Solved: Costing Exercise 1 – Problem 4

Exercise-1 (Unit product cost under variable and absorption costing)

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Super Bike Manufacturing Company presents the following data for 2011:
Opening inventory 0 Units
Sales 8,000 Units
Production 10,000 Units
Closing inventory 2,000 Units
Direct materials $240
Direct labor $280
Variable manufacturing overhead expenses $100
Variable selling and administrative expenses $40
Fixed manufacturing overhead expenses $1200,000
Fixed selling and administrative expenses $800,000
Required: Compute the unit product cost of one bike under:
1. Absorption costing system.
2. Variable costing system.

Exercise-2 (Variable costing income statement, Reconciliation of net operating income)

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The following is the absorption costing income statement of a manufacturing company:
Sales (40,000 units @ $67.50) $2,700,000
Less cost of goods sold:
Opening inventory 0
Add cost of goods manufactured (50,000 ×
42) 2,100,000
———-
Available for use 2,100,000
Less closing inventory 420,000 1,680,000
———- ———-
Gross margin 1,020,000
Less selling and administrative expenses 840,000
———-
Net operating income 180,000
———-
Fixed selling and administrative expenses are $600,000. Variable selling and
administrative expenses are $6 per unit sold. The unit product cost under
absorption costing is computed as follows:
Direct materials $20
Direct labor 8
Variable manufacturing overhead 4
Fixed manufacturing overhead
($500,000/50,000) 10
——-
Total cost per unit $42
——-
Required:
1. Prepare a contribution margin income statement using variable costing system.
2. Reconcile any difference between net operating income figure under variable
costing income statement and net operating income figure under absorption
costing income statement.

Exercise-3 (Unit product cost under variable costing, break-even point)

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A company manufactures and sells large size tables to be used in the offices of the
executives. One table is sold for $400. The data for 2010 is as follows:
Manufacturing costs:
Direct materials per unit $120
Direct labor per unit $60
Variable manufacturing overhead per unit $20
Fixed manufacturing overhead per year $600,000
Non-manufacturing costs:
Variable selling administrative per unit $40
Fixed selling administrative $900,000
Inventory:
Opening 0
Production during 2010 10,000
———
Units available for sale 10,000
Sales 9,000
———
Closing inventory 1,000
———
Required:
1. Compute cost of one table under variable costing.
2. Prepare income statement if variable costing is used.
3. Compute breakeven point in units.
4. Calculate net operating income of the company under absorption costing by
preparing a reconciliation schedule.

Exercise-4 (Variable and absorption costing ending inventory, external reports)

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The production and sales data of Albari company for the year 2011 is as follows:
Variable costs per unit:
Direct materials $20
Direct labor $10
Variable manufacturing overhead $4
Variable selling and administrative
expenses
$8
Fixed costs per year:
Fixed manufacturing overhead $180,000
Fixed selling and administrative expenses $600,000
During 2011, Albari company manufactured 30,000 units out of which 25,000 units were
sold. At the end of 2011, the finished goods inventory account showed a balance of
$170,000.
Required:
1. What costing method is used by Albari to compute finished goods inventory?
2. Should company use $170,000 finished goods inventory figure for external
reports? if not what is correct amount in dollars that the company should use for
external reporting purpose?

Exercise-5 (Variable and absorption costing income statement, reconciliation)

Posted in: Variable and absorption costing exercises
AGA company manufactures and sells a product for $20/Kg. The data for the last year is
given below:
Sales 75,000 Kg
Finished goods inventory at the beginning of the
period 12,000 Kg
Finished goods inventory at the closing of the period 17,000 Kg
Manufacturing costs:
Variable cost $8 per Kg
Fixed manufacturing overhead cost $320,000 per
year
Marketing and administrative expenses:
Variable expenses $2 per Kg of sale
Fixed expenses $300,000 per
year
Required:
1. Income statement using absorption and variable costing methods.
2. Explanation of the cause of difference in operating income under two concepts.

Problem-1 (Variable costing income statement and reconciliation)

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Absorption costing income statement of a company for the first two years is as follows:
Year-1 Year-2
Sales 2,000,000 3,000,000
Less cost of goods sold:
Beginning inventory 0 340,000
Add cost of goods manufactured 1,700,000 1,700,000
————- ————-
Goods available for sale 1,700,000 2,040,000
Less ending inventory 340,000 0
————- ————-
Cost of goods sold 1,360,000 2,040,000
————- ————-
Gross margin 640,000 480,000
Less selling and administrative expenses* 620,000 680,000
————- ————-
Net operating income 20,000 280,000
————- ————-
*6 per unit variable; $500,000 fixed each year.
The manufacturing cost per unit is computed as follows:
Direct materials $16
Direct labor $20
Variable manufacturing overhead $4
Fixed manufacturing overhead $28
——
$68
——
Sales and production for two years:
Year-1 Year-2
Units produced 25,000 25,000
Units sold 20,000 30,000
Required:
1. Prepare a variable costing (contribution margin) income statement.
2. Reconcile net operating income figures.

Problem-2 (Variable and absorption costing unit product costs and income statements)

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A company manufactures a unique device that is used to boost Wi-Fi signals. The
following data relates to the first month of operation:
Beginning inventory 0
Units produced 40,000
Units sold 35,000
Selling price per unit $120
Selling and administrative expenses:
Variable per unit $4
Fixed (total for the month) $1,120,000
Manufacturing costs:
Direct materials cost per unit $30
Direct labor cost per unit $14
Variable manufacturing overhead cost per unit $4
Fixed manufacturing overhead cost $1,280,000
Management is anxious to see the profitability of newly designed unique booster.
Required:
1. Calculate unit product cost and prepare income statement under variable costing
system and absorption costing system.
2. Prepare income statement under two costing system.
3. Prepare a schedule to reconcile the net operating income under variable and
absorption costing system.

Problem-3 (Impact of change in production on variable and absorption costing)

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AJX company manufactures and sells a single product. Company sold the same number
of units this year as it did last year but generated different profit for two years. The
president asks for the explanation of difference in net operating income for two years.
The income statements of two years are as follows:
Year 1 Year 2
Sales (40,000 units) $2,500,000 $2,500,000
Less cost of goods sold $1,680,000 $1,440,000
————- ————-
Gross margin 820,000 1,060,000
Less selling and administrative expenses 700,000 700,000
————- ————-
Net operating income 120,000 360,000
————- ————-
Sales, production and production for two years are as follows:
Year 1 Year 2
Production in units 40,000 50,000
Sales in units 40,000 40,000
Variable production cost per unit $12 $12
Fixed manufacturing overhead cost $1,200,000 $1,200,000
Variable selling and administrative expenses of AJX are $4.00 per unit sold. A new
manufacturing overhead rate is computed each year.
Required:
1. Calculate unit product cost for both the years under absorption costing and direct
costing (variable costing).
2. Prepare a contribution margin format income statement for two years.
3. Reconcile the net operating income figures for each year under two costing
methods.
4. Explain how operations would have different in year 2 if the company had been
using just in time (JIT) manufacturing and inventory control methods.

Problem-4 (Constant production and change in sales – variable and absorption costing)

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Fine Producers Inc. suffered a loss for the first month of operations. Following is the
income statement prepared by the accounting service providers of Fine Producers.
Sales $400,000
Less variable cost of goods sold $160,000
————
Gross contribution margin $240,000
Less variable selling and administrative expenses $60,000
————
Contribution margin $180,000
Less fixed expenses:
Fixed manufacturing overhead $150,000
Fixed selling and administrative expenses $40,000 $190,000
———— ————
Net operating loss $(10,000)
————
The loss created a serious problem because company was planning to use the statement to
encourage investors to purchase the stock of the company. Other relevant data is given
below:
Units produced during the first month of operation 50,000
Units sold during the first month of operation 40,000
Variable unit cost:
Direct materials $2.00
Direct labor 1.60
Variable manufacturing overhead expenses 0.40
Variable selling and administrative expenses 1.50
Required:
1. What costing method was used by the accounting service providers to prepare
income statement of Fine Producers Inc? Can an absorption costing income
statement show a profit rather than loss? Support your answer with computations.
2. Prepare company’s income statement using variable costing and absorption
costing for the second month if 60,000 units were sold in the second month and
there were no closing inventories.
3. Reconcile the second month’s net operating income under both the costing
approaches.