Exercise 19-9 (25 minutes)
1.
a.
Cost per unit using absorption costing
Direct materials ……………………………………………………………………….
$ 60 per unit
Direct labor ……………………………………………………………………………..
22 per unit
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) ……………………..
3,672,000
Gross profit ……………………………………………………………………………..
1,368,000
Selling and administrative expenses* ……………………………………….
501,000
Net income ………………………………………………………………………………
$ 867,000
Exercise 19-9 (concluded)
2.
a. Cost per unit using variable costing
$60 per unit
22 per unit
8 per unit
$90 per unit
b.
COOL SKY
Variable Costing Income Statement
Sales (36,000 units x $140 per unit) ………………………..
$5,040,000
Variable expenses
Variable product costs* ………………………………………..
$3,240,000
Variable selling and administrative expenses** ……..
396,000
Total variable expenses………………………………………..
3,636,000
Contribution margin ……………………………………………….
Fixed expenses
Fixed manufacturing costs …………………………………..
Fixed selling and administrative expenses ……………
105,000
Total fixed expenses …………………………………………….
633,000
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 ending inventory* …………………………..
3,000
1,750
2,000
Fixed overhead in beginning inventory* ………………………….
_______
(3,000)
(1,750)
Exercise 19-11 (15 minutes)
Per unit
Direct materials ……………………………………………………………………………….
$100
Direct labor ……………………………………………………………………………………
30
Variable overhead ……………………………………………………………………………
8
Fixed overhead ($600,000/50,000 units) …………………………………………….
12
Total product cost using absorption costing …………………………………….
$150
Target profit ($150 x 40%)……………………………………………… 60
Target selling price ……………………………………………………… $210
Exercise 19-12 (10 minutes)
Fixed overhead per unit at 60,000 unit level =
60,000
$720,000
= $12 per unit
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) ………………………….
4,500
Contribution margin …………………………………………………………………………
$14,250
Yes, the offer should be accepted.
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) ……………………….
16,000
Contribution margin …………………………………………………………………………
$44,000
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
travelers, the airline’s contribution margin for the college travelers will be:
Revenue from trip …………………………..…………………………………………..
$30,000
Variable costs …………………………………………………………………………….
15,000
Contribution margin ……………………………………………………………………
$15,000
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
China segment. This represents a 9.8% (computed as $135/$91,372)
increase. By comparison, operating income in the U.S. increased by
$112 million (3.0%) in 2017.
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
Variable product costs ($21 per unit sold*) …………………….
420,000
840,000
Variable sell. & admin. costs ($2.50 per unit sold) ………….
50,000
100,000
Total variable costs ………………………………………………………
470,000
940,000
450,000
Fixed expenses
Factory overhead ……………………………………………………….
300,000
300,000
Fixed selling & administrative costs …………………………..
240,000
240,000
Total fixed expenses …………………………………………………….
540,000
540,000
Net income ……………………………………………………………………..
$(90,000)
$ 360,000
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) ……..
_______
(100,000)
Absorption costing income …………………………………………….
$ 10,000
$260,000
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) …….
180,000
Total variable expenses ……………………………………….
1,860,000
Contribution margin ………………………………………………
2,140,000
Fixed expenses
Fixed manufacturing costs …………………………………..
Fixed selling & administrative expenses ……………….
350,000
Part 2
The dollar difference in variable costing income and absorption costing
income = 20,000 units x $9 fixed overhead per unit.
Problem 19-3A (30 minutes)
Part 1
BLAZER CHEMICAL
Income Statement
Sales (60 tons x $21,000 per ton) ………………………………………………………
$1,260,000
Cost of goods sold (60 tons x $11,000 per ton*) …………………………..
660,000
Gross margin ……………………………………………………………………………………
600,000
Selling and administrative expenses …………………………..…………………….
318,600
Net income ……………………………………………………………………………………
$ 281,400
Part 2
Blazer Chemical can increase its income by $300,000 by producing 40 tons
more than it sells. Each of the 40 tons in inventory will include $7,500 in
fixed overhead ($750,000/100 tons). 40 tons times $7,500 per ton equals the
$300,000 in fixed overhead that is not expensed in the current period. It will
be expensed when the chemical is sold in a future period.
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
Variable product costs ($18 per unit sold*) ……………
990,000
1,170,000
Variable selling & admin. costs ($3 per unit sold) …..
165,000
195,000
Total variable costs ……………………………………………..
1,155,000
1,365,000
Contribution margin ………………………………………………
770,000
910,000
Fixed expenses
Factory overhead …………………………………………………
480,000
480,000
Fixed selling & administrative costs ……………………..
300,000
Total fixed expenses ……………………………………………
780,000
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 ending inventory (5,000 x $8) ……….
40,000
Fixed overhead in beginning inventory (5,000 x $8) ….
(40,000)
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
Contribution margin ……………………………………………………….
2,000,000
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
per unit in fixed overhead attached to them. Under variable costing all of
the fixed overhead is expensed. Under absorption costing, only the portion
of the fixed overhead attached to the units sold is expensed.
Problem 19-3B (30 minutes)
Part 1
Yes, it is possible for the company to report a net income by increasing its
production to 300,000 lbs. and storing the excess inventory. The following
absorption costing income statement shows this.
CHEM-MELT
Income Statement (Absorption Costing)
Sales (250,000 lbs. x $8 per lb.) ……………………………………………………….
$2,000,000
Cost of goods sold (250,000 lbs. x $6 per lb.*) …………………………..
1,500,000
Gross margin ……………………………………………………………………………………
500,000
Selling and administrative expenses …………………………..…………………….
450,000
Net income ……………………………………………………………………………………
$ 50,000
*Variable product costs (300,000 lbs. x $2 per lb.) ……………….
$ 600,000
Fixed product costs …………………………………………………………..
1,200,000
Total product costs ……………………………………………………………
$1,800,000
Absorption cost per ton ($1,800,000 / 300,000 lbs.) …………….
$6.00 per lb.
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
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Serial Problem — SP 19
Serial Problem—SP 19, Business Solutions (40 minutes)
Part 1 (a and b)
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
Cost of goods sold (300 x $1,380*);(300 x $1,375**) ……..
414,000
412,500
19,000
19,000
* 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
Total cost per unit ……………………………………
$1,380 per unit
Direct materials ……………………………………….
Direct labor ……………………………………………..
Variable overhead ……………………………………
Fixed overhead ($24,000/320 units)…………..
Variable ($50 x 300) ………………………………….
Fixed ……………………………………………………….
Total selling expenses …………………………..
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) …………………..
15,000
15,000
Total variable expenses ………………………………………
405,000
405,000
Contribution margin ………………………………………………
495,000
495,000
Fixed expenses
Factory overhead ………………………………………………..
24,000
24,000
Selling expenses …………………………………………………
4,000
Total fixed expenses …………………………………………..
28,000
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
ending inventory. Variable costing income will be $467,000 no matter how
Company Analysis — AA 19-1
1. Apple reports net income of $48,351 (millions) for the year ended
September 30, 2017. This is prepared using absorption costing, in
accordance with U.S. GAAP.
3. Variable costing income
2017 Absorption costing income…………………….. $48,351.0
– Fixed overhead costing in ending inventory*……… (485.5)
+ Fixed overhead cost in beginning inventory………. 213.2
= 2017 Variable costing income………………………… $48,078.7
*Fixed overhead cost is assumed to be 10% of both beginning and ending inventory.
Comparative Analysis — AA 19-2
2. Google’s inventory level increased from 2016 to 2017. When inventory
levels increase, variable costing income will be lower than absorption
costing income.
Global Analysis — AA 19-3
1. Samsung reports the following inventories (millions):
December 31, 2017………………………………………… ¥24,983,355
December 31, 2016…………………………………………. 18,353,503
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
can avoid expensing some of the fixed manufacturing costs by
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
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
total variable costs. If a company uses variable costing, the break-even
volume will provide zero net income. If Mertz’s sales volume is below the
break-even volume, a variable costing income statement would show a
loss.
Taking It to the Net — BTN 19-3
1. This requires that students print out the required page.
2. Variable costing is also called “direct costing” or “marginal costing.”
3. According to the website:
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.
• When considering special offers, variable costing information is more
relevant.
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
income between these two methods depends, in large part, on the amount
of goods held in ending inventory. Since Lantern Inn provides a service, it
holds no goods in inventory. Thus, there would no difference in income
due to the different accounting methods.
Hitting the Road — BTN 19-6
1. Many answers are possible, but variable costs with respect to
occupancy would include: cleaning supplies; laundry for towels, linens,
etc.; water (if the hotel pays per gallon of water usage); and wages of
maid service.
2. Fixed costs would include: Salary of hotel manager; wages of front desk
staff; wages of maintenance staff; utilities (the hotel is likely to keep
vacant rooms heated and cooled); depreciation; taxes.