Exercise 6-12 (30 minutes) 1 a. Under variable costing, only the variable manufacturing costs are included in product costs. Year 1 Year 2 Direct materials $20 $20 Direct labor 12 12 Variable manufacturing overhead 4 4 Variable costing unit product cost $36 $36 Note that selling and administrative expenses are not treated as product costs; that is, they are not included in the costs that are inventoried. These expenses are always treated as period costs. 1 b. Year 1 Year 2 Sales $2,000,00 0 $2,500,00 0 Variable expenses: Variable cost of goods sold @ $36 per unit 1,440,000 1,800,000 Variable selling and administrative @ $3 per unit 120,0 00 150, 000 Total variable expenses 1,560,00 0 1,950,0 00 Contribution margin 440,0 00 550, 000 Fixed expenses: Fixed manufacturing overhead 200,000 200,000 Fixed selling and administrative 80,0 00 80, 000 Total fixed expenses 280,0 00 280, 000 Net operating income (loss) $ 160,000 $ 270,0 00
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Exercise 6-12 (30 minutes)
1 a. Under variable costing, only the variable manufacturing costs are included in product costs.
Year 1 Year 2Direct materials $20 $20Direct labor 12 12Variable manufacturing overhead 4 4 Variable costing unit product cost $36 $36
Note that selling and administrative expenses are not treated as product costs; that is, they are not included in the costs that are inventoried. These expenses are always treated as period costs.
1 b.Year 1 Year 2
Sales $2,000,000$2,500,00
0Variable expenses:
Variable cost of goods sold @ $36 per unit 1,440,000 1,800,000
Variable selling and administrative @ $3 per unit 120,000
150,00 0
Total variable expenses 1,560,000 1,950,00
0
Contribution margin 440,000 550,00
0Fixed expenses:
Fixed manufacturing overhead 200,000 200,000Fixed selling and administrative 80,000 80,000
Total fixed expenses 280,000 280,00
0
Net operating income (loss) $ 160,000 $ 270,00
0
2 a. The unit product costs under absorption costing:
Year 1
Year 2
Direct materials $20 $20
Direct labor 12 12Variable manufacturing overhead 4 4Fixed manufacturing overhead *4 **5 Absorption costing unit product
cost $40 $41
* $200,000 ÷ 50,000 units = $4 per unit.
** $200,000 ÷ 40,000 units = $5 per unit.
Exercise 6-12 (continued)
2 b. The absorption costing income statements appears below:
Year 1 Year 2
Sales$2,000,00
0 $2,500,000
Cost of goods sold*1,600,00
0*
*2 ,040,000 Gross margin 400,000 460,000Selling and administrative
expenses 200,00
0 2 30,000
Net operating income$ 200,00
0 $ 230,000
* 40,000 units × $40 per unit = $1,600,000** (40,000 units × $41 per unit) + (10,000 units × $40 per
unit) = $2,040,000
3. The net operating incomes are reconciled as follows:
Year 1 Year 2Variable costing net operating income
(loss) $ 160,000$ 270,00
0Add: Fixed manufacturing overhead
cost deferred in inventory under absorption costing (10,000 units × $4 per unit) 40,000
Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing (10,000 units × $4 per unit)
(40,00 0)
Absorption costing net operating income
$ 200,00 0
$ 230,00 0
Exercise 6-14 (20 minutes)
1. $75,000 × 40% CM ratio = $30,000 increased contribution margin in Dallas. Because the fixed costs in the office and in the company as a whole will not change, the entire $30,000
would result in increased net operating income for the company.
It is incorrect to multiply the $75,000 increase in sales by Dallas’ 25% segment margin ratio. This approach assumes that the segment’s traceable fixed expenses increase in proportion to sales, but if they did, they would not be fixed.
2. a. The segmented income statement follows:
SegmentsTotal Company Houston DallasAmount % Amount % Amount %
b. The segment margin ratio rises and falls as sales rise and fall due to the presence of fixed costs. The fixed expenses are spread over a larger base as sales increase.
In contrast to the segment ratio, the contribution margin ratio is stable so long as there is no change in either variable expenses or the selling price of a unit of service.
Exercise 7-11 (30 minutes)
1. Priston CompanyDirect Materials Budget
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Required production 6,000 7,000 8,000 5,000Raw materials per unit × 3 × 3 × 3 × 3 Production needs 18,000 21,000 24,000 15,000Add desired ending inventory 4,200 4,800 3,000 3,700 Total needs 22,200 25,800 27,000 18,700Less beginning inventory 3,600 4,200 4,800 3,000 Raw materials to be purchased 18,600 21,600 22,200 15,700 Cost of raw materials to be
purchased at $2.50 per pound $46,500 $54,000 $55,500 $39,250
Schedule of Expected Cash Disbursements for Materials
Accounts payable, beginning balance
$11,775
1st Quarter purchases 32,550 $13,9502nd Quarter purchases 37,800 $16,2003rd Quarter purchases 38,850 $16,6504th Quarter purchases 27,475 Total cash disbursements for
materials$44,325 $51,750 $55,050 $44,125
Exercise 7-11 (continued)
2. Priston CompanyDirect Labor Budget
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter Year
Units to be produced 6,000 7,000 8,000 5,000 26,000
Direct labor time per unit (hours) × 0.50 ×
0.50 ×
0.50 ×
0.50Total direct labor-hours needed 3,000 3,500 4,000 2,500 13,000
Direct labor cost per hour×
$12.00×
$12.00×
$12.00×
$12.00 $12.00
Total direct labor cost$ 36,000 $ 42,00
0$ 48,00
0$ 30,00
0$156,00
Exercise 7-12 (30 minutes)
1.
1.
1.
Harveton CorporationDirect Labor Budget
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Units to be produced 16,000 15,000 14,000 15,000Direct labor time per unit
(hours) 0.80 0.80 0.80 0.80
Total direct labor-hours needed
12,800 12,000 11,200 12,000
Direct labor cost per hour $11.50 $11.50 $11.50 $11.50Total direct labor cost $147,20
The net unfavorable variance of $16,390 for the month caused the plant’s variable cost of goods sold to increase from the budgeted level of $80,000 to $96,390:
Budgeted cost of goods sold at $16 per ingot $80,000
Add the net unfavorable variance (as above) 16,390
Actual cost of goods sold $96,390
This $16,390 net unfavorable variance also accounts for the difference between the budgeted net operating income and the actual net loss for the month.
Budgeted net operating income $15,000Deduct the net unfavorable variance added
to cost of goods sold for the month 16,390 Net operating loss $(1,390)
3. The two most significant variances are the materials price variance and the labor efficiency variance. Possible causes of the variances include: