Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
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Exercise 19-9 (25 minutes)
1.
a.
Cost per unit using absorption costing
Direct materials ……………………………………………………………………….
$ 60 per unit
Direct labor ……………………………………………………………………………..
Variable overhead ……………………………………………………………………
Fixed overhead ($528,000/44,000 units) …………………………………….
b.
COOL SKY
Absorption Costing Income Statement
Sales (36,000 units x $140 per unit) …………………………………………..
$5,040,000
Cost of goods sold (36,000 units x $102 per unit) ……………………..
Gross profit ……………………………………………………………………………..
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Exercise 19-9 (concluded)
2.
a. Cost per unit using variable costing
b.
COOL SKY
Variable Costing Income Statement
Sales (36,000 units x $140 per unit) ………………………..
$5,040,000
Variable expenses
$3,240,000
Fixed expenses
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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 beginning inventory* ………………………….
Exercise 19-11 (15 minutes)
Per unit
Direct materials ……………………………………………………………………………….
$100
Direct labor ……………………………………………………………………………………
30
Variable overhead ……………………………………………………………………………
Fixed overhead ($600,000/50,000 units) …………………………………………….
Total product cost using absorption costing …………………………………….
Exercise 19-12 (10 minutes)
Fixed overhead per unit at 60,000 unit level =
60,000
$720,000
= $12 per unit
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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) ………………………….
$14,250
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) ……………………….
$44,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Exercise 19-15 (10 minutes)
Yes, the offer should be accepted.
Explanation: Assuming that the fixed costs identified by MidCoast Airlines
are allocated over all passengers and not direct costs to the college
Exercise 19-16 (15 minutes)
1. Operating income is growing faster in the China segment than in the
U.S. segment. Operating income grew by $135 million in 2017 for the
2. No, the difference in operating income growth between the segments is
not due to the use of different costing methods. Nike follows U.S. GAAP
and thus prepares its financial statements using the absorption costing
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
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PROBLEM SET A
Problem 19-1A (45 minutes)
Part 1
DOWELL COMPANY
Variable Costing Income Statements
2018
2019
Sales ($46 per unit sold) …………………………………………………
$920,000
$1,840,000
Variable expenses
Fixed expenses
Part 2
DOWELL COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
2018
2019
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) ……..
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Problem 19-2A (25 minutes)
Part 1
TREZ COMPANY
Variable Costing Income Statement
Sales (80,000 x $50) ……………………………………………….
$4,000,000
Variable expenses
Variable product costs (80,000 x $21*) ………………….
$1,680,000
Variable sell. & adm. expenses (80,000 x $2.25) …….
Total variable expenses ……………………………………….
Fixed expenses
Fixed manufacturing costs …………………………………..
Fixed selling & administrative expenses ……………….
*Direct materials ……………………………………………………..
$ 5 per unit
Direct labor ……………………………………………………….
14 per unit
Variable overhead ………………………………………………….
2 per unit
Total variable product costs …………………………………..
$21 per unit
Part 2
The dollar difference in variable costing income and absorption costing
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Problem 19-3A (30 minutes)
Part 1
BLAZER CHEMICAL
Income Statement
Sales (60 tons x $21,000 per ton) ………………………………………………………
$1,260,000
Gross margin ……………………………………………………………………………………
Part 2
Blazer Chemical can increase its income by $300,000 by producing 40 tons
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PROBLEM SET B
Problem 19-1B (45 minutes)
Part 1
AZULE COMPANY
Variable Costing Income Statements
2018
2019
Sales ($35 per unit sold) ………………………………………..
$1,925,000
$2,275,000
Variable expenses
Fixed expenses
Part 2
AZULE COMPANY
Reconciliation of Variable Costing Income to Absorption Costing Income
2018
2019
Variable costing income ………………………………………….
$(10,000)
$130,000
Fixed overhead in beginning inventory (5,000 x $8) ….
(40,000)
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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 product 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
Fixed expenses
Fixed manufacturing costs ……………………………………………
Fixed selling & administrative expenses ………………………..
1,200,000
Total fixed expenses …………………………………………………….
1,650,000
Part 2
Absorption costing income is $75,000 more than variable costing income.
This is because there are 50,000 units in ending inventory which have $1.50
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Problem 19-3B (30 minutes)
Part 1
Yes, it is possible for the company to report a net income by increasing its
CHEM-MELT
Income Statement (Absorption Costing)
Sales (250,000 lbs. x $8 per lb.) ……………………………………………………….
$2,000,000
Selling and administrative expenses …………………………..…………………….
Chem-Melt can increase its income by $200,000 by producing 50,000
pounds more than it sells. Each of the 50,000 pounds in inventory will
carry $4.00 in fixed overhead ($1,200,000/300,000 lbs.). 50,000 pounds
times $4.00 per pound equals the $200,000 in fixed overhead that is not
expensed in the current period. It will be expensed when the chemical is
sold in a future period.
Part 2
Whether the company should produce the extra 50,000 pounds depends on
a number of factors.
• It would be unethical to produce the extra 50,000 pounds just to raise
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Serial Problem — SP 19
BUSINESS SOLUTIONS
Absorption Costing Income Statements
Forecasted for Year Ended 2019
Workstations produced
(a) 300
(b) 320
Sales (300 x $3,000) ………………………………………………
$900,000
$900,000
* Absorption costing cost per unit for 300 units produced:
Direct materials ……………………………………….
$ 800 per unit
Direct labor ……………………………………………..
400 per unit
Variable overhead ……………………………………
100 per unit
Fixed overhead ($24,000/300 units)…………..
80 per unit
Direct materials ……………………………………….
Direct labor ……………………………………………..
Variable overhead ……………………………………
Fixed overhead ($24,000/320 units)…………..
Total cost per unit ……………………………………
Variable ($50 x 300) ………………………………….
Fixed ……………………………………………………….
Total selling expenses …………………………..
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Serial Problem SP-19 (Concluded)
Part 2 (a and b)
BUSINESS SOLUTIONS
Variable Costing Income Statements
Forecasted for Year Ended 2019
Workstations produced
(a) 300
(b) 320
Sales (300 x $3,000) ……………………………………………….
$900,000
$900,000
Variable expenses
Variable cost of goods sold (300 x $1,300*) ………….
390,000
390,000
Variable selling expenses (300 x $50) …………………..
Total variable expenses ………………………………………
Fixed expenses
Factory overhead ………………………………………………..
Selling expenses …………………………………………………
Total fixed expenses …………………………………………..
*Variable costing cost per unit:
Direct materials ………………………………………..
$ 800 per unit
Direct labor ………………………………………………
Variable overhead …………………………………….
Part 3
Absorption costing yields the higher net income when 320 workstations are
produced and 300 are sold; here, income is increased by $1,500. This is
equal to 20 units x $75 per unit in fixed overhead that will be attached to the
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Company Analysis — AA 19-1
1. Apple reports net income of $48,351 (millions) for the year ended
2. Apple reports the following inventories (millions):
3. Variable costing income
2017 Absorption costing income…………………….. $48,351.0
Comparative Analysis — AA 19-2
1. Apple’s inventory level increased from 2016 to 2017. When inventory
2. Google’s inventory level increased from 2016 to 2017. When inventory
3. A goal of a JIT system is to reduce inventory levels. Since the difference
in income between absorption and variable costing is based on
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Global Analysis — AA 19-3
1. Samsung reports the following inventories (millions):
2. Variable costing income
2017 Absorption costing income…………………….. ¥42,186,747.0
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Ethics Challenge — BTN 19-1
1. FDP Company must use absorption costing to determine its income for
external reporting purposes. Absorption costing “absorbs” both
variable and fixed manufacturing costs into each unit of inventory. FDP
2. Yes, there is an ethical concern. If the company produces excess
inventory it cannot sell, it will spend resources unnecessarily. The
company’s financial position will appear better than it really is, and
stockholders will be deceived as to the company’s performance.
Prudent stockholders or potential stockholders should closely examine
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Communicating in Practice — BTN 19-2
MEMORANDUM
TO: ____________________
FROM: ____________________
DATE: ____________________
SUBJECT: ____________________
Break-even volume is determined by dividing total fixed expenses by the
contribution margin per unit. The contribution margin is selling price less
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Taking It to the Net — BTN 19-3
1. This requires that students print out the required page.
Teamwork in Action — BTN 19-4
Answers will vary, but students’ answers should center on several issues:
• In the long run, companies must recover all costs of production, fixed as
well as variable. Long-run pricing must consider the full absorption cost
of the product.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Entrepreneurial Decision — BTN 19-5
Lantern Inn’s income measured under absorption costing would be about
the same as its income measured under variable costing. The difference in
Hitting the Road — BTN 19-6
1. Many answers are possible, but variable costs with respect to
2. Fixed costs would include: Salary of hotel manager; wages of front desk
3. It is likely that the fixed costs will far outweigh the variable costs. Most
4. During low occupancy seasons, the hotel would like to have paying