Problem 19-2B (25 minutes)
Part 1
E’LONTE COMPANY
Variable Costing Income Statement
Sales (250,000 x $18)…………….……………………….….….….….… $4,500,000
Variable expenses
Variable production costs (250,000 x $6*)…..…..….….….…..$1,500,000
Variable selling & admin. expenses (250,000 x $4)……..….. 1,000,000
Total variable expenses…………………………………………….….. 2,500,000
Contribution margin…………………………..…………………………… 2,000,000
Fixed expenses
*Direct materials…………………………………….. $2.00 per unit
Direct labor………………………………..……….… $2.40 per unit
Variable overhead………………….…………...… $1.60 per unit
Total variable production costs…..…………. $6.00 per unit
Part 2
Absorption costing income is $75,000 more than variable costing income.
Problem 19-3B (30 minutes)
Part 1
Yes, it is possible for the company to report a net income by increasing its
production to 300,000 lbs. and storing the excess inventory. The following
absorption costing income statement shows this.
CHEM-MELT
Income Statement (Absorption Costing)
Sales (250,000 lbs. x $8 per lb.)……………..……………….…………..….….….….$2,000,000
Cost of goods sold (250,000 lbs. x $6 per lb.*)…………..….….….….….….… 1,500,000
*Variable production costs (300,000 lbs. x $2 per lb.).……....... $ 600,000
Fixed production costs…………………………………………………….. 1,200,000
Total production costs…………………………………….…..…………… $1,800,000
Absorption cost per ton ($1,800,000 / 300,000 lbs.)…………..… $6.00 per lb.
Chem-Melt can increase its income by $200,000 by producing 50,000
sold in a future period.
Part 2
Whether the company should produce the extra 50,000 pounds depends on
a number of factors.
It would be unethical to produce the extra 50,000 pounds just to raise
Serial Problem — SP 19
Part 1 (a and b)
BUSINESS SOLUTIONS
Absorption Costing Income Statements
Forecasted for Year Ended 2016
Workstations produced
(a) 300 (b) 320
Sales (300 x $3,000)……………….………………….…..….….. $900,000 $900,000
Cost of goods sold (300 x $1,380*);(300 x $1,375**).….…. 414,000 412,500
* Absorption costing cost per unit for 300 units produced:
Direct materials…………………………..………….. $ 800 per unit
Direct labor……………………………………….……. 400 per unit
Variable overhead………………..…………….…… 100 per unit
Fixed overhead ($24,000/300 units)…….……. 80 per unit
Total cost per unit……………………..…………….$1,380 per unit
** Absorption costing cost per unit for 320 units produced:
Fixed…………………………..…………….……..……. 4,000
Total selling expenses………………..….…….….$ 19,000
Serial Problem SP-19 (Concluded)
Part 2 (a and b)
BUSINESS SOLUTIONS
Variable Costing Income Statements
Forecasted for Year Ended 2016
Workstations produced
(a) 300 (b) 320
Sales (300 x $3,000)……………….……………………….…..….$900,000 $900,000
Variable expenses
Variable cost of goods sold (300 x $1,300*)……….…. 390,000 390,000
Total fixed expenses………………..….…..….….….….…... 28,000 28,000
Net income……………..…………………..……….….….….….….$467,000 $467,000
*Variable costing cost per unit:
Direct materials………………………..….…………..$ 800 per unit
Direct labor……………………………………………... 400 per unit
Variable overhead………………..………………….. 100 per unit
Total cost per unit…………………………………….$1,300 per unit
Part 3
For absorption costing, her income is increased by $1,500 if she produces
the extra 20 units. This is equal to 20 units x $75 per unit in fixed overhead
that will be attached to the ending inventory. Variable costing income will
be $467,000 no matter how many units are produced, as all fixed overhead
Reporting in Action — BTN 19-1
1. Apple’s ending inventory increased in each of the years 2013 and 2012.
All else equal, this means more fixed overhead costs remain in ending
2. One goal of just-in-time (JIT) inventory systems is to reduce the level of
inventory. Since the difference in income between variable costing and
Comparative Analysis — BTN 19-2
1. The costs that Google must consider include variable overhead, such as
miscellaneous supplies, and any new fixed costs that must be incurred
2. In this case, absorption costing is probably more useful because of the
likelihood of the additional fixed costs that will be incurred in a start-up
operation.
Ethics Challenge — BTN 19-3
1. FDP Company must use absorption costing to determine its income for
external reporting purposes. Absorption costing “absorbs” both
variable and fixed manufacturing costs into each unit of inventory. FDP
2. Yes, there is an ethical concern. If the company produces excess
inventory it cannot sell, it will spend resources unnecessarily. The
company’s financial position will appear better than it really is, and
stockholders will be deceived as to the company’s performance.
Prudent stockholders or potential stockholders should closely examine
Communicating in Practice — BTN 19-4
MEMORANDUM
TO: ____________________
FROM: ____________________
DATE: ____________________
SUBJECT: ____________________
Break-even volume is determined by dividing total fixed expenses by the
The reason that Mertz’s income statement shows income of $264,000 is
because they prepare their income statement using absorption costing,
Taking It to the Net — BTN 19-5
1. This requires that students print out the required page.
3. According to the website:
If beginning and ending inventory levels are equal: absorption
costing profit = variable costing profit;
Teamwork in Action — BTN 19-6
Answers will vary, but students’ answers should center on several issues:
In the long run, companies must recover all costs of production, fixed as
well as variable. Long-run pricing must consider the full absorption cost
of the product.
Variable costing information is less likely to lead managers to
overproduce. While companies may overproduce in the short run in
resources tied up in inventory.
Entrepreneurial Decision — BTN 19-7
1. Happy Family Brands’s income measured under absorption costing
probably would be about the same as its income measured under
variable costing. The difference in income between these two methods
Hitting the Road — BTN 19-8
1. Many answers are possible, but variable costs with respect to
2. Fixed costs would include: Salary of hotel manager; wages of front desk
3. It is likely that the fixed costs will far outweigh the variable costs. Most
4. During low occupancy seasons, the hotel would like to have paying
Global Decision— BTN 19-9
If Samsung buys an entire business, its managers will be interested in the
Of course, if Samsung decides to expand or contract the service business,