Problem 6-18B (45 minutes)
1. a. The unit product cost under absorption costing is:
Direct materials ………………………………
$17
Direct labor ……………………………………
8
Variable manufacturing overhead ……….
1
Fixed manufacturing overhead
($882,000 ÷ 49,000 units) ……………..
18
Absorption costing unit product cost ……
$44
b. The absorption costing income statement is:
Sales (44,000 units × $78 per unit) ………………………
$3,432,000
Cost of goods sold (44,000 units × $44 per unit) …….
1,936,000
Gross margin …………………………………………………..
1,496,000
Selling and administrative expenses
(44,000 units × $3 per unit) + $563,000 ……………..
695,000
Net operating income ………………………………………..
$ 801,000
2. a. The unit product cost under variable costing is:
Direct materials ………………………………
$17
Direct labor ……………………………………
8
Variable manufacturing overhead ……….
1
Variable costing unit product cost ……….
$26
b. The variable costing income statement is:
Sales (44,000 units × $78 per unit) …………..
Variable expenses:
Variable cost of goods sold
(44,000 units × $26 per unit) ………………
$1,144,000
Variable selling expense
(44,000 units × $3 per unit) ……………….
132,000
Contribution margin ……………………………….
Fixed expenses:
Fixed manufacturing overhead ……………….
882,000
Fixed selling and administrative expense ….
563,000
Net operating loss …………………………………
Problem 6-18B (continued)
3. The difference in the ending inventory relates to a difference in the
handling of fixed manufacturing overhead costs. Under variable costing,
these costs have been expensed in full as period costs. Under
absorption costing, these costs have been added to units of product at
(2) above.
Problem 6-19B (45 minutes)
1. The break-even point in units sold can be computed using the
contribution margin per unit as follows:
Selling price per unit …………………
$52
Variable cost per unit ………………..
44
Contribution margin per unit ………
$ 8
Break-even unit sales = Fixed expenses ÷ Unit contribution margin
= $480,000 ÷ $8 per unit
= 60,000 units
2 a. Under variable costing, only the variable manufacturing costs are
included in product costs.
Year 1
Year 2
Year 3
Direct materials ………………………………
$22
$22
$22
Direct labor …………………………..……….
14
14
14
Variable manufacturing overhead ……….
5
5
5
Variable costing unit product cost ……….
$41
$41
$41
Note that selling and administrative expenses are not treated as
product costs; that is, they are not included in the costs that are
inventoried. These expenses are always treated as period costs.
Problem 6-19B (continued)
2. b. The variable costing income statements appear below:
Year 1
Year 2
Year 3
Sales ………………………………………………………………
$3,120,000
$2,600,000
$3,380,000
Variable expenses:
Variable cost of goods sold @ $41 per unit …………..
2,460,000
2,050,000
2,665,000
Variable selling and administrative @ $3 per unit …..
180,000
150,000
195,000
Total variable expenses ………………………………………
2,640,000
2,200,000
2,860,000
Contribution margin …………………………………………..
480,000
400,000
520,000
Fixed expenses:
Fixed manufacturing overhead …………………………..
270,000
270,000
270,000
Fixed selling and administrative ………………………….
210,000
210,000
210,000
Total fixed expenses ………………………………………….
480,000
480,000
480,000
Net operating income (loss) ………………………………..
$ 0
$ (80,000)
$ 40,000
3. a. The unit product costs under absorption costing:
Year 1
Year 2
Year 3
Direct materials ………………………………
$22.00
$22.00
$22.00
Direct labor …………………………..……….
14.00
14.00
14.00
Variable manufacturing overhead ……….
5.00
5.00
5.00
Fixed manufacturing overhead …………..
*4.50
**3.60
***6.75
Absorption costing unit product cost ……
$45.50
$44.60
$47.75
* $270,000 ÷ 60,000 units = $4.50 per unit.
** $270,000 ÷ 75,000 units = $3.60 per unit.
*** $270,000 ÷ 40,000 units = $6.75 per unit.
Problem 6-19B (continued)
3. b. The absorption costing income statements appears below:
Year 1
Year 2
Year 3
Sales ……………………………………………..
$3,120,000
$2,600,000
$3,380,000
Cost of goods sold…………………………….
2,730,000
2,230,000
3,025,000
Gross margin …………………………………..
390,000
370,000
355,000
Selling and administrative expenses ……..
390,000
360,000
405,000
Net operating income (loss) ………………..
$ 0
$ 10,000
$ (50,000)
Cost of goods sold computations:
Year 1: 60,000 units × $45.50 per unit = $2,730,000
Year 2: 50,000 units × $44.60 per unit = $2,230,000
Year 3: (25,000 × $44.60 per unit) + (40,000 × $47.75 per unit) = $3,025,000
4.
Year 1
Year 2
Year 3
Units sold …………………………………………………..
60,000
50,000
65,000
Break-even point in units ……………………………….
60,000
60,000
60,000
Units above (below) break-even point ………………
0
(10,000)
5,000
Variable costing net operating income (loss) ………
$0
$(80,000)
$ 40,000
Absorption costing net operating income (loss) …..
$0
$ 10,000
$(50,000)
The absorption costing net operating incomes in years 2 and 3 are counterintuitive. In year 2, the
number of units sold is below the break-even point; however, absorption costing reports a net
operating income greater than zero. In year 3, the number of units sold is above the break-even
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Education.
Solutions Manual, Chapter 6 6-7
point; however, absorption costing reports a net operating income less than zero.
Sales …………………………………………………
Variable expenses:
Total variable expenses ………………………….
Contribution margin ………………………………
Fixed expenses:
Total fixed expenses ……………………………..
Net operating income (loss) ……………………
Variable costing net operating income (loss)
Absorption costing net operating income …..
Problem 6-20B (30 minutes)
1. The unit product cost under the variable costing is computed as follows:
Direct materials ………………………………
$ 7
Direct labor ……………………………………
12
Variable manufacturing overhead ……….
2
Variable costing unit product cost ……….
$21
Problem 6-21B (45 minutes)
1.
a. and b.
Absorption
Costing
Variable
Costing
Direct materials ………………………………
$ 83
$83
Variable manufacturing overhead ……….
5
5
Fixed manufacturing overhead
($252,000 ÷ 4,000 units) ……………….
63
—
Unit product cost …………………………....
$151
$88
2. Absorption costing income statement:
Sales (3,200 units × $340 per unit) ………………….
$1,088,000
Cost of goods sold (3,200 units × $151 per unit) …
483,200
Gross margin ……………………………………………….
604,800
Selling and administrative expenses
(8% × $1,088,000 + $158,000) ……………………
245,040
Net operating income ……………………………………
$ 359,760
3. Variable costing income statement:
Sales (3,200 units × $340 per unit) ………
$1,088,000
Variable expenses:
Variable cost of goods sold (3,200 units
× $88 per unit) …………………………..
$281,600
Variable selling and administrative
expense ($1,088,000 × 8%) …………..
87,040
368,640
Contribution margin …………………………..
719,360
Fixed expenses:
Fixed manufacturing overhead …………..
252,000
Fixed selling and administrative …………
158,000
410,000
Net operating income ………………………..
$309,360)
Problem 6-21B (continued)
4. A manager may prefer to take the statement prepared under the
absorption approach in part (2), because it shows a higher profit for the
5.
Variable costing net operating income …………………………...
$ 309,360)
Add fixed manufacturing overhead cost deferred in
inventory under absorption costing (800 units × $63 per
unit) …………………………………………………………………….
50,400
Absorption costing net operating income ………………………..
$359,760
Problem 6-22B (45 minutes)
1.
a. and b.
Absorption
Costing
Variable
Costing
Direct materials ………………………………
$ 3
$ 3
Direct labor ……………………………………
12
12
Variable manufacturing overhead ……….
3
3
Fixed manufacturing overhead
($120,000 ÷ 24,000 units) ……………..
5
—
Unit product cost …………………………....
$23
$18
2.
May
June
Sales ………………………………………………….
$960,000
$1,344,000
Variable expenses:
Variable cost of goods sold @ $18 per unit .
360,000
504,000
Variable selling and administrative expense
@ $3 per unit ………………………………….
60,000
84,000
Total variable expenses …………………………..
420,000
588,000
Contribution margin ……………………………….
540,000
756,000
Fixed expenses:
Fixed manufacturing overhead ……………….
120,000
120,000
Fixed selling and administrative expenses …
166,000
166,000
Total fixed expenses ………………………………
286,000
286,000
Net operating income (loss) …………………….
$254,000)
$ 470,000
3.
May
June
Variable costing net operating income (loss)
$254,000)
$470,000
Add fixed manufacturing overhead cost
deferred in inventory under absorption
costing (4,000 units × $5 per unit) ………..
20,000
Deduct fixed manufacturing overhead cost
released from inventory under absorption
costing (4,000 units × $5 per unit) ………..
(20,000)
Absorption costing net operating income …..
$274,000
$450,000