Solution manual cost and managerial accounting by barfield 3rd absorption(variable) costing and cost volume profit analysis
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Chapter 13
Absorption and Variable Costing
Chapter 11
Absorption/Variable Costing and CostVolumeProfit
Analysis
Questions
1.
The two basic differences between absorption and variable
costing lie in the treatment of fixed factory overhead and the
presentation of costs/expenses on the income statement.
Absorption costing treats fixed factory overhead as a product
cost and allocates it to the units produced during the period;
variable costing treats fixed overhead as a period expense and
charges the full amount incurred to the income of the period.
Absorption costing presents costs on the income statement in
their functional categories without regard to cost behavior
while variable costing presents costs on the income statement
as either fixed or variable as well as product or period.
2.
The underlying cause of the difference between absorption and
variable costing is the definition of an asset. Asset cost
should include all costs necessary to get an item into place
and ready for sale or use. Absorption costing considers fixed
overhead to be an inventoriable cost (asset) because products
could not be produced without the basic manufacturing capacity
represented by fixed overhead cost. Variable costing
proponents, however, believe that fixed overhead is not an
inventoriable cost because it is incurred regardless of
whether production is achieved. This is not a problem for
which there is a single correct answer since both positions
have logical and rational arguments to support them.
3.
A functional classification requires cost to be classified
based on the reason it was incurred, i.e., selling,
administrative, or production. A behavioral classification of
costs requires costs to be classified according to the way the
cost behaves with changes in product volume, i.e., variable or
fixed.
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Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
4.
Absorption costing is required for external reporting. The
rationale is that fixed manufacturing overhead is regarded as
a product cost and that it should therefore be included with
the variable production costs and be shown as an expense only
in the period in which the related products are sold.
5.
Use of monetary, quantitative information varies greatly
between external and internal users. External users emphasize
profitability potential; internal users emphasize information
that helps make sales, production, and capital expenditure
decisions.
Both absorption and variable costing have a place in
decision making. Accountants and decision makers need to
understand the applications and limitations of the two
techniques within the context of past, present, and future
cost information needs. No matter which type of costing a
firm uses, the firm’s total revenue must cover all costs—both
variable and fixed—and also generate a satisfactory profit if
a firm is to survive in the long run.
The methods of cost accumulation and cost presentation
used for reporting are determined by what is acceptable to
those parties for whom the reports are intended. External
reporting is guided by the characteristics of reliability,
uniformity, and consistency. Internal reporting is guided by
flexibility in helping managers with planning, controlling,
decision making, and performance evaluation.
Absorption costing requires a functional classification of
costs, with two major cost groupings: product and period.
Variable costing requires costs to be classified according to
their behavior: fixed or variable. In addition, variable
costing can employ a dual categorization of costs; costs are
first classified by their behavior and then, within the
behavioral classes, costs are further classified as to their
function.
6.
7.
Variable overhead is highly correlated with production,
meaning that it statistically changes directly and
proportionately with production. Because it behaves with
respect to production the same way as direct material and
direct labor, and treats only these three costs as product
costs, many accountants have called it direct costing.
Variable costing is a better term because all three costs are
variable; however, variable overhead must be allocated and is,
therefore, not direct.
8.
Many important organizational decisions involve a
consideration of impacts on volume of production and sales,
and/or tradeoffs between variable and fixed costs. A scheme
that requires costs to be classified by their behavior lends
itself to these types of decisions.
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
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Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
9.
Student answers will vary. No solution provided.
10.
When the production level exceeds the sales level, absorption
costing income will be higher than variable costing income
because some of the fixed factory overhead incurred during the
period will be deferred into inventory rather than going to
the income statement. Since no fixed overhead is inventoried
under variable costing, there will be more dollars of expense
on the income statement under variable costing than there will
be under absorption costing.
When the production level is less than the sales level,
some of the fixed overhead deferred in previous periods will
be charged against income as part of cost of goods sold under
absorption costing in addition to the current period fixed
overhead. Thus, there will be greater income charges under
absorption costing than under variable, resulting in a smaller
income amount.
11.
The breakeven point is the starting point for CVP analysis
because before a company can earn profits, it must first cover
all of its variable and fixed costs; the point at which all
costs are just covered is the breakeven point.
12.
Contribution margin is selling price minus variable cost.
Contribution margin is the amount that is available to cover
fixed costs and generate profits for the company. It
fluctuates in direct proportion with sales volume because the
two elements used in its computation (selling price and
variable cost) are both variable and, thus in total, fluctuate
directly with sales volume.
13.
The usefulness of CVP analysis is its ability to clearly
forecast income expected to result from the shortrun
interplay of cost, volume, price, and quality. It is often
useful in analyzing current problems regarding product mix,
make or buy, sell or process further, and pricing.
In the long run, however, all of these factors and their
relationships and the assumptions that underlie CVP regarding
these factors are likely to change. This emphasizes that CVP
only holds true for the short run. Results must be
recalculated periodically to maintain validity.
14.
The variable costing income statement is depicted by the
following equation: Sales variable costs fixed costs =
pretax income. At any operating level, total revenues are
equal to total expenses plus profits (or minus losses). Total
expenses can be illustrated by the formula for a straight line
(y=a+bX). At the breakeven point, y (total costs) is equal to
total revenues. By adding an additional amount for desired
profit, it is "as if another cost needs to be covered,
requiring revenues to increase to that extent."
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
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Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
15.
If fixed costs increase and selling price and variable costs
remain constant, contribution margin will not change because
fixed costs do not enter into the computation of contribution
margin. Because a larger amount of fixed costs must now be
covered by the same amount of contribution margin per unit,
the breakeven point will rise.
16.
Contribution margin per unit can be divided into fixed costs
to compute breakeven point in units. Contribution margin
percentage can be divided into fixed costs to compute break
even point in sales dollars.
17.
The contribution margin ratio is simply the contribution
margin per unit divided by the sales price per unit. The
breakeven point is obtained by dividing total fixed costs by
the contribution margin ratio.
18.
Since taxes will reduce income before taxes by $.40 of each
dollar, the income that will remain to be considered net
income or profits will only be $.60 of each dollar. Therefore,
to generate $.60 of net income, the company will need to
produce $1.00 of income before taxes dividing what is
desired by the remaining portion after taxes yields the
corresponding value before taxes.
19.
The "bag" or "basket" assumption means that a multiproduct
firm will consider that the products it sells are sold in a
constant, proportional sales mix as if in a bag of goods. It
is necessary to make this assumption in order to determine the
contribution margin for the entire company product line, since
individual products' contribution margins may differ
significantly. A single contribution margin must be used in
CVP analysis so the "bag" or "basket" assumption allows CVP
computations to be made.
20.
The margin of safety is a measure that presents the difference
between the actual or pro forma level of sales and its break
even point, BEP. Remember that the BEP is not a commercial
objective, but rather a reference point against which actual
or pro forma sales can be compared, and the margin of safety
measures either the comfort or risk, depending on whether the
margin of safety is greater than or less than the BEP.
Therefore, the margin of safety is the relationship of actual
or pro forma sales to the BEP reference point.
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
31
21.
Operating leverage refers to the amount of fixed costs
relative to variable costs in a company's cost structure.
Higher operating leverage is associated with a higher
proportion of fixed costs; lower operating leverage is
associated with a lower level of fixed costs. The level of
operating leverage is dependent on the level of revenues.
Further, operating leverage provides information about how
profit will change when revenue changes. High operating
leverage indicates that the level of profit is very sensitive
to a change in revenue level. The reverse is true for low
operating leverage.
Margin of safety is the difference between actual or
projected sales and breakeven level sales. It identifies the
amount by which sales could fall and still leave the firm's
bottom line in the black.
22.
Breakeven charts are prepared to show, in graphic form, the
relationships between revenues, expenses, volume, and profits
(losses). The traditional breakeven chart does not present
contribution margin, whereas the contemporary breakeven chart
does. On the contemporary breakeven chart, contribution
margin is indicated by the area between the revenue line and
the variable cost line. The profitvolume graph plots profit
against volume.
Exercises
23.
24.
a.
(20,000 18,400) × $8.50 = $13,600
b.
(20,000 18,400) × ($8.50 $1.50) = $11,200
c.
Absorption costing would have produced the higher net
income because it would have required $2,400 (1,600 ×
$1.50) of fixed manufacturing overhead to be inventoried
rather than to be charged against income.
The only difference between variable and absorption net income
is due to the difference in treatment of fixed manufacturing
overhead.
Fixed overhead expensed:
Variable costing $500,000
Absorption costing ($500,000 × (37,500÷40,000)) 468,750
NI difference $ 31,250
The company's net income would have been $31,250 higher.
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25.
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
a.
Ingredients
Labor
Variable overhead
Total variable cost
Divided by units
Variable cost per unit
$28,000
13,000
24,000
$65,000
÷100,000
$0.65
Total variable cost
$65,000
Fixed overhead
12,000
Total cost
$77,000
Divided by units
÷100,000
Absorption cost per unit
$0.77
b.
Variable cost of goods sold = 99,000 × $0.65 = $64,350
c.
Cost of goods sold = 99,000 × $0.77 = $76,230
d.
Ending inventory (variable costing) = 1,000 × $0.65
= $650
Ending inventory (absorption costing) = 1,000 × $0.77
= $770
Fixed overhead charged to expense (variable costing)
= $12,000
Fixed overhead charged to expense (absorption costing)
= 99,000 × ($12,000 ÷ 100,000) = 99,000 × $0.12 = $11,880
e.
26.
a.
Incomevariable costing $90,000
Deduct additional fixed cost ($6 × 2,000) 12,000
Incomeabsorption costing $78,000
b.
Incomevariable costing $ 90,000
Add inventoriable fixed cost ($6 × 3,000) 18,000
Incomeabsorption costing $108,000
27. a.
1. Charming Curios
Income Statement (Absorption Costing Basis)
For the Month ended April 2002
($000 omitted)
Sales
$4,800
Less cost of goods sold:
Variable cost per unit
$ 24
Fixed overhead cost per unit
10
Total unit cost
$ 34
Times number of units sold
× 100
Cost of goods sold at standard
$3,400
Less production volume variance
(5,000 units @ $10)
(50)
(3,350)
Gross margin
$1,450
Less fixed selling & administrative expenses
(800)
Income before taxes
$ 650
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
2.
33
Difference in incomes = $600 $650 = ($50)
This amount is equal to the increase in inventory of
5,000 units × $10 per unit fixed overhead deferred
in ending inventory under absorption costing.
b.
The vicepresident of marketing should find the variable
costing approach to income determination desirable for
many reasons, including these:
•Variable costing income varies with units sold, not
units produced.
•Fixed manufacturing overhead costs are charged against
revenue in the period in which they are incurred;
consequently, manufacturing cost per unit does not
change with a change in production level.
•The contribution margin offers a useful tool for making
decisions that consider changes in relationships among
costs, volume levels, and profit figures.
(CMA adapted)
28.
a.
Estimated fixed overhead = $0.16 × 200,000 = $32,000
b.
Actual (and estimated) fixed overhead
Applied fixed overhead (180,000 × $.16)
Underapplied fixed overhead (absorption)
$32,000
28,800
$ 3,200
There would be no under or overapplied fixed overhead
under variable costing since fixed overhead is not
applied to units of product.
c.
Direct materials
Direct labor
Variable overhead
Cost per unit (variable)
Fixed overhead
Cost per unit (absorption)
$0.18
0.10
0.05
$0.33
0.16
$0.49
d.
Absorption Cost of Goods Sold (195,000 × $0.49) $ 95,550
Plus underapplied overhead
3,200
Adjusted cost of goods sold
$ 98,750
Selling and administrative costs:
Variable (195,000 × $0.14) $ 27,300
Fixed
150,000 177,300
Total period costs (absorption)
$276,050
Variable cost of goods sold (195,000 × $0.33) $ 64,350
Variable selling expenses (195,000 × $0.14) 27,300
Fixed overhead
32,000
Fixed selling and administrative
150,000
Total period costs (variable)
$273,650
34
29.
30.
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
e.
Income will be higher under variable costing because the
sales level is greater than the production level. It
will be higher by the fixed overhead per unit ($0.16)
times the change in inventory (15,000 unit decline) or
$2,400.
a.
Total revenue rises by $50 + $42 = $92.
b.
Total costs rise by the amount of variable costs, $42.
c.
Total pretax profit rises at the rate of the CM per unit,
$50.
Breakeven in units = $120,875 ÷ ($60$35) = 4,835 units; in
dollars breakeven = 4,835 × $60 = $290,100
31.
Let Y = level of sales that generate pretax income = 30% of
sales, then:
Y 0.60Y ($50,000 × 12) = 0.30Y
0.10Y = $600,000
Y = $6,000,000.
Since existing sales are $2,500,000, sales would need to
increase by $6,000,000 $2,500,000 = $3,500,000.
32.
a.
First, convert the desired aftertax income to a pretax
desired income:
$495,014 ÷ (1 0.35) = $761,560
Note that total variable costs per unit = $1,800, and
total fixed costs = $280,420.
Next, let P represent the number of playhouses that must
be sold to generate $761,560 in pretax income:
$3,000P $1,800P $280,420 = $761,560
$1,200P = $1,041,980
= 869 playhouses
(rounded)
b.
Find aftertax equivalent of 20%: 20% ÷ (1 0.35) =
30.77%. Variable costs as a percentage of sales: $1,800
÷ $3,000 = 60%.
Let R = the level of revenue that generates a pretax
return of 30.77%:
R 0.60R $280,420 = 0.3077R
0.0923R = $280,420
R = $3,038,137 (rounded)
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
33.
a.
35
Sales ($4.50 × 200,000) $900,000
Variable Costs ($2.70 × 200,000) (540,000)
Contribution Margin $360,000
Fixed Costs (316,600)
Net Income $ 43,400
BEP = $316,600 ÷ .4 = $791,500
Margin of safety, dollars: $900,000 $791,500 = $108,500
Margin of safety in units: $108,500 ÷ $4.50 = 24,111
units
b.
$360,000 ÷ $43,400 = 8.29
c.
Income will increase by: 8.29 × 30% = 249%
Proof:
Sales ($4.50 × 200,000 × 1.30) $1,170,000
Variable Costs ($2.70 × 200,000 × 1.30) (702,000)
Contribution Margin $ 468,000
Fixed Costs (316,600)
Net Income $ 151,400
($151,400 $43,400) ÷ $43,400 = 249%
d.
BEP = ($316,600 + $41,200) ÷ 0.4 = $894,500
Sales ($4.50 × 200,000 × 1.15) $1,035,000
Variable Costs ($2.70 × 200,000 × 1.15) (621,000)
Contribution Margin $ 414,000
Fixed Costs (357,800)
Net Income $ 56,200
Operating leverage = $414,000 ÷ $56,200 = 7.37
34.
a.
Each "bag" contains 2 units of M and 4 units of N. Thus,
each bag generates contribution margin of:
(2 × $10) + (4 × $5) = $40. The breakeven point would
be: $90,000 ÷ $40 = 2,250 bags. Since each bag contains
4 units of N, at the breakeven point 2,250 × 4 = 9,000
units of N would be sold.
b.
At the breakeven point, total CM = total FC; and the CM
per unit would be $800 ÷ 2,000 = $0.40. If one unit is
sold beyond the breakeven point, net income would rise
by $0.40.
c.
$5X 0.40($5X) $108,000 = 0.25($5X)
$1.75X = $108,000
X = 61,715 units
d.
In units: 1,600 1,400 = 200 units
In dollars: 200 units × $65 per unit = $13,000
36
35.
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
a.
Percentage: $13,000 ÷ ($65 X 1,600) = 12.5%
Each bag contains 3 gloves and 1 bat. Each bag generates
(3 × $4) + (1 × $5) = $17 of contribution margin.
BEP = $200,000 ÷ $17 = 11,764.71, or 11,765 bags.
11,765 bags contain 11,765 × 3 = 35,295 bats and 11,765
gloves.
Bat revenue: 11,765 × 3 × $10 = $352,950
Glove revenue: 11,765 × 1 × $15 = 176,475
Total revenue $529,425
Alternatively, the BEP can be computed based on dollars
rather than units. Total revenue per bag is (3 × $10) +
(1 × $15) = $45. The CM% = $17 ÷ $45 = 37.78%
BEP = $200,000 ÷ 0.3778 = $529,381. Note that due to
rounding, this answer differs slightly from the answer
obtained using the units approach.
b.
0.3778X $200,000 = $90,000; X = $767,601.91
c.
Convert aftertax revenue to pretax revenue:
$90,000 ÷ (1 .40) = $150,000
X .3778 $200,000 = $150,000
X = $926,416.09
d.
First, determine how many bags were sold:
$767,601.91 ÷ $35 = 21,931 bags
Total CM:
Bats: 21,931 × 2 × $4 = $175,448
Gloves: 21,931 × 1 × $5 = 109,655 $285,103
Fixed costs 200,000
Profit $ 85,103
The actual profit is lower than the expected profit
because each dollar of sales generated less contribution
margin than the planned sales. This is proven below:
Actual Bag Planned Bag
Sales $35 $45
CM 13 17
CM% 37.14% 37.78%
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
37
36. a.
Total
revenue
curve
Traditional CVP Graph
200000
Breakeven
Point
180000
160000
Profit
area
140000
$
120000
100000
Total
costs
80000
Loss
area
60000
40000
20000
Fixed Cost
0
0
7500
15000
Units of production
22500
38
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
b.
Breakeven Point
Total
revenue
curve
Contemporary CVP Graph
200000
Breakeven
point
180000
Profit
area
160000
Total
costs
140000
$
120000
100000
Fixed
costs
80000
60000
40000
Variable
costs
20000
0
0
7500
15000
Units of production
22500
Loss area
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
39
c.
Breakeven point
Profit
curve
Profit-Volume Graph
80000
60000
Profit
area
$
40000
20000
0
0
7500
15000
22500
Loss area
-20000
-40000
Units of production
d.
Graph (a) demonstrates how total costs and total
revenues behave as volume changes. In graph (a),
variable costs are not explicitly shown but can be
inferred as the distance between the total cost and fixed
cost lines. Profit or loss is the distance between the
total revenue and total cost lines. Graph (b) is similar
to graph (a) but it doesn't explicitly show fixed costs;
however the amount of fixed costs can be determined by
looking at the area between the total cost line and the
variable cost line. Graph (c) shows only how profit
changes with changes in volume. The shaded area to the
right of the profit curve is the profit area; the shaded
area to the left is the loss area. No actual revenues or
costs can be determined by looking at this graph.
40
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
Problems
37.
a.
George Jones Enterprises
Income Statement (Absorption)
For the Year Ended December 31, 2002
Sales
$3,750,000
Cost of goods sold Variable (1,950,000)
Fixed overhead $1,500,000 × (1,500 ÷ 1,750) (1,285,714)
Gross profit
$ 514,286
Variable selling & administrative $270,000
Fixed selling & administrative
190,000 (460,000)
Net income
$ 54,286
b.
The difference in the amounts is equal to the fixed
overhead of ($1,500,000 ÷ 1,750 units) approximately
$857.14 per unit times the 250 units produced but not
sold during the year. This $214,286 is contained in
ending inventory under absorption costing, whereas it
appears as part of total fixed overhead expense on the
variable costing income statement.
c.
It is not only ethical, it is required for the statements
to be in conformity with generally accepted accounting
principles.
d.
1. George Jones Enterprises
Income Statement (Variable)
For the Year Ended December 31, 2003
Sales
$4,625,000
Variable cost of goods sold (1,850 × $1,300)
(2,405,000)
Product contribution margin
$2,220,000
Variable selling & administrative ($180 × 1,850) (333,000)
Contribution margin
$1,887,000
Fixed overhead
$1,500,000
Fixed selling & administrative 190,000
(1,690,000)
Net income
$ 197,000
2. George Jones Enterprises
Income Statement (Absorption)
For the Year Ended Dec. 31, 2003
Sales
$4,625,000
Cost of goods sold Variable
2,405,000
Fixed overhead $1,500,000 × (1,850 ÷ 1,750) (1,585,714)
Gross profit
$ 634,286
Variable selling & administrative $333,000
Fixed selling & administrative
190,000
(523,000)
Net income
$ 111,286
Net income under variable costing
Net income under absorption costing
Difference in net incomes
$197,000
(111,286)
$ 85,714
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
3.
38.
41
The difference in the net incomes is equal to the
incremental decrease in the ending balances of
the inventory accounts when compared to the
beginning balances. Another way to look at this more
easily is to multiply the 100 units sold in excess
of the 1,750 units produced by the fixed overhead
application rate.
a.
Direct material
Direct labor
Variable overhead
Total cost
$1.20
1.50
0.40
$3.10
b.
Direct material
Direct labor
Variable overhead
Fixed overhead
Total cost
$1.20
1.50
0.40
0.16
$3.26
c. Net income under variable costing
$223,000
Inventory incr. (10,000 units × $0.16 fixed OH) 1,600
Net income under absorption costing
$224,600
39.
a. Kirkfield Fashions
Income Statement (Variable)
For the Year Ended December 31, 2003
Sales (20,000 $40)
Variable cost of goods sold
(20,000 x $15)
Manufacturing variances (variable)
Contribution margin
Fixed costs:
Production
Selling & administrative
Income before taxes
$800,000
$300,000
4,000 (304,000)
$496,000
$117,000
125,000 (242,000)
$254,000
b. Kirkfield Fashions
Income Statement (Absorption)
For the Year Ended December 31, 2003
Sales (20,000 $40) $800,000
Cost of goods sold (20,000 x $18.90) $378,000
Manufacturing variances (unfavorable) 27,400
* 405,400)
Gross margin $394,600
Less Selling and administrative costs (125,000)
Income before taxes $269,600
*
From before
$ 4,000 variable
42
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
Underapplied OH 23,400 [(30,000 24,000) × $117,000 ÷
$27,400 U 30,000]
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
c.
Inventory increased 4,000 units. Each added unit absorbs
$3.90 in allocated fixed overhead or a total of $15,600.
The presumption in the problem is that the books are
maintained on a variable costing basis. Assuming only
the current year needs to be adjusted (the beginning
inventory of 2003 was charged with the appropriate fixed
overhead), then the entry would be:
Inventory
Cost of Goods Sold
Underapplied Overhead
Factory Overhead
d.
43
15,600
78,000
23,400
117,000
Advantages:
The fixed costs are reported at incurred values (and
not
applied), thus increasing the likelihood of better
control of those costs.
Profits are directly influenced by changes in sales
volume (and not influenced by building inventory).
The impact of fixed costs on profits is emphasized.
Product line, territory, etc., marginal contribution is
emphasized and more readily ascertainable.
The income statements are in the same form as the
costvolume profit relationships.
Disadvantages:
Total costs may be overlooked when considering
problems.
Distinction between fixed and variable cost is
arbitrary
for many costs.
Emphasis on variable cost may cause managers to ignore
fixed costs.
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.
The difficulty in separating fixed and variable costs
might cause statements to be misleading.
Statements would confuse investors used to absorption
costing statements.
Confidential information (on the nature of costs) could
be disclosed to competitors.
(CMA adapted)
44
40.
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
Babbage Digital
Income Statements (Absorption)
For the Years Ended December 31, 2002 and 2003
2002 (20,000 units) 2003 (24,000 units)
Sales (units × $190) $3,800,000 $4,560,000
Cost of Goods Sold:
(units × $130) $2,600,000 $3,120,000
Underapplied FOH 0 2,600,000 90,000 3,210,000
Gross Profit $1,200,000 $1,350,000
S&A:
Variable
(units × $20) $ 400,000 $ 480,000
Fixed 180,000 580,000 180,000 660,000
Income before taxes $ 620,000 $ 690,000
Babbage Digital
Income Statements (Variable)
For the Years Ended December 31, 2002 and 2003
2002 (20,000 units) 2003 (24,000 units)
Sales (units × $190)
$3,800,000
$4,560,000
Cost of Goods Sold:
(units × $100)
2,000,000
2,400,000
Product contribution
margin
$1,800,000
$2,160,000
Variable SG&A:
(units × $20)
400,000
480,000
Total contribution
margin
$1,400,000
$1,680,000
Fixed costs
Factory
$750,000
$750,000
S&A
180,000 930,000
180,000 930,000
Income before taxes
$ 470,000
$ 750,000
Net income (absorption)
Net income (variable)
Difference
2002 2003
$620,000 $690,000
470,000 750,000
$150,000 $(60,000)
Difference is equal to inventory change +5,000
Times FOH application rate
× $30
$150,000
2,000
× $30
$(60,000)
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
41.
45
a.
Revenues:
Airline bookings ($30,000 × 0.08) $2,400
Rental car bookings ($4,500 × 0.10) 450
Hotel bookings ($7,000 × 0.20) 1,400 $4,250
Costs:
Advertising $1,100
Rent 900
Utilities 250
Other 2,200 (4,450)
Net loss
$ (200)
b.
Increase in revenues $30,000 × 0.40 × 0.08 = $960
Increase in costs (600)
Increase in profits $360
Yes, Mr. Hand should incur the $600 of advertising expense
because it would generate $360 of new profits.
c.
Increase in revenues:
Airline bookings ($10,000 × .08) $ 800
Rental car bookings ($1,500 × .10) 150
Hotel bookings ($4,000 × 0.20) 800 $1,750
Increase in costs:
Kyle's commission ($1,750 × .50) 875
Kyle's wage 300
Additional utility cost 300 (1,475)
Increase in profits
$ 275
Yes, Joseph should hire Kyle because doing so would increase
his profits by $275.
d.
Increase in revenues:
Airline bookings ($8,000 × .08)
$ 640
Increase in costs:
Kyle's commission ($640 × .50) $320
Kyle's wage 300
Additional fixed cost 400 (1,020)
Increase in losses $ (380)
No. The decision to hire Kyle, in retrospect, was unwise
because the commissions he generated were insufficient to
cover the additional costs he generated.
46
42.
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
a.
Total variable costs = $28 + $12 + $8 = $48
CM per unit = $70 $48 = $22 per unit
CM% = $22 ÷ $70 = 31.43%
Total fixed costs = $20,000 + $48,000 = $68,000
BEP, units = $68,000 ÷ $22 per unit = 3,091 units
(rounded)
BEP, dollars = $68,000 ÷ 0.3143 = $216,354
b.
($80,000 + $68,000) ÷ .3143 = $470,888, this is ($470,888
÷ $70) = 6,727 units (rounded).
c.
Convert aftertax earnings to pretax earnings:
$80,000 ÷ (1 .40) = $133,333.
Required sales = ($133,333 + $68,000) ÷ .3143 = $640,577;
$640,577 ÷ $70 = 9,151 units.
d.
Convert the aftertax rate of earnings to a pretax rate
of earnings: (20% ÷ (1.40) = 33.33%.
Because the CM% is only 31.43%, no level of sales would
generate net income equal, on a pretax basis, to 33.33%
of sales.
e.
Variable cost savings (5,000 × $6) = $30,000
Additional fixed costs (8,000)
Additional profit $22,000
Yes, she should add the lab.
f.
Existing CM per unit = $22
CM under proposal = ($70 × 0.90) $48 = $15
Total CM under proposal (3,000 × 1.30) × $15 = $ 58,500
Existing CM (3,000 × $22) (66,000)
Change in CM $ (7,500)
Change in fixed costs (20,000)
Change in net earnings before taxes $(27,500)
No, these two changes should not be made because they
would lower pretax profits by $27,500 relative to
existing levels.
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
43.
47
a.
Dollars per unit Percent
Sales $25 100%
Variable costs 12 48
Contribution margin $13 52%
b.
BEP = $589,550 $13 per unit = 45,350 mice
c.
BEP = $589,550 0.52 = $1,133,750
d.
MS, in units = 120,000 45,350 = 74,650 mice
MS, in dollars = ($25×120,000) $1,133,750 = $1,866,250
MS, percentage = $1,866,250 $3,000,000 = 62.21%
e.
Current sales (120,000 × $25) $3,000,000
Variable costs (120,000 × $12) 1,440,000
Contribution margin $1,560,000
Fixed costs 589,550
Income before taxes $ 970,450
DOL = $1,560,000 $970,450 = 1.61 (rounded)
Percentage increase in income = 25% X 1.61 = 40.25%
f.
Required sales = ($589,550 + $996,450) $13 per mouse
= 122,000 mice
g.
Pretax equivalent of $657,800 = $657,800 (1 .20)
= $822,250
Required sales = ($589,550 + $822,250) $13 per mouse
= 108,600 mice
h.
BEP = ($589,550 + $7,865) $13 per mouse = 45,955 mice
i.
Additional sales ($20 × 4,000) $80,000
Additional VC: ($12.60 × 4,000) (50,400)
Additional Contribution margin $29,600
Additional fixed costs (18,000)
Additional pretax income $11,600
48
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
44.
a. Hun Company
Income Statement (Absorption)
First Qtr. Second Qtr.
Sales $2,250,000 $2,625,000
Cost of Goods Sold
Beginning FG $ 0 $ 309,000
CGM
Variable costs 2,058,000 1,764,000
Fixed costs 105,000 90,000
Available goods $2,163,000 $2,163,000
Ending FG (309,000) 0
Volume Var. (7,500) (1,846,500) 7,500 (2,170,500)
Gross Margin $ 403,500 $ 454,500
Operating expenses
Variable $ 171,000 $ 199,500
Fixed 21,400 (192,400) 21,400 (220,900)
Operating income $ 211,100 $ 233,600
Income taxes (73,885) (81,760)
Net income $ 137,215 $ 151,840
b. Hun Company
Income Statement (Variable)
First Qtr. Second Qtr.
Sales $2,250,000 $2,625,000
Variable Costs
Cost of Goods Sold
Beginning FG $ 0 $ 294,000
CGM
Variable prod. 2,058,000 1,764,000
Available goods $2,058,000 $2,058,000
Ending FG (294,000) 0
Other variable 171,000 (1,935,000) 199,500 (2,257,500)
Contribution Margin $ 315,000 $ 367,500
Fixed expenses
Production $ 97,500 $ 97,500
Operating 21,400 (118,900) 21,400 (118,900)
Pretax income $ 196,100 $ 248,600
Income taxes (68,635) (87,010)
Net income $ 127,465 $ 161,590
c.
1.
$75 ($58.80 + $5.70) = $10.50
2.
$10.50 $75 = 14%
3.
130,000 × $10.50 = $1,365,000
4.
Contribution margin $1,365,000
Fixed costs (($97,500 + $21,400) X 4) 475,600
Pretax income $ 889,400
Income taxes 311,290
Chapter 11
Absorption/Variable Costing and CostVolumeProfit Analysis
49
Net income $ 578,110
