Connect - Managerial Accounting Chapter 6

1.

Trio Company reports the following information for the current year, which is its first year of operations.

  

Direct materials	$	15	per unit
Direct labor	$	16	per unit
Overhead costs for the year
Variable overhead	$	80,000	per year
Fixed overhead	$	160,000	per year
Units produced this year		20,000	units
Units sold this year		14,000	units
Ending finished goods inventory in units		6,000	units
Compute the cost per unit using absorption costing. Cost per unit of finished goods using: Absorption costing Direct materials per unit $15 Direct labor per unit 16 Variable overhead per unit 4 Fixed overhead per unit 8 Cost per unit of finished goods $43 Determine the cost of ending finished goods inventory using absorption costing. Cost per unit of finished goods using: Absorption costing Number of units in finished goods 6,000 Total cost of finished goods inventory $258,000 Determine the cost of goods sold using absorption costing. Cost per unit of goods sold using Absorption costing Number of units in sold goods 14,000 Total cost of sold goods $602,000

-----------------------------------------------------------------------------------------------------------------------------------

2.

Trio Company reports the following information for the current year, which is its first year of operations.

  

Direct materials	$	15	per unit
Direct labor	$	16	per unit
Overhead costs for the year
Variable overhead	$	80,000	per year
Fixed overhead	$	160,000	per year
Units produced this year		20,000	units
Units sold this year		14,000	units
Ending finished goods inventory in units		6,000	units
Compute the cost per unit using variable costing. Cost per unit of finished goods using: Variable costing Direct materials per unit $15 Direct labor per unit 16 Variable overhead per unit 4 Cost per unit of finished goods $35 Determine the cost of ending finished goods inventory using variable costing. Cost per unit of finished goods using: Variable costing Number of units in finished goods 6,000 Total cost of finished goods inventory $210,000 Determine the cost of goods sold using variable costing. Cost per unit of goods sold using Variable costing Number of units in sold goods 14,000 Total cost of sold goods $490,000

-----------------------------------------------------------------------------------------------------------------------------------

3.

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2015. Its cost and sales information for this year follows.

Manufacturing costs
Direct materials	$	40	per unit
Direct labor	$	60	per unit
Overhead costs for the year
Variable overhead	$	3,000,000
Fixed overhead	$	7,000,000
Selling and administrative costs for the year
Variable	$	770,000
Fixed	$	4,250,000
Production and sales for the year
Units produced		100,000	units
Units sold		70,000	units
Sales price per unit	$	350	per unit

1.	Prepare an income statement for the year using variable costing.

SIMS COMPANY Variable Costing Income Statement Sales $24,500,000 Less: Variable costs Direct materials 2,800,000 Direct labor 4,200,000 Variable overhead costs 2,100,000 Variable selling and administrative expenses 770,000 Total variable costs 9,870,000 Contribution margin 14,630,000 Less: Fixed expenses Fixed selling and administrative costs 4,250,000 Fixed overhead costs 7,000,000 Total fixed expenses 11,250,000 Net income (loss) $3,380,000

2.	Prepare an income statement for the year using absorption costing.

SIMS COMPANY Absorption Costing Income Statement Sales $24,500,000 Less: Cost of goods sold Direct materials $2,800,000 Direct labor 4,200,000 Variable overhead costs 2,100,000 Fixed overhead costs 4,900,000 Cost of goods sold 14,000,000 Gross margin 10,500,000 Selling general and administrative expenses Fixed selling and administrative costs 4,250,000 Variable selling and administrative expenses 770,000 Total selling, general and administrative expenses 5,020,000 Net income (loss) $5,480,000

3.	Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

Production equals sales and there is no beginning finished goods inventory

-----------------------------------------------------------------------------------------------------------------------------------

4.

Rey Company’s single product sells at a price of $216 per unit. Data for its single product for its first year of operations follow.

   

Direct materials	$	20	per unit
Direct labor	$	28	per unit
Overhead costs
Variable overhead	$	6	per unit
Fixed overhead per year	$	160,000	per year
Selling and administrative expenses
Variable	$	18	per unit
Fixed	$	200,000	per year
Units produced and sold		20,000	units

1.	Prepare an income statement for the year using absorption costing

REY COMPANY Absorption Costing Income Statement Sales $4,320,000 Less: Cost of goods sold Direct materials 400,000 Direct labor 560,000 Variable overhead costs 120,000 Fixed overhead costs 160,000 Cost of goods sold 1,240,000 Gross margin 3,080,000 Selling general and administrative expenses Fixed selling and administrative costs 200,000 Variable selling and administrative expenses 360,000 Total selling, general and administrative expenses 560,000 Net income (loss) $2,520,000

2.	Prepare an income statement for the year using variable costing.

REY COMPANY Variable Costing Income Statement Sales $4,320,000 Less: Variable costs Direct materials 400,000 Direct labor 560,000 Variable overhead costs 120,000 Variable selling and administrative expenses 360,000 Total variable costs 1,440,000 Contribution margin 2,880,000 Less: Fixed expenses Fixed selling and administrative costs 200,000 Fixed overhead costs 160,000 Total fixed expenses 360,000 Net income (loss) $2,520,000

-----------------------------------------------------------------------------------------------------------------------------------

Questions 5-6

[The following information applies to the questions displayed below.]

Oak Mart, a producer of solid oak tables, reports the following data from its second year of business.

Sales price per unit	$	320	per unit
Units produced this year		115,000	units
Units sold this year		118,000	units
Units in beginning-year inventory		3,000	units
Beginning inventory costs
Variable (3,000 units × $135)	$	405,000
Fixed (3,000 units × $80)		240,000
Total	$	645,000
Manufacturing costs this year
Direct materials	$	40	per unit
Direct labor	$	62	per unit
Overhead costs this year
Variable overhead	$	3,220,000
Fixed overhead	$	7,400,000
Selling and adminstrative costs this year
Variable	$	1,416,000
Fixed		4,600,000

5.

1.	Prepare the current year income statement for the company using variable costing.

OAK MART COMPANY Variable Costing Income Statement Sales $37,760,000 Less: Variable costs Beginning inventory: Variable costs $405,000 Manufacturing cost this year Direct materials 4,600,000 Direct labor 7,130,000 Variable overhead costs 3,220,000 Total variable costs available 15,355,000 Less: Ending finished goods inventory 0 Variable cost of goods sold 15,355,000 Variable selling and administrative expenses 1,416,000 Total variable costs 16,771,000 Contribution margin 20,989,000 Less: Fixed expenses Fixed selling and administrative costs $4,600,000 Fixed overhead costs 7,400,000 Total fixed expenses 12,000,000 Net income (loss) $8,989,000

6.

2.	Prepare the current year income statement for the company using absorption costing.

OAK MART COMPANY Absorption Costing Income Statement Sales $37,760,000 Less: Cost of goods sold Beginning inventory $645,000 Manufacturing costs this year: Direct materials 4,600,000 Direct labor 7,130,000 Variable overhead costs 3,220,000 Fixed overhead costs 7,400,000 Less: Ending inventory 0 Cost of goods sold 22,995,000 Gross margin 14,765,000 Selling general and administrative expenses Fixed selling and administrative costs $4,600,000 Variable selling and administrative expenses 1,416,000 Total fixed expenses 6,016,000 Net income (loss) $8,749,000 Net income under variable costing is higher than net income under absorption costing costing by: 240,000 Number of units added to(subtracted from) inventory 3,000 Fixed overhead cost per unit $80 Fixed costs added to(subtracted from) inventory $240,000

-----------------------------------------------------------------------------------------------------------------------------------

A company is currently operating at 80% capacity producing 5,000 units. Current cost information relating to this production is shown in the table below:

	Per Unit
Sales price	$34
Direct material	$2
Direct labor	$3
Variable overhead	$4
Fixed overhead	$5

The company has been approached by a customer with a request for a 100-unit special order. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?
Any amount over $9 per unit.

The data needed for cost-volume-profit analysis is readily available if the income statement is prepared under absorption costing.
False

Assume a company had the following production costs:

Direct labor	$2 per unit
Direct material	$3 per unit
Variable overhead	$4 per unit
Total variable	$9 per unit
Fixed overhead ($50,000/10,000 units)	$5 per unit
Total production cost	$14 per unit

Under absorption costing, the total product cost per unit when 4,000 units are produced would be $22.50.
False

Manufacturing overhead costs are those that can be traced directly to the product.
False

When the number of units produced is equal to the number of units sold, net income reported under variable costing is identical to net income reported under absorption costing.
True

A company normally sells a product for $25 per unit. Variable per unit costs for this product are: $3 direct materials, $5 direct labor, and $2 variable overhead. The company is currently operating at 100% of capacity producing 30,000 units per year. Total fixed costs are $75,000 per year. The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs.
False

Given the following data, total product cost per unit under absorption costing will be greater than total product cost per unit under variable costing.

Direct labor	$9 per unit
Direct materials	$7 per unit
Overhead
Total variable overhead	$45,000
Total fixed overhead	$27,000
Expected units to be produced	9,000 units

True

When the number of units produced exceeds the number of units sold, absorption costing defers some of the fixed costs incurred.
True

During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit, Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at year-end. What is the value of ending inventory under absorption costing?
$110,000

The bottom line of a contribution margin report is net income.
False

Which of the following would be a line item for a variable costing income statement?
Contribution margin

Given the following data, total product cost per unit under variable costing is $10.75.

Direct labor	$7 per unit
Direct materials	$1 per unit
Overhead
Total variable overhead	$20,000
Total fixed overhead	$90,000
Expected units to be produced	40,000 units

False

Swola Company reports the following annual cost data for its single product.

Normal production level	75,000 units
Direct materials	$1.25 per unit
Direct labor	$2.50 per unit
Variable overhead	$3.75 per unit
Fixed overhead	$300,000 in total

This product is normally sold for $25 per unit. If Swola increases its production to 200,000 units, while sales remain at the current 75,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing?
$187,500 increase.

Given the following data, total product cost per unit under absorption costing will be $400 greater than total product cost per unit under variable costing.

Direct labor	$1.50 per unit
Direct materials	$1.50 per unit
Overhead
Total variable overhead	$900,000
Total fixed overhead	$1,200,000
Expected units to be produced	3,000 units

True

Absorption costing is usually used for internal management purposes, and variable costing is usually used for external reporting purposes.
False

Sales less total variable costs equals manufacturing margin.
False

Assuming fixed costs remain constant, and a company sells more units than it produces, then income under absorption costing is less than income under variable costing
True

If a company has excess capacity, increases in production level will increase variable production costs but not fixed production costs.
True

Assuming fixed costs remain constant, and a company produces and sells the same number of units, then income under absorption costing is less than income under variable costing.
False

Variable costing separates the variable costs from fixed costs and therefore makes it easier to identify and assign control over costs.
True

Which of the following costing methods charges all manufacturing costs to its products?
Absorption costing

-----------------------------------------------------------------------

Sea Company reports the following information regarding its production costs:

Units produced	42,000 units
Direct labor	$35 per unit
Direct materials	$28 per unit
Variable overhead	$17 per unit
Fixed overhead	$105,000 in total

Compute the product cost per unit under absorption costing.
$82.50

Compute the product cost per unit under variable costing.

$80.00

The traditional costing approach assigns all manufacturing costs to products.
True

Given the following data, total product cost per unit under variable costing is $7.09.

True

When there are zero units in Beginning Finished Goods Inventory and the units produced are more than the units sold, the income will be lower under variable costing than under absorption costing.
True

Variable costing is the only acceptable basis for both external reporting and tax reporting.
False

The use of absorption costing can result in misleading product cost information.
True

Alexis Co. reported the following information for May:

What is the manufacturing margin for Part A?
$1,400,000

Chance, Inc. sold 3,000 units of its product at a price of $72 per unit. Total variable cost per unit is $51, consisting of $32 in variable production cost and $19 in variable selling and administrative cost. Compute the manufacturing margin for the company under variable costing.
$120,000

Using a traditional costing approach, which of the following manufacturing costs are assigned to products?
Variable manufacturing overhead, direct materials, direct labor, and fixed manufacturing overhead.

Swisher, Incorporated reports the following annual cost data for its single product:

This product is normally sold for $48 per unit. If Swisher increases its production to 50,000 units, while sales remain at the current 30,000 unit level, by how much would the company's income increase or decrease under variable costing?
There is no change in gross margin.

Which of the following is not considered a product cost?
Research and development costs.

Shore Company reports the following information regarding its production cost.

Compute production cost per unit under absorption costing.
$60.39

Quaker Corporation sold 6,600 units of its product at a price of $42.40 per unit. Total variable cost per unit is $19.25, consisting of $10.15 in variable production cost and $9.10 in variable selling and administrative cost. Compute contribution margin for the company.
$152,790

Special order decisions should be made using variable costing because:
Only variable costs will increase as a result of the special order.

Accurate Metal Company sold 32,000 units of its product at a price of $250 per unit. Total variable cost per unit is $155, consisting of $145 in variable production cost and $5 in variable selling and administrative cost. Compute the manufacturing margin for the company under variable costing.
$3,360,000

Mentor Corp. has provided the following information for the current year:

Calculate the unit product cost using variable costing.
$145