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Exercise 6-1 (15 minutes)
- Under absorption costing, all manufacturing costs (variable and fixed) are included in product costs. (All currency values are in thousands of rupees, denoted by R.)
Direct materials ................................................................. R Direct labor ....................................................................... 140
Variable manufacturing overhead ........................................ 50 Fixed manufacturing overhead (R600,000 ÷ 10,000 units) .... 60 Absorption costing unit product cost.................................... R
- Under variable costing, only the variable manufacturing costs are included in product costs. (All currency values are in thousands of rupees, denoted by R.) Direct materials ................................. R Direct labor ....................................... 140 Variable manufacturing overhead ........ 50 Variable costing unit product cost........ R Note that selling and administrative expenses are not treated as product costs under either absorption or variable costing. These expenses are always treated as period costs and are charged against the current period’s revenue.
Exercise 6-2 (20 minutes)
- 2,000 units in ending inventory × R60 fixed manufacturing overhead per unit = R120,000.
- The variable costing income statement appears below:
Sales................................................. R4,000, Variable expenses: Variable cost of goods sold (8,000 units × R310 per unit) ........ R2,480, Variable selling and administrative (8,000 units × R20 per unit) .......... 160,000 2,640, Contribution margin ........................... 1,360, Fixed expenses: Fixed manufacturing overhead.......... 600, Fixed selling and administrative ........ 400,000 1,000, Net operating income ......................... R 360, The difference in net operating income between variable and absorption costing can be explained by the deferral of fixed manufacturing overhead cost in inventory that has taken place under the absorption costing approach. Note from part (1) that R120,000 of fixed manufacturing overhead cost has been deferred in inventory to the next period. Thus, net operating income under the absorption costing approach is R120,000 higher than it is under variable costing
Exercise 6-4 (10 minutes)
Total CD DVD Sales* ............................................... $750,000 $300,000 $450, Variable expenses** ........................... 435,000 120,000 315, Contribution margin ........................... 315,000 180,000 135, Traceable fixed expenses .................... 183,000 138,000 45, Product line segment margin............... 132,000 $ 42,000 $ 90, Common fixed expenses not traceable to products ..................................... 105, Net operating income ......................... $ 27,
CD: 37,500 packs × $8.00 per pack = $300,000; DVD: 18,000 packs × $25.00 per pack= $450,000. CD: 37,500 packs × $3.20 per pack = $120,000; DVD: 18,000 packs × $17.50 per pack= $315,000.
Exercise 6-6 (20 minutes)
- The company is using variable costing. The computations are:
Variable Costing
Absorption Costing Direct materials ............................. $10 $ Direct labor ................................... 5 5 Variable manufacturing overhead .... 2 2 Fixed manufacturing overhead ($90,000 ÷ 30,000 units) ............. — 3 Unit product cost ........................... $17 $ Total cost, 5,000 units .................... $85,000 $100,
- a. No, $85,000 is not the correct figure to use, because variable costing is not generally accepted for external reporting purposes or for tax purposes.
b. The finished goods inventory account should be stated at $100,000, which represents the absorption cost of the 5, unsold units. Thus, the account should be increased by $15, for external reporting purposes. This $15,000 consists of the
amount of fixed manufacturing overhead cost that is allocated to the 5,000 unsold units under absorption costing (5,000 units × $3 per unit fixed manufacturing overhead cost = $15,000).
Less variable expenses: Variable cost of goods sold (16,000 units × $27 per unit) ................. $432, Variable selling expense (16,000 units × $2 per unit) ................... 32,000 464, Contribution margin .................................... 336, Less fixed expenses: Fixed manufacturing overhead................... 200, Fixed selling and administrative ................. 110,000 310, Net operating income .................................. $ 26,
Exercise 6-7 (continued)
- The price increase appears to be a good idea from an absorption costing perspective because it increases net operating income by $4,000, but a variable costing income statement reveals that the price increase would actually decrease net operating income by $6,000. The income statements are shown below:
The absorption costing income statement: Sales (15,000 units × $51 per unit) .......................... $765, Cost of goods sold (15,000 units × $37 per unit)....... 555, Gross margin .......................................................... 210, Selling and administrative expenses [(15,000 units × $2 per unit) + $110,000] ............. 140, Net operating income .............................................. $ 70, The variable costing income statement: Sales (15,000 units × $51 per unit) .............. $765, Less variable expenses: Variable cost of goods sold (15,000 units × $27 per unit) ................. $405, Variable selling expense (15,000 units × $2 per unit) ................... 30,000 435, Contribution margin .................................... 330, Less fixed expenses: Fixed manufacturing overhead................... 200, Fixed selling and administrative ................. 110,000 310, Net operating income .................................. $ 20,
- The break-even point in units sold can be computed using the contribution margin per unit as follows: Selling price per unit .................... $ Variable cost per unit ................... 120
Contribution margin per unit ......... $ 80 Break-even unit sales = Fixed expenses ÷ Unit contribution margin = $750,000 ÷ $80 per unit = 9,375 units Exercise 6-10 (20 minutes)
- Under absorption costing, all manufacturing costs (variable and fixed) are included in product costs. Direct materials ................................. $ 60 Direct labor ....................................... 30 Variable manufacturing overhead ........ 10 Fixed manufacturing overhead ($300,000 ÷ 10,000 units) ............... 30 Unit product cost ............................... $
- The absorption costing income statement appears below:
Sales (9,000 units × $200 per unit) .............................. $1,800, Cost of goods sold (9,000 units × $130 per unit)........... 1,170, Gross margin .............................................................. 630, Selling and administrative expenses (9,000 units × $20 per unit) + $450,000 .................... 630, Net operating income .................................................. $ 0 Note: The company apparently has exactly zero net operating income even though its sales are below the break-even point computed in Exercise 6-9. This occurs because $30,000 of fixed manufacturing overhead has been deferred in inventory and does not appear on the income statement prepared using absorption costing.
