SOLUTION
(20 min.) Throughput costing (continuation of Exercise 9-21).
1. April 2017 May 2017
Direct material cost of goods sold
Beginning inventory
d ($3,300 × 500) + $2,000,000
2. Operating income under:
April May
In April, throughput costing has the lowest operating income, whereas in May throughput costing
3. Throughput costing puts a penalty on production without a corresponding sale in the
9-23 Variable and absorption costing, explaining operating-income
differences. EntertainMe Corporation manufactures and sells 50-inch television sets and uses
standard costing. Actual data relating to January, February, and March 2017 are as follows:
9-1
January February March
Unit data:
Beginning inventory 0 150 150
Production 1,500 1,400 1,520
Sales 1,350 1,400 1,530
Variable costs:
Manufacturing cost per unit produced $
1,000
$ 1,000 $
1,00
0
Operating (marketing) cost per unit
sold
$
800
$ 800 $
800
Fixed costs:
Manufacturing costs $525,00
0
$525,000 $525,0
00
Operating (marketing) costs $130,00
0
$130,000 $130,0
00
The selling price per unit is $3,300. The budgeted level of production used to calculate the
budgeted fixed manufacturing cost per unit is 1,500 units. There are no price, efficiency, or
spending variances. Any production-volume variance is written off to cost of goods sold in the
month in which it occurs.
1. Prepare income statements for EntertainMe in January, February, and March 2017 under (a)
variable costing and (b) absorption costing.
2. Explain the difference in operating income for January, February, and March under variable
costing and absorption costing.
SOLUTION
(40 min.) Variable and absorption costing, explaining operating-income differences.
1. Key inputs for income statement computations are:
January February March
Beginning inventory
0
150
150
The budgeted fixed manufacturing cost per unit and budgeted total manufacturing cost
9-2
per unit under absorption costing are:
January February March
9-3
(a) Variable Costing
January 2017 February 2017 March 2017
Revenuesa$4,455,000 $4,620,000 $5,049,000
Variable costs
Beginning inventoryb$ 0 $ 150,000 $ 150,000
9-4
(b) Absorption Costing
January 2017 February 2017 March 2017
Operating costs
9-5
2. – = –
The difference between absorption and variable costing is due solely to moving fixed
manufacturing costs into inventories as inventories increase (as in January) and out of
inventories as they decrease (as in March).
9-24 Throughput costing (continuation of 9-23). The variable manufacturing costs per unit
of EntertainMe Corporation are as follows:
January February March
Direct material cost per unit $ 525 $ 525 $ 525
Direct manufacturing labor cost per unit 200 200 200
Manufacturing overhead cost per unit 275 275 275
$1,000 $1,000 $1,000
Required:
1. Prepare income statements for EntertainMe in January, February, and March 2017 under
throughput costing.
2. Contrast the results in requirement 1 of this exercise with those in requirement 1 of Exercise
9-23.
3. Give one motivation for EntertainMe to adopt throughput costing.
SOLUTION
(20–30 min.) Throughput costing (continuation of Exercise 9-23).
1.
January February March
Revenuesa
Direct material cost of
goods sold:
Beginning inventoryb$ 0
$4,455,000
$78,750
$4,620,000
$ 78,750
$5,049,000
9-6
Direct materials in goods
Other costs
Manufacturinge
Operatingf
1,237,500
1 ,210,000
1,190,000
1 ,250,000
1,247,000
1 ,354,000
2. Operating income under:
January February March
Throughput costing
Throughput costing puts greater emphasis on sales as the source of operating income than does
3. Throughput costing puts a penalty on producing without a corresponding sale in the same
period. Costs other than direct materials that are variable with respect to production are expensed
9-25 Variable versus absorption costing. The Tomlinson Company manufactures trendy,
high-quality, moderately priced watches. As Tomlinson’s senior financial analyst, you are asked
to recommend a method of inventory costing. The CFO will use your recommendation to prepare
Tomlinson’s 2017 income statement. The following data are for the year ended December 31,
2017:
Beginning inventory, January 1, 2017 90,000 units
9-7
Ending inventory, December 31, 2017 34,000 units
2017 sales 433,000 units
Selling price (to distributor) $24.00 per unit
Variable manufacturing cost per unit, including
direct materials
$5.40 per unit
Variable operating (marketing) cost per unit sold $1.20 per unit sold
Fixed manufacturing costs $1,852,200
Denominator-level machine-hours 6,300
Standard production rate 60 units per machine-hour
Fixed operating (marketing) costs $1,130,000
Required:
Assume standard costs per unit are the same for units in beginning inventory and units produced
during the year. Also, assume no price, spending, or efficiency variances. Any
production-volume variance is written off to cost of goods sold.
1. Prepare income statements under variable and absorption costing for the year ended
December 31, 2017.
2. What is Tomlinson’s operating income as percentage of revenues under each costing method?
3. Explain the difference in operating income between the two methods.
4. Which costing method would you recommend to the CFO? Why?
SOLUTION
(40 min) Variable versus absorption costing.
1.
Beginning Inventory + 2017 Production = 2017 Sales + Ending Inventory
Income Statement for the Tomlinson Company, Variable Costing
for the Year Ended December 31, 2017
Revenues: $24 × 433,000 $10,392,000
Variable costs
9-8
Fixed costs
Absorption Costing Data
Fixed manufacturing overhead allocation rate =
¸
Fixed manufacturing overhead allocation rate per unit =
¸
Income Statement for the Tomlinson Company, Absorption Costing
for the Year Ended December 31, 2017
Revenues: $24 × 433,000 $10,392,000
Cost of goods sold
Beginning inventory ($5.40 + $4.90) × 90,000 $ 927,000
Variable manuf. costs: $5.40 × 377,000 2,035,800
Deduct ending inventory: ($5.40 + $4.90) × 34,000 (350,200)
Operating costs
Variable operating costs: $1.20 × 433,000 $ 519,600
Fixed operating costs 1 ,130,000
Total operating costs 1 ,649,600
2. Tomlinson’s operating margins as a percentage of revenues are
9-9
Under variable costing:
Under absorption costing:
3. Operating income using variable costing is 6.4% higher than operating income calculated
using absorption costing. The difference is entirely due to the way fixed manufacturing costs are
accounted for under the two costing systems.
4. The factors the CFO should consider include
(a) Effect on managerial behavior.
(b) Effect on external users of financial statements.
I would recommend absorption costing because it considers all the manufacturing resources
(whether variable or fixed) used to produce units of output. Absorption costing has many critics.
However, the dysfunctional aspects associated with absorption costing can be reduced by
9-26 Absorption and variable costing. (CMA) Miami, Inc., planned and actually
manufactured 250,000 units of its single product in 2017, its first year of operation. Variable
manufacturing cost was $19 per unit produced. Variable operating (nonmanufacturing) cost was
$13 per unit sold. Planned and actual fixed manufacturing costs were $750,000. Planned and
actual fixed operating (nonmanufacturing) costs totaled $420,000. Miami sold 170,000 units of
product at $41 per unit.
Required:
1. Miami’s 2017 operating income using absorption costing is (a) $600,000, (b) $360,000, (c)
$780,000, (d) $1,020,000, or (e) none of these. Show supporting calculations.
2. Miami’s 2017 operating income using variable costing is (a) $1,100,000, (b) $600,000, (c)
$360,000, (d) $780,000, or (e) none of these. Show supporting calculations.
9-10
9-11