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43. a.
MHs
Total Cost
=
Variable Cost
+
Fixed Cost
High activity
2,700
$13,160
$8,640
$4,520
Low activity
(1,400)
(9,000)
4,480
4,520
Differences
1,300
$ 4,160
Variable rate = $4,160 ÷ 1,300 MHs = $3.20 per MH
High activity variable cost = 2,700 $3.20 = $8,640
Low activity variable cost = 1,400 $3.20 = $4,480
Fixed cost at low activity = $9,000 – $4,480 = $4,520
Total R&M cost = $4,520 + $3.20 MH
b.
x
y
xy
x2
1,400
$ 9,000
$ 12,600,000
1,960,000
1,900
10,719
20,366,100
3,610,000
2,000
10,900
21,800,000
4,000,000
2,500
13,000
32,500,000
6,250,000
2,200
11,578
25,471,600
4,840,000
2,700
13,160
35,532,000
7,290,000
1,700
9,525
16,192,500
2,890,000
2,300
11,670
26,841,000
5,290,000
16,700
$89,552
$191,303,200
36,130,000
44. a.
DIRECT LABOR HOURS
550
600
650
700
Variable costs:
Supplies
$ 2,200
$ 2,400
$ 2,600
$ 2,800
Direct labor
6,600
7,200
7,800
8,400
Overhead
550
600
650
700
Total variable costs
$ 9,350
$10,200
$11,050
$11,900
Variable cost per DLH
$ 17.00
$ 17.00
$ 17.00
$ 17.00
Fixed costs:
Overhead
$ 8,000
$ 8,000
$ 8,000
$ 8,000
Fixed costs per DLH
$ 14.55
$ 13.33
$ 12.31
$ 11.43
Total cost
$17,350
$18,200
$19,050
$19,900
b. Total cost per DLH
$ 31.55
$ 30.33
$ 29.31
$ 28.43
c. Price = (1.45 × $29.31) + [0.4 × (1.45 × $29.31)] = $59.50 (rounded)
60 Chapter 3
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45. a.
ACTIVITY IN MHs
Low
High
2,500
3,000
3,500
Production overhead costs:
Variable
$ 10,125
$ 12,150
$ 14,175
Fixed
95,400
95,400
95,400
Total
$105,525
$107,550
$109,575
ACTIVITY IN DLHs
6,000
7,000
8,000
Installation overhead costs:
Variable
$ 85,500
$ 99,750
$114,000
Fixed
73,800
73,800
73,800
Total
$159,300
$173,550
$187,800
b.
Number of pools: 8
Production (25 MHs per pool):
Variable (8 25 $4.05)
$ 810
Fixed (monthly amount)
7,950
Total production overhead
$ 8,760
Installation (60 DLHs per pool):
Variable (8 60 $14.25)
$6,840
Fixed (monthly amount)
6,150
Total installation
12,990
Total
$21,750
c.
Number of pools: 120
Production (25 MHs per pool):
Variable (120 25 $4.05)
$ 12,150
Fixed
95,400
$ 107,550
Installation (60 DLHs per pool):
Variable (120 60 $14.25)
$102,600
Fixed
73,800
176,400
Total overhead
$ 283,950
Budgeted capacity
÷ 120
Overhead cost per pool
$2,366.25
46. You would likely tell Snider that he should provide to his superior the equation for
each cost that provides the most accurate prediction of the cost. To make this deter-
process. Other monthly data could be used to assess the accuracy of each equation.
Your initial bias would favor the model based on machine hours because that model
Chapter 3 61
47. a. Georgia Shacks
Income Statement (Absorption)
For the Year Ended December 31, 2013
Sales
$ 3,750,000
Cost of goods sold—variable
$1,950,000
Fixed overhead [($1,500,000 ÷ 2,000) 1,500]
1,125,000
(3,075,000)
Gross profit
$ 675,000
Variable selling & administrative
$ 270,000
Fixed selling & administrative
190,000
(460,000)
Net income
$ 215,000
b. The difference in the amounts is equal to the fixed overhead of ($1,500,000 ÷
2,000 units) or $750 per unit times the 500 units produced but not sold during the
income statement.
c. It is not only ethical, but it is also required for the statements to be in conformity
with generally accepted accounting principles.
d. (1) Georgia Shacks
Income Statement (Variable)
For the Year Ended December 31, 2014
Sales (2,200 $2,500)
$ 5,500,000
Variable cost of goods sold (2,200 $1,300)
(2,860,000)
Product contribution margin
$ 2,640,000
Variable selling & administrative ($180 2,200)
(396,000)
Contribution margin
$ 2,244,000
Fixed overhead
$1,500,000
Fixed selling & administrative
190,000
(1,690,000)
Net income
$ 554,000
(2) Georgia Shacks
Income Statement (Absorption)
For the Year Ended December 31, 2014
Sales
$ 5,500,000
Cost of goods sold—variable
$2,860,000
Fixed overhead [($1,500,000 ÷ 2,000)
2,200]
1,650,000
(4,510,000)
Gross profit
$ 990,000
Variable selling & administrative
$ 396,000
Fixed selling & administrative
190,000
(586,000)
Net income
$ 404,000
(3) Net income under variable costing
$ 554,000
Net income under absorption costing
(404,000)
Difference in net incomes
$ 150,000
62 Chapter 3
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sold in excess of the 2,200 units produced by the fixed overhead application
rate of $750 per unit (200 $750 = $150,000).
48. Bird’s Eye View
Income Statements (Absorption)
For the Years Ended December 31, 2013 and 2014
2013 (10,000 units)
2014 (12,000 units)
Sales (units × $500)
$ 5,000,000
$ 6,000,000
CGS (units × $270)
$2,700,000
$3,240,000
Underapplied FOH
0
(2,700,000)
90,000
(3,330,000)
Gross profit
$ 2,300,000
$ 2,670,000
S&A:
Variable (units × $50)
$ 500,000
$ 600,000
Fixed
180,000
(680,000)
180,000
(780,000)
Income before taxes
$ 1,620,000
$ 1,890,000
Bird’s Eye View
Income Statements (Variable)
For the Years Ended December 31, 2013 and 2014
2013 (10,000 units)
2014 (12,000 units)
Sales (units $500)
$ 5,000,000
$ 6,000,000
CGS (units $210)
(2,100,000)
(2,520,000)
Product CM
$ 2,900,000
$ 3,480,000
Variable S&A (units $50)
(500,000)
(600,000)
Total CM
$ 2,400,000
$ 2,880,000
Fixed costs:
Factory
$750,000
$750,000
S&A
180,000
(930,000)
180,000
(930,000)
Income before taxes
$ 1,470,000
$ 1,950,000
2013
2014
Net income (absorption)
$1,620,000
$1,890,000
Net income (variable)
1,470,000
1,950,000
Difference in income
$ 150,000
$ (60,000)
Difference equals inventory change
+ 2,500
1,000
Times FOH application rate
$60
$60
Difference in income
$ 150,000
$ (60,000)
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49. a. Akron Aviation
Income Statement (Variable)
For the Year Ended December 31, 2014
Sales
$1,015,000
Variable cost of goods sold:
Work in process 1/1/14
$ 46,400
Finished goods 1/1/14
16,950
Manufacturing costs incurred
650,600
Total costs available
$713,950
Work in process 12/31/14
(61,900)
Finished goods 12/31/14
(13,180)
(638,870)
Product contribution margin
$ 376,130
Variable selling expenses
(50,750)
Contribution margin
$ 325,380
Fixed expenses:
Factory overhead
$ 42,300
Selling
44,250
Administrative
75,000
(161,550)
Operating Income
$ 163,830
Supporting calculations
Variable finished goods inventory at 1/1/14:
Absorption finished goods inventory
$18,000
Less fixed overhead (1,050 hours $1 per hour)
(1,050)
Variable finished goods inventory
$16,950
Variable work in process inventory at 1/1/14:
Absorption work in process inventory
$48,000
Less fixed overhead (1,600 hours $1 per hour)
(1,600)
Variable work in process
$46,400
Variable manufacturing costs incurred during 2014:
Direct material
$370,000
Direct labor (23,000 hours $6 per hour)
138,000
Variable overhead (23,000 hours $6.20 per hour)
142,600
Variable manufacturing costs
$650,600
The direct labor rate is ($150,000 ÷ 25,000 hours) or $6.00 per hour. The variable
overhead rate is ($155,000 ÷ 25,000 hours) or $6.20 per hour.
Variable work in process inventory at 12/31/14:
Absorption work in process inventory
$64,000
Less fixed overhead (2,100 hours $1)
(2,100)
Variable work in process inventory
$61,900
Variable finished goods inventory at 12/31/14:
Absorption finished goods inventory
$14,000
Less fixed overhead (820 hours $1)
(820)
Variable finished goods inventory
$13,180
64 Chapter 3
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Variable selling expenses = Sales × 5% = $1,015,000 × 5% = $50,750
Fixed selling expenses:
Total selling expenses
$ 95,000
Less variable selling expenses
(50,750)
Fixed selling expenses
$ 44,250
b. The main advantage of variable costing is that it reveals the marginal cost of pro-
duction. That is, variable costing facilitates making decisions about pricing,
changes in volume, and changes in cost structure. Variable costing also facilitates
50. a. Increasing production, relative to sales or relative to prior plans, has the effect of
moving fixed manufacturing overhead from the income statement to the balance
b. Because the increase in production is not matched by an increase in sales, fin-
ished goods, and perhaps in process, inventories would increase. Also, the costs
of manufacturing would rise as production increases. The rising costs could be
c. The CFO’s plan is not ethical. The intent of the increase in production is to distort
d. The effects of the CFO’s plan should be detectible by analyzing the financial
51. a. Tomm’s T’s
Income Statement (Variable)
For the Year Ended December 31, 2013
Sales (40,000 $22)
$ 880,000
Variable cost of goods sold (40,000 $8.25)
(330,000)
Contribution margin
$ 550,000
Fixed costs:
Production
$120,000
Selling & administrative
130,000
(250,000)
Income before taxes
$ 300,000
Chapter 3 65
b. Tomm’s T’s
Income Statement (Absorption)
For the Year Ended December 31, 2013
Sales (40,000 $22)
$ 880,000
Cost of goods sold (40,000 $10.25)
$410,000
Underapplied fixed overhead*
24,000
(434,000)
Gross margin
$ 446,000
Less selling and administrative costs
(130,000)
Income before taxes
$ 316,000
Number of units in ending FG inventory = 4,000 + 48,000 – 40,000 = 12,000
FOH: $120,000 ÷ 60,000 = $2.00 per unit
Underapplied FOH = $2.00 (60,000 – 48,000) = $2.00 12,000 = $24,000
Inventory (8,000 × $2.00)
16,000
Cost of Goods Sold (40,000 × $2.00)
80,000
Underapplied Overhead
24,000
Fixed Factory Overhead
120,000
d. Advantages:
enced by building inventory).
The impact of fixed costs on profits is emphasized.
Product line, territory, etc., marginal contribution is emphasized and more
readily ascertainable.
Disadvantages:
e. Advantages:
Statements would readily reflect the direct impact of sales volume on profits.
The consequences of fixed costs would be more obvious.
Inventory swings would not influence profits.
Disadvantages:
Costs are not matched with revenues.
to be misleading.
66 Chapter 3
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petitors.
(CMA adapted)
52. a.
x
y
xy
x2
10
$ 8,000
$ 80,000
100
14
9,200
128,800
196
22
12,000
264,000
484
28
14,200
397,600
784
40
18,500
740,000
1,600
62
28,000
1,736,000
3,844
100
34,000
3,400,000
10,000
90
30,000
2,700,000
8,100
80
24,000
1,920,000
6,400
446
$177,900
$11,366,400
31,508
b.
x
y
xy
x2
$ 12,000
$ 8,000
$ 96,000,000
144,000,000
18,000
9,200
165,600,000
324,000,000
26,000
12,000
312,000,000
676,000,000
36,000
14,200
511,200,000
1,296,000,000
60,000
18,500
1,110,000,000
3,600,000,000
82,000
28,000
2,296,000,000
6,724,000,000
120,000
34,000
4,080,000,000
14,400,000,000
100,000
30,000
3,000,000,000
10,000,000,000
96,000
24,000
2,304,000,000
9,216,000,000
$550,000
$177,900
$13,874,800,000
46,380,000,000