Exercise 19-10 (15 minutes)
Reconciliation of variable costing income to absorption costing income:
Year 1
Year 2
Year 3
Variable costing income……………………….….
$110,000
$114,400
$118,950
Fixed overhead in ending inventory* …….…………………….
3,000
1,750
2,000
Fixed overhead in beginning inventory* .…………………………
_______
(3,000)
(1,750)
Absorption costing income ………………….……….
$113,000
$113,150
$119,200
*Computed as $2.50 per unit x the number of units in inventory
Exercise 19–11 (15 minutes)
Per unit
Direct materials ……………………………………………………………………………….
$100
Direct labor …………………………………………………………………………….……..
30
Variable overhead …………………………………………………………………..……….
8
Fixed overhead ($600,000/50,000 units) …………………………………………….
12
Total production cost using absorption costing …………………………..
$150
Target profit ($150 x 40%)……………………………………………… 60
Target selling price ……………………………………………………… $210
Exercise 19-12 (10 minutes)
Fixed overhead per unit at 60,000 unit level =
60,000
$720,000
= $12 per unit
$720,000
Exercise 19-13 (15 minutes)
Expected contribution margin from Bikers’ Club offer:
Revenue (50 suites x 3 nights x $125 per night) ………………………..…
$18,750
Variable costs (50 suites x 3 nights x $30 per night) …………………..……..
4,500
Contribution margin …………………………………………………………………………
$14,250
As long as there are no additional fixed costs (additional staff that must be
hired to see to the extra customers, for instance), and as long as no
customers who would otherwise pay the full $250 per night are turned
away, the hotel will realize a $14,250 increase in profits.
Exercise 19–14 (15 minutes)
Expected contribution margin from JSA convention offer:
Revenue (100 rooms x 4 nights x $150 per night) …………………………..
$60,000
Variable costs (100 rooms x 4 nights x $40 per night) ……………….………
16,000
Contribution margin …………………………………………………………………………
$44,000
As long as there are no additional fixed costs (additional staff that must be
hired to see to the extra customers, for instance), and as long as no
customers who would otherwise pay the full $300 per night are turned
away, the hotel will realize a $44,000 increase in profits.
Exercise 19–15 (10 minutes)
Memo to: Manager, MidCoast Airlines
Subject: International student group
Assuming that the fixed costs identified by MidCoast Airlines are allocated
Exercise 19–16 (15 minutes)
Part 1
Operating income is growing faster in the Europe segment than in the U.S.
2013.
Part 2
No, the difference in operating income growth between the segments is not
due to the use of different costing methods. McDonald’s follows U.S. GAAP
Problem 19-1A (45 minutes)
Part 1
DOWELL COMPANY
Variable Costing Income Statements
2014
2015
Sales ($46 per unit sold)………………………………………….………
$920,000
$1,840,000
Variable expenses
Variable production costs ($21 per unit sold*) ……………….
420,000
840,000
Variable sell. & admin. costs ($2.50 per unit sold) ………….
50,000
100,000
Total variable costs ……………………………………………..……….
470,000
940,000
Contribution margin ……………………………………………………….
450,000
900,000
Fixed expenses
Factory overhead …………………………..…………………….…….
300,000
300,000
Fixed selling & administrative costs ……………………..……
240,000
240,000
Total fixed expenses…………………………..………………..……….
540,000
540,000
Net income …………………………..………………………………..……….
$(90,000)
$ 360,000
*$5 + $9 + $7 = $21
Part 2
DOWELL COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
2014
2015
Variable costing income………………………………………………….
$(90,000)
$360,000
Fixed overhead in ending inventory (10,000 x $10) ……….….
100,000
Fixed overhead in beginning inventory (10,000 x $10) ….….
_______
(100,000)
Absorption costing income …………………………………………….
$ 10,000
$260,000
Problem 19-2A (25 minutes)
Part 1
TREZ COMPANY
Variable Costing Income Statement
Sales (80,000 x $50) …………………………..…………………..
$4,000,000
Variable expenses
Variable production costs (80,000 x $21*) ……………..
$1,680,000
Variable sell. & adm. expenses (80,000 x $2.25) …....
180,000
Total variable expenses …………………………..…………..
1,860,000
Contribution margin ……………………………………………...
2,140,000
Fixed expenses
Fixed manufacturing costs …………………………………..
900,000
Fixed selling & administrative expenses ……………....
350,000
Total fixed expenses…………………………..………………..
1,250,000
Net income …………………………..………………………………..
$ 890,000
*Direct materials …………………………………………….…….
$ 5 per unit
Direct labor …………………………………………………..…..
$14 per unit
Variable overhead ………………………………………….…….
$ 2 per unit
Total variable production costs …………………………..
$21 per unit
Part 2
Absorption costing income is $180,000 more than variable costing income.
This is because there are 20,000 units in ending inventory which have $9
per unit in fixed overhead attached to them. Under variable costing all of
the fixed overhead is expensed. Under absorption costing, only the portion
of the fixed overhead attached to the units sold is expensed.
Problem 19-3A (30 minutes)
Part 1
Yes, it is possible for the company to report a net income by increasing its
production to 100 tons and storing the excess inventory. The following
absorption costing income statement shows this.
BLAZER CHEMICAL
Income Statement
Sales (60 tons x $21,000 per ton) …………………………………………….………..
$1,260,000
Cost of goods sold (60 tons x $11,000 per ton*) ……………………….….
660,000
Gross margin ………………………………………………………………………….………..
600,000
Selling and administrative expenses ……………………………………….………..
318,600
Net income …………………………..……………………………………………………….
$ 281,400
*Variable production costs (100 tons x $3,500 per ton) ……….
$ 350,000
Fixed production costs……………………………………………………
750,000
Total production costs ……………………………………………………
$1,100,000
Absorption cost per ton ($1,100,000 / 100 tons) …………………
$11,000 per ton
Blazer Chemical can increase its income by $300,000 by producing 40 tons
more than it sells. Each of the 40 tons in inventory will carry $7,500 in fixed
overhead ($750,000/100 tons). 40 tons times $7,500 per ton equals the
$300,000 in fixed overhead that is not expensed in the current period. It will
be expensed when the chemical is sold in a future period.
Problem 19-3A (concluded)
Part 2
Whether the company should produce the extra 40 tons depends on a
number of factors.
Problem 19-1B (45 minutes)
Part 1
AZULE COMPANY
Variable Costing Income Statements
2014
2015
Sales ($35 per unit sold)………………………………………...
$1,925,000
$2,275,000
Variable expenses
Variable production costs ($18 per unit sold*) ……...
990,000
1,170,000
Variable selling & admin. costs ($3 per unit sold) …..
165,000
195,000
Total variable costs …………………………..………………...
1,155,000
1,365,000
Contribution margin ……………………………………………...
770,000
910,000
Fixed expenses
Factory overhead …………………………..…………………....
480,000
480,000
Fixed selling & administrative costs ……………………..
300,000
300,000
Total fixed expenses…………………………..………………..
780,000
780,000
Net income (loss) …………………………..……………………...
$ (10,000)
$ 130,000
*$4+ $6 + $8 = $18
Part 2
AZULE COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
2014
2015
Variable costing income…………………………………………..
$(10,000)
$130,000
Fixed overhead in ending inventory (5,000 x $8) ……….
40,000
Fixed overhead in beginning inventory (5,000 x $8) ….
_______
(40,000)
Absorption costing income ……………………………………..
$ 30,000
$ 90,000
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
Fixed manufacturing costs …………………………………..……….
450,000
Fixed selling & administrative expenses ……………….……….
1,200,000
Total fixed expenses…………………………..………………..……….
1,650,000
Net income …………………………..………………………………..……….
$ 350,000
*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