool Controls Corporation. The division absorption manufactures and sells a pump that is used in a wide variety of applications. During the -and coming year, it expects to sell 60,000 units for $20 per unit. Imran Qureshi manages the variabledivision. He is considering producing either 60,000 or 100,000 units during the period. costing Other information is as follows: income Division Information for 2012 statements; reconcile Beginning inventory 0 the Expected sales in units 60,000 differences between Selling price per unit $20 the two Variable manufacturing cost $9 income per unit statements when sales Fixed manufacturing overhead $240,000 and cost (total) production Fixed manufacturing overhead levels costs per unit change; discuss the Based on 60,000 units $4.00 per unit usefulness of the two Based on 100,000 units $2.40 per unit approaches to costing. Manufacturing cost per unit Based on 60,000 units

$13

per unit

Based on 100,000 units

$11.40

per unit

Variable selling and administrative expenses Fixed selling and administrative expenses (total)  Instructions

$1 $30,000

per unit

(a) Prepare an absorption-costing income statement, with one column showing the results if 60,000 units are produced and one column showing the results if 100,000 units are produced. (b) Prepare a variable-costing income statement, with one column showing the results if 60,000 units are produced and one column showing the results if 100,000 units are produced. (c) Reconcile the difference in net incomes under the two approaches and explain what causes this difference. (d) Discuss the usefulness of the variable-costing income statements versus the absorption-costing income statements for decision-making and for evaluating the manager's performance.

Calculate *P8-40B the product cost, prepare income statements under variable costing and absorption costing, and reconcile the differences when sales and production levels change.

Allerdyce Corporation Ltd. (ACL) prepares external financial statements using absorption costing and internal financial statements using variable costing. You have the following information for the operations of ACL for the past two years:  

2011

2012

Sales in units (@ $35 per unit)

25,000

35,000

Production in units

30,000

30,000

$ 20

$ 20

Fixed production costs

$120,000

$120,000

Fixed marketing costs

$ 50,000

$ 50,000

Variable production costs per unit

Beginning inventory

0

 Instructions

(a) Prepare absorption-costing income statements for the years ended December 31, 2011, and 2012. Include a column for totals for the two years. (b) Prepare variable-costing income statements for the years ended December 31, 2011, and 2012. Include a column for totals for the two years. (c) Reconcile the year-to-year differences in net income under the absorption-costing and variable-costing methods.

Calculate P8-41B the product cost, prepare income statements under variable costing and absorption costing, and reconcile the differences when sales and production levels change.

The vice-president of Abscorp Ltd. is not happy. Sales have been rising steadily, but profits have been falling. In September 2012, Abscorp had record sales, but the lowest profits ever. The results for the months of July, August, and September 2012 follow: ABSCORP LTD. Comparative Monthly Income Statements (in thousands) July Sales (@ $25 per unit)

August

September

$1,750

$1,875

$2,000

80

320

400

Variable manufacturing (@ $9 per unit)

765

720

540

Fixed manufacturing overhead

595

560

420

1,360

1,280

960

1,440

1,600

1,360

Less ending inventory

320

400

80

Cost of goods sold

1,120

1,200

1,280

(35)

0

140

1,085

1,200

1,420

Gross margin

665

675

580

Less selling and administrative expenses

620

650

680

$ 45

$ 25

Less cost of goods sold Opening inventory Costs applied to production

Cost of goods manufactured Goods available for sale

Underapplied (overapplied) fixed overhead Adjusted cost of goods sold

Net income (loss)

$ (100)

You have been asked to explain to the vice-president that the problem is more a matter of appearance than reality by reinterpreting the results in a variable-costing format. You obtain the following information that will help you:   Production

July

August

September

85,000 units

80,000 units

60,000 units

  Sales

July

August

September

70,000

75,000

80,000

Additional information about the company's operations is as follows: • There were 5,000 units of finished goods in the opening inventory on July 1, 2012. • Fixed manufacturing overhead costs totalled $1,680,000 per quarter and were

incurred evenly throughout the quarter. The fixed manufacturing overhead cost is applied to the units of production based on a budgeted production volume of 80,000 units per month. • Variable selling and administrative expenses are $6 per unit sold. The remaining selling and administrative expenses on the comparative monthly income statements are fixed. • The company uses a FIFO cost flow assumption. Work in process inventories are small enough to be ignored.  Instructions

(a) Calculate the monthly break-even point under variable costing. (b) 1. Calculate the net income for each month under variable costing. 2. Reconcile the variable-costing and absorption-costing net incomes for each

month. 3. Explain why profits have not been more closely related to changes in the sales volume. (adapted from CGA Canada) Calculate P8-42B Boat Refit Inc. produces and sells custom parts for powerboats. The company uses a the product costing system based on actual costs. Selected accounting and production information for cost fiscal 2012 is as follows: contributio Net income (under absorption costing) $ 400,000 n margin under Sales $3,400,000 variable Fixed factory overhead $ 600,000 costing and the gross Fixed selling and administrative costs (all costs are fixed) $ 400,000 margin Net income (under variable costing) $ 310,000 under absorption Units produced 2,000 costing. Units sold ? Boat Refit had no work in process inventory at either the beginning or the end of fiscal 2012. As well, the company did not have any finished goods inventory at the beginning of  the fiscal year.  Instructions

(a) Calculate the units sold in fiscal 2012. (b) Calculate the total contribution margin under variable costing. (c) Calculate the gross margin under absorption costing. (d) Calculate the cost per unit sold under variable costing. (e) Calculate the cost per unit sold under absorption costing. (adapted from CGA Canada)

Prepare an P8-43B income statement under variable costing; discuss the advantage s of variable costing over absorption costing.

Wingfoot Co. began operations on July 1, 2011. By the end of its first fiscal year, ended June 30, 2012, Wingfoot had sold 10,000 wingers. Selected data on operations for the year ended June 30, 2012, follow. (Any balance sheet figures are as at June 30, 2012.) Selling price Wingers produced Ending work in process Total manufacturing overhead Wage rate Machine hours used Wages payable Direct materials costs Selling and administrative expenses

$100 18,000 0 $15,000 $8

per hour

9,000 $20,000 $10

per kilogram

$40,000

Additional information: 1. Each winger requires 2 kg of direct materials, 0.5 machine hours, and one direct

labour hour. 2. Except for machinery depreciation of $5,000 and a $1,000 miscellaneous fixed cost, all manufacturing overhead is variable. 3. Except for $4,000 in advertising expenses, all selling and administrative expenses are variable. 4. The tax rate is 40%.

 Instructions

Assume that the company uses variable costing and prepare a contribution-method income statement in good form for the year ended June 30, 2012. (adapted from CGA Canada)

Calculate P8-44B the product cost; prepare income statements under variable costing and absorption costing, and reconcile the difference s when sales and production levels change; discuss the usefulness of absorption costing versus

Portland Optics, Inc., specializes in manufacturing lenses for large telescope cameras used in space exploration. Since the specifications for the lenses are determined by the customer and vary considerably, the company uses a job-order costing system. It applies factory overhead to jobs based on direct labour hours using the absorption (full) costing method. Portland's predetermined overhead rates for 2011 and 2012 were based on the following estimates:   Direct labour hours

2011

2012

32,500

44,000

Direct labour cost

$325,000

$462,000

Fixed factory overhead

$130,000

$176,000

Variable factory overhead

$162,500

$198,000

Marie-Michelle David, Portland's controller, would like to use variable costing for internal reporting since she believes statements prepared using variable costing are more appropriate for making product decisions. In order to explain the benefits of variable costing to the other members of Portland's management team, Marie-Michelle plans to convert the company's income statement from absorption costing to variable costing. She has gathered the following information, along with a copy of Portland's comparative income statement for the years 2011 and 2012.

variable costing.

PORTLAND OPTICS, INC. Comparative Income Statement Years 2011–2012  

2011

Net sales

2012

$1,140,000

$1,520,000

16,000

25,000

Cost of goods manufactured

720,000

976,000

Total available

736,000

1,001,000

25,000

14,000

711,000

987,000

12,000

7,000

Cost of goods sold

723,000

994,000

Gross profit

417,000

526,000

Selling expenses

150,000

190,000

Administrative expenses

160,000

187,000

310,000

377,000

$ 107,000

$ 149,000

Cost of goods sold Finished goods, January 1

Finished goods, December 31 Cost of goods sold before overhead adjustment Overhead adjustment

Total operating expenses Operating income

Portland's actual manufacturing data for the two years are as follows:   Direct labour hours

2011

2012 30,000

42,000