Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
T3-10
SOLUTIONS TO PROBLEMS
Problem T3-8
a.
2013
2014
2015
Variable costing
Variable costs of production
from income statement
$2,028,000
Units sold
39,000
Unit product cost
$52
$52
$52
Absorption costing
Variable costs
$52
$52
$52
Fixed overhead: 2013
($1,520,000 40,000)
38
Fixed overhead: 2014
($1,520,000 38,000)
$40
Fixed overhead: 2015
($1,520,000 40,000)
$38
Unit product cost
$90
$92
$90
b.
Absorption costing
2014
Sales
$4,345,000a
Cost of goods sold
Units in beginning inventory
2,000 units × $90
180,000
500 units × $92
Units sold from current year production
37,500 units × $92
3,450,000
39,000 units × $90
Total cost of goods sold
3,630,000
Gross margin
715,000
Selling expense
Variableb (39,500 units × $5)
197,500
Fixed
450,000
Operating Income
$67,500
Topic Focus 3 – Variable and Absorption Costing
T3-11
Problem T3-8, continued
Variable costing
Sales
$4,345,000
Variable costs – production (39,500 × $52)
(2,054,000)
Variable costs – selling (39,500 × $5)
(197,500)
Contribution margin
2,093,500
Fixed manufacturing costs
(1,520,000)
Fixed selling costs
(450,000)
Operating income
$123,500
a Sales price =
$4,290,000
39,000 units sold
based on 2013 sales; 39,500 units sold × $110 per unit = $4,345,000
bTo compute variable selling costs per unit, use information from the 2013 income statement.
c. Income decreases from 2013 to 2014 and then increases from 2014
d.
Absorption costing
Variable costing
2013
$135,000
$97,000
2014
67,500
123,500
2015
141,500
123,500
Total
$344,000
$344,000
The totals across the three years are the same because the number
T3-12
Problem T3-9
a.
Per unit:
Sales
$100
Direct materials
25
Direct labor
15
Variable overhead
15
Fixed overhead
5
Cost of goods sold per unit
60
Gross margin per unit
$40
Units sold
1,500
Total gross margin
$60,000
Selling and administrative costs
Variable ($1 1,500)
1,500
Fixed
4,000
Total selling and administrative costs
5,500
Operating income
$54,500
b.
Per unit:
Sales
$100
Variable costs
Direct material
25
Direct labor
15
Manufacturing overhead
15
Selling
1
Total variable costs
56
Contribution margin per unit
$44
Units sold
1,500
Total contribution margin
$66,000
Fixed costs
Manufacturing overhead ($5 2,000)
10,000
Selling
4,000
Total fixed costs
14,000
Operating income
$52,000
Topic Focus 3 – Variable and Absorption Costing
T3-13
Problem T3-9, continued
2011
2012
Absorption costing income
$54,500
$93,500
Variable costing income
52,000
96,000
Difference
$2,500
($2,500)
Change in ending inventory units
500
(500)
× Fixed overhead per unit
$5
$5
Reconciliation
$2,500
($2,500)
T3-14
Problem T3–10
a.
Absorption
Variable
Food and beverages
$15
$15
Direct labor
5
5
Variable overhead
2
2
Fixed overhead
5
Cost per person
$27
$22
b.
Absorption
Variable
Cost per person
$27.00
$22.00
Markup (cost 15%)
4.05
3.30
Price per person
$31.05
$25.30
Topic Focus 3 – Variable and Absorption Costing
T3-15
Problem T3–11
a. Scenario
A
B
C
D
E
Product cost per unit
Variable cost
$20.00
$20.00
$20.00
$20.00
$20.00
Fixed cost
60.48
50.40a
43.20b
37.80c
33.60d
Total unit cost
$80.48
$70.40
$63.20
$57.80
$53.60
Income Statement – Absorption Costing
Sales
$69,300e
$69,300
$69,300
$69,300
$69,300
Cost of Goods Sold
Units in beginning inventory
(12,640)
(12,640)
(12,640)
(12,640)
(12,640)
Units sold from current year production
(40,240)f
(35,200)g
(31,600)h
(28,900)i
(26,800)j
Total Cost of Goods Sold
(52,880)
(47,840)
(44,240)
(41,540)
(39,440)
Gross margin
16,420
21,460
25,060
27,760
29,860
Selling expense
(24,650)
(24,650)
(24,650)
(24,650)
(24,650)
Operating Income
($8,230)
($3,190)
$410
$3,110
$5,210
Income Statement – Variable Costing
Sales
$69,300
$69,300
$69,300
$69,300
$69,300
Variable costs
(14,000)k
(14,000)
(14,000)
(14,000)
(14,000)
Contribution margin
55,300
55,300
55,300
55,300
55,300
Fixed manufacturing costs
(30,240)
(30,240)
(30,240)
(30,240)
(30,240)
Fixed selling costs
(24,650)
(24,650)
(24,650)
(24,650)
(24,650)
Operating income
$410
$410
$410
$410
$410
d$30,240 ÷ 900 h500 units produced and sold × $63.20
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
T3-16
the next.
c. The difference in units produced and units sold is the sole reason for
the difference in income.
e. While that is true, focusing on actions that don’t derive true value for
the company is not good for the company in the long-term. If you
SOLUTIONS TO CASE
Case T3-12
fixed costs per unit.
b. Net income under variable costing will be lower than net income
under absorption costing because more fixed overhead will be
expensed.
problem.
d. As controller, Waldrop should do more than record events. He needs
Topic Focus 3 – Variable and Absorption Costing
T3-17
apparent reason.
Waldrop may have chosen to “look the other way” since he and
Lambert are at the same level in the organization, they were hired at
the same time, and they worked together closely to arrange the
that he will receive a bonus.
Based on the IMA’s Statement of Ethical Professional Practice,
Waldrop is not meeting the credibility standard. That standard
requires all relevant information that could reasonably be expected to
Waldrop also has a conflict of interest in that his compensation is tied
to net income which is favorably affected by Lambert’s actions.
e. Yes, Lambert has violated her ethical obligation to the company. As
could have been put to better use.
f. Lambert has to manage several aspects of the plant, yet only one
receives emphasis in the compensation system. The unit cost aspect
of the system needs to be changed to total actual cost compared to a
one at the expense of others.