For 2011, Nichols, Inc., had sales of 150,000 units and production of 200,000 units. Other information for the year included:

1)        For 2011, Nichols, Inc., had sales of 150,000 units and production of 200,000 units. Other information for the year included:

Direct manufacturing labor	$187,500
Variable manufacturing overhead	100,000
Direct materials	150,000
Variable selling expenses	100,000
Fixed administrative expenses	100,000
Fixed manufacturing overhead	200,000
There was no beginning inventory.

Required:

a.         Compute the ending finished goods inventory under both absorption and variable costing.

b.        Compute the cost of goods sold under both absorption and variable costing.

Answer:
a.                                                        Absorption	Variable
Direct   materials                             $150,000	$150,000
Direct  manufacturing  labor             187,500	187,500
Variable  manufacturing  overhead   100,000	100,000
Fixed  manufacturing  overhead        200,000	0
Total                                    $637,500	$437,500

Unit costs:

$637,500/200,000   units       $3.1875

$437,500/200,000   units                               $2.1875

Ending inventory:

50,000  units × $3.1875      $159,375

50,000  units × $2.1875                              $109,375

b.   Cost of goods sold:

150,000  ×  $3.1875            $478,125

150,000  ×  $2.1875                                    $328,125

Diff: 2

Terms:  variable costing, absorption costing

Objective: 1

AACSB:  Analytical skills

2)        Bressler Company sells its products for $33 each. The current production level is 50,000 units, although only 40,000 units are anticipated to be sold.

Unit manufacturing costs are:
Direct materials	$6.00
Direct manufacturing labor	$9.00
Variable manufacturing costs	$4.50
Total fixed manufacturing costs	$180,000
Marketing expenses	$3.00 per unit, plus $60,000 per year

Required:

a.         Prepare an income statement using absorption costing.

b.        Prepare an income statement using variable costing.

Answer: a.   Absorption-costing income statement:
Sales (40,000 × $33)	$1,320,000
Cost of goods sold (40,000 × $23.10*)	924,000
Gross margin	396,000
Marketing: Variable  (40,000 × $3)                        $120,000 Fixed                                                          60,000	180,000
Operating income	$216,000
* $6.00 + $9.00 + $4.50 + ($180,000/50,000) = $23.10
b.   Variable-costing income statement:
Sales (40,000 × $33) Variable costs: Cost of goods sold (40,000  × $19.50*)     $780,000 Marketing  (40,000 × $3)                             120,000	$1,320,000 900,000
Contribution margin Fixed costs: Manufacturing                                       $180,000 Marketing                                                  60,000	420,000 240,000
Operating income	$180,000
* $6.00 + $9.00 + $4.50 = $19.50 Diff: 2 Terms: variable costing, absorption costing Objective: 2 AACSB:  Analytical skills

3)        Ireland Corporation planned to be in operation for three years.

∙             During the first year, 20x1, it had no sales but incurred $240,000 in variable manufacturing expenses and $80,000 in fixed manufacturing expenses.

∙             In 20x2, it sold half of the finished goods inventory from 20x1 for $200,000 but it had no manufacturing costs.

∙             In 20x3, it sold the remainder of the inventory for $240,000, had no manufacturing expenses and went out of business.

∙             Marketing and administrative expenses were fixed and totaled $40,000 each year.

Required:

a.         Prepare an income statement for each year using absorption costing.

a.   Absorption-costing income statements: 20X1 20X2 20X3 Sales                                                      $0 $200,000 $240,000 Cost  of goods sold                                0 160,000 160,000 Gross   margin                                        0 40,000 80,000 Marketing  and  administrative     40,000 40,000 40,000 Operating   income                   $(40,000) $ 0 $40,000 b.   Variable-costing income statements: 20X1 20X2 20X3 Sales                                                     $ 0 $200,000 $240,000 Variable   expenses                                 0 120,000 120,000 Contribution   margin                             0 80,000 120,000 Fixed expenses: Manufacturing                       $80,000 $ 0 $ 0 Marketing and administrative 40,000 40,000 40,000 Total   fixed                           120,000 40,000 40,000 Operating   income                 $(120,000) $40,000 $80,000

Prepare an income statement for each year using variable costing.