1)
Jarvis Golf Company sells a special
putter for $20 each. In March, it sold 28,000 putters while manufacturing 30,000. There was no beginning inventory on
March 1. Production information for March was:
Direct manufacturing labor per unit 15 minutes
|
Fixed selling and administrative costs
|
$
40,000
|
|
Fixed manufacturing overhead
|
132,000
|
|
Direct materials cost per unit
|
2
|
|
Direct manufacturing labor per
hour
|
24
|
|
Variable manufacturing overhead per unit
|
4
|
|
Variable selling expenses per unit
|
2
|
|
Required:
|
|
a.
Compute the cost per unit under both
absorption and variable costing.
b.
Compute the ending inventories under both
absorption and variable costing.
c.
Compute operating income under both absorption
and variable costing.
Answer:
a. Absorption Variable
Direct manufacturing labor ($24/4) $ 6.00 $
6.00
Direct materials 2.00 2.00
Variable
manufacturing
overhead 4.00 4.00
Fixed manufacturing
overhead ($132,000/30,000) 4.40 0
Total cost per unit $16.40 $12.00
b. Absorption Variable
Beginning inventory $0 $0
Cost of goods manufactured:
30,000 × $16.40 $492,000
30,000 × $12.00
$360,000
Cost
of goods available for sale $492,000 $360,000
Cost of goods sold:
28,000 × $16.40 $459,200
28,000
×
$12.00 $336,000
Ending inventory $ 32,800 $
24,000
c.
Absorption-costing
income statement:
Sales (28,000 × $20) $560,000
Cost of
goods sold (28,000 × $16.40) 459,200
Gross margin 100,800
Less:
Variable selling and administrative $56,000
Fixed selling and administrative 40,000 96,000
Operating income $ 4,800
Variable-costing
income statement:
Sales (28,000 × $20) $560,000
|
Variable
COGS (28,000 × $12)
|
$336,000
|
|
|
Variable selling expenses (28,000
× $2)
|
56,000
|
392,000
|
|
Contribution margin Fixed costs:
Manufacturing
|
$132,000
|
168,000
|
|
Selling and administrative
|
40,000
|
172,000
|
|
Operating income
|
|
$ (4,000)
|
Diff: 2
Terms: variable costing,
absorption costing Objective: 2
AACSB: Analytical
skills
2)
Johnson Realty bought a 2,000-acre island
for $10,000,000 and divided it into 200 equal size lots. As the lots are sold, they are cleared at an average cost
of $5,000.
Storm drains and driveways are
installed at an average cost of $8,000 per site.
Sales commissions are 10% of selling price.
Administrative costs are $850,000
per year.
The average selling price was
$160,000 per lot during 20X5 when 50 lots were
sold.
During 20X6, the company bought
another 2,000-acre island and developed it exactly the same way. Lot sales in 20X6 totaled 300 with an
average selling price of $160,000. All costs were the same as in 20X5.
Required:
Prepare income statements for both years using both absorption and
variable costing methods.
|
Answer: Cost per site:
|
Absorption
|
Variable
|
|
Land cost $10,000,000/200 sites
|
$50,000
|
$0
|
|
Clearing costs
|
5,000
|
5,000
|
|
Improvements
|
8,000
|
8,000
|
|
Total
|
$63,000
|
$13,000
|
|
Absorption-costing
income statements:
|
20X5
|
20X6
|
|
Sales
Cost of goods sold:
50
× ($50,000 + $8,000 + $5,000)
|
$8,000,000
3,150,000
|
$48,000,000
|
|
300 × ($50,000 + $8,000 + $5,000)
|
|
18,900,000
|
|
Gross margin
|
$4,850,000
|
$29,100,000
|
|
Variable marketing
|
800,000
|
4,800,000
|
|
Fixed administrative
|
850,000
|
850,000
|
|
Operating income
|
$3,200,000
|
$23,450,000
|
|
Variable-costing
income statements:
|
20X5
|
20X6
|
|
Sales
Variable expenses: Cost of operations:
|
$8,000,000
|
$48,000,000
|
|
50 × $13,000
300 × $13,000
|
650,000
|
3,900,000
|
|
Selling expenses
|
800,000
|
4,800,000
|
|
Contribution margin Fixed expenses:
Land
|
$6,550,000
10,000,000
|
$39,300,000
10,000,000
|
|
Administrative
|
850,000
|
850,000
|
|
Operating income Diff: 3
|
$(4,300,000)
|
$28,450,000
|
Terms: variable costing,
absorption costing Objective: 2
AACSB: Analytical
skills
3)
Kaiser Company just hired its fourth
production manager in three years. All three previous managers had quit because they could not get the company above
the break-even point, even though sales had increased somewhat each year. The
company was operating at about 60 % of plant capacity. The flatware industry
was growing, so increased sales were not out of the question.
I. R. Thinking took the job as
manager of the production division with a very attractive salary package. After
interviewing for the position, he proposed a salary and bonus package that
would give him a very small salary but a large bonus if he took the operating
income (using absorption costing) above the breakeven point during his very
first year.
Required:
What do you think Mr. Thinking had
in mind for increasing the company's operating income? Answer: Mr. Thinking
realized that he could probably increase both production and sales during the
coming year. If he substantially overproduced he knew that the extra costs
would be hidden in unsold
inventory. If the new production
level could be sold by the sales force in the growing market, the profits would increase anyway and
everybody would be happy.
Also, he could combine increased
production with reduced fixed manufacturing costs such as maintenance. In the
short run, several combinations could be undertaken by Mr. Thinking to ensure that the profit picture would improve.
Diff: 3
Terms: absorption costing Objective: 3
AACSB: Ethical reasoning
4)
Explain three methods under absorption
costing that managers can use to improve operating income. Answer: 1) A plant manager may switch to manufacturing
products that absorb the highest amount of fixed manufacturing costs,
regardless of the demand for the product.
2) A plant
manager may accept a particular order to increase production, even though
another plant in the same company may be better suited to handle the order.
3) To
increase production, a manager may defer maintenance beyond the current period. Diff: 3
Terms: absorption costing
Objective: 3
AACSB: Reflective
thinking
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