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Eldenburg & Wolcott’s Cost Management, 1e Slide # 3
Q1: Absorption Costing Income Statements
• Under absorption costing, fixed manufacturing overhead is an inventoriable cost.
• GAAP requires the use of absorption costing.
• Absorption costing income statements are prepared using the traditional format.• Expenses are grouped by function.• Manufacturing costs deducted above the gross margin
subtotal.• Nonmanufacturing costs deducted below the gross
Eldenburg & Wolcott’s Cost Management, 1e Slide # 4
Q1: Absorption Costing IncomeStatement Example
Russell Corporation produces a product that sells for $10. In 2005, there were 10,000 units in beginning finished goods inventory. The company expected to produce, and actually did produce, 80,000 units, and 62,000 units were sold. The costs incurred in 2005 are shown below. Given the cost information below, compute the inventoriable costs per unit under absorption costing.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 5
Suppose that the Russell Corporation uses the LIFO inventory method. Prepare an absorption costing income statement for 2005.
Q1: Absorption Costing IncomeStatement Example
Note that cost of goods sold is based on the 2005 per-unit manufacturing costs because:
(1) Russell is using LIFO, and
(2) production exceeded sales in 2005.
Note that cost of goods sold is based on the 2005 per-unit manufacturing costs because:
(1) Russell is using LIFO, and
(2) production exceeded sales in 2005.
Sales (# units sold @ $10) $620,000 Cost of goods sold (# units sold @ $4.45) 275,900Gross margin 344,100Nonmfg costs ($70,000 + $55,800) 125,800Operating income $218,300
Sales (# units sold @ $10) $620,000 Cost of goods sold (# units sold @ $4.45) 275,900Gross margin 344,100Nonmfg costs ($70,000 + $55,800) 125,800Operating income $218,300
Russell Corporation produces a product that sells for $10. In 2005, there were 10,000 units in beginning finished goods inventory. The company expected to produce 100,000 units in 2005. However, it actually produced 80,000 units and sold 62,000 units. The costs incurred in 2005 are shown below. Compute the inventoriable costs per unit under absorption costing.
Direct materials $0.75 Direct labor $1.60 Variable mfg overhead $0.85 Fixed mfg overhead $1.00
$4.20
Note that choice of denominator level affects only the fixed overhead cost per unit.
Note that choice of denominator level affects only the fixed overhead cost per unit.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 10
Q2: Absorption Costing Income Statement & Volume Variance Example
Suppose that the Russell Corporation uses the LIFO inventory method and that the volume variance is considered material. Assume that the balances in WIP, FG, and CGS, before any adjustment for the volume variance, were at a ratio of 1:2:7 at 12/31/05. There was no fixed overhead spending variance in 2005. Compute the volume variance and prepare the year-end entry to close the Fixed overhead control account.
Note that the unfavorable volume variance equals the underapplied fixed overhead because there was no spending variance for fixed overhead.Note that the unfavorable volume variance equals the underapplied fixed overhead because there was no spending variance for fixed overhead.
Budgeted fixed overhead $100,000Fixed overhead applied (80,000 units x $1/unit) 80,000Unfavorable fixed overhead volume variance $20,000
Fixed overhead control 20,000Work in process [(1/10) x 20,000] 2,000Finished goods [(2/10) x 20,000] 4,000Cost of good sold [(7/10) x 20,000] 14,000
Eldenburg & Wolcott’s Cost Management, 1e Slide # 11
Q2: Absorption Costing Income Statement& Volume Variance Example
Using the cost information on slide #8 and the volume variance you calculated on the prior slide, prepare an absorption costing income statement for 2005.
Sales (# units sold @ $10) $620,000 Cost of goods sold: (# units sold @ $4.20) $260,400 Adjustment for volume variance 14,000 274,400Gross margin 345,600Nonmfg costs ($70,000 + $55,800) 125,800Operating income $219,800
Sales (# units sold @ $10) $620,000 Cost of goods sold: (# units sold @ $4.20) $260,400 Adjustment for volume variance 14,000 274,400Gross margin 345,600Nonmfg costs ($70,000 + $55,800) 125,800Operating income $219,800
Eldenburg & Wolcott’s Cost Management, 1e Slide # 13
Q3: Variable Costing Income Statement Example
Russell Corporation produces a product that sells for $10. In 2005, there were 10,000 units in beginning finished goods inventory. The company expected to produce, and actually did produce, 80,000 units, and 62,000 units were sold. The costs incurred in 2005 are shown below. Compute the inventoriable costs per unit under variable costing.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 14
Suppose that the Russell Corporation uses the LIFO inventory method. Prepare a variable costing income statement for 2005.
Q3: Variable Costing Income Statement Example
Note that cost of goods sold is based on the 2005 per-unit manufacturing costs because Russell is using LIFO.
Note that cost of goods sold is based on the 2005 per-unit manufacturing costs because Russell is using LIFO.
Sales (# units sold @ $8) $620,000 Variable costs:Cost of goods sold (# units sold @ $3.20) 198,400Nonmfg variable costs 55,800Contribution margin 365,800Fixed costs:Fixed mfg overhead 100,000Fixed nonmfg costs 70,000Operating income $195,800
Sales (# units sold @ $8) $620,000 Variable costs:Cost of goods sold (# units sold @ $3.20) 198,400Nonmfg variable costs 55,800Contribution margin 365,800Fixed costs:Fixed mfg overhead 100,000Fixed nonmfg costs 70,000Operating income $195,800
Eldenburg & Wolcott’s Cost Management, 1e Slide # 15
Suppose that the Russell Corporation uses the LIFO inventory method. Reconcile the income under variable costing you determined on the prior slide with the $218,300 income under absorption costing computed on slide #4.
Q3: Variable Costing Income Statement Example
Variable costing income $195,800
Add: fixed overhead attached to the increase in inventory
Eldenburg & Wolcott’s Cost Management, 1e Slide # 17
Sales (# units sold @ $8) $620,000 Cost of goods sold (# units sold @ $0.75) 46,500Throughput margin 573,500All other costs:Direct labor 128,000Variable mfg overhead 68,000Fixed mfg overhead 100,000Variable nonmfg overhead costs 55,800Fixed nonmfg costs 70,000Operating income $151,700
Q4: Throughput Costing Income Statement Example
Russell Corporation produces a product that sells for $10. In 2005, there were 10,000 units in beginning finished goods inventory. The company expected to produce, and actually did produce, 80,000 units, and 62,000 units were sold. The costs incurred in 2005 are shown below. Suppose that the Russell Corporation uses the LIFO inventory method. Prepare a throughput costing income statement for 2005.
Note that DL and VO costs expensed based on units produced, not
units sold
Note that DL and VO costs expensed based on units produced, not
units sold
Sales (# units sold @ $8) $620,000 Cost of goods sold (# units sold @ $0.75) 46,500Throughput margin 573,500All other costs:Direct labor 128,000Variable mfg overhead 68,000Fixed mfg overhead 100,000Variable nonmfg overhead costs 55,800Fixed nonmfg costs 70,000Operating income $151,700
Eldenburg & Wolcott’s Cost Management, 1e Slide # 18
Q4: Throughput Costing Income Statement Example continued
Reconcile the income under throughput costing you computed on the prior slide to the income under variable costing computed on slide #13 and to the income under absorption costing computed on slide #4.
Throughput costing income $151,700
Add: Costs attached to the increase in inventory:
Direct labor (18,000 units x $1.60/unit) 28,800
Variable overhead (18,000 units x $0.85/unit) 15,300
Variable costing income $195,800
Add: fixed overhead attached to the increase in inventory
(18,000 units x $1.25/unit) 22,500
Absorption costing income $218, 300
Throughput costing income $151,700
Add: Costs attached to the increase in inventory:
Direct labor (18,000 units x $1.60/unit) 28,800
Variable overhead (18,000 units x $0.85/unit) 15,300
Variable costing income $195,800
Add: fixed overhead attached to the increase in inventory