DATES WEEK
CLS [M-W]
7
DATES [T-Th]
GNB ASSIGNED PROBLEM SOLUTIONS
TOPICS READINGS
BUAD 250B FALL 2009
ASSIGNMENTS [TO BE COMPLETED BY DATE ASSIGNED]
12
Oct 5
Oct 6
Presentations Team I Variable Costing Variable Costing
Ch. 7
DUE: Team Assignment I BE: 7-1, 2, 3, 4 OUT: Midterm Review Material PR: 7-6, 10, 11
13
Oct 7
Oct 8
Ch. 7
NO ASSIGNED PROBLEMS IN WEEK 8
WEEK
CLS DATES [M-W]
8
DATES [T-Th]
GNB ASSIGNED PROBLEM SOLUTIONS
TOPICS READINGS
BUAD 250B FALL 2009
ASSIGNMENTS [TO BE COMPLETED BY DATE ASSIGNED]
14 15
Oct 12 Oct 14
Oct 13 Oct 14
Midterm Review
Prepare: Midterm Review Problems
MIDTERM EXAM (Chapters & Team Assignment I) [300 points]
Exercise 7-1 1. Under absorption costing, all manufacturing costs (variable and fixed) are included in product costs. (All currency values are in thousands of rupiah, denoted by Rp.) Direct materials ..................................................................................................... Direct labor ........................................................................................................... Variable manufacturing overhead ......................................................................... Fixed manufacturing overhead (Rp60,000 250 units) ....................................... Absorption costing unit product cost..................................................................... Rp100 320 40 240 Rp700
2. Under variable costing, only the variable manufacturing costs are included in product costs. (All currency values are in thousands of rupiah, denoted by Rp.) Direct materials ..................................................................................................... Direct labor ........................................................................................................... Variable manufacturing overhead ......................................................................... Variable costing unit product cost ......................................................................... Rp100 320 40 Rp460
Note that selling and administrative expenses are not treated as product costs under either absorption or variable costing. These expenses are always treated as period costs and are charged against the current periods revenue.
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Exercise 7-2 (Note: All currency values are in thousands of rupiah, denoted by Rp.) 1. 25 units in ending inventory Rp240 per unit fixed manufacturing overhead per unit = Rp6,000 2. The variable costing income statement appears below: Sales .............................................................................................. Variable expenses: Variable cost of goods sold (225 units sold Rp460 per unit) .......................................... Variable selling and administrative expenses (225 units Rp20 per unit) ........................................................................ Contribution margin ....................................................................... Fixed expenses: Fixed manufacturing overhead .................................................. Fixed selling and administrative expenses ................................ Net operating income .................................................................... 60,000 20,000 Rp 80,000 3,250 4,500 108,000 83,250 Rp103,500 Rp191,250
The difference in net operating income between variable and absorption costing can be explained by the deferral of fixed manufacturing overhead cost in inventory that has taken place under the absorption costing approach. Note from part (1) that Rp6,000 of fixed manufacturing overhead cost has been deferred in inventory to the next period. Thus, net operating income under the absorption costing approach is Rp6,000 higher than it is under variable costing.
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Exercise 7-3 1. Beginning inventories.............................. Ending inventories .................................. Change in inventories ............................. Fixed manufacturing overhead in beginning inventories (@$560 per unit) ..................................................... Fixed manufacturing overhead in ending inventories (@$560 per unit) ... Fixed manufacturing overhead deferred in (released from) inventories (@$560 per unit) ................................. Variable costing net operating income .... Add (deduct) fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing ................................................. Absorption costing net operating income................................................. $1,063,600 $1,038,000 $1,018,800 (16,800) 5,600 22,400 ($ 16,800) $1,080,400 $ 5,600 $1,032,400 $ 22,400 $ 996,400 95,200 100,800 123,200 $112,000 $ 95,200 $100,800 Year 1 200 170 (30) Year 2 170 180 10 Year 3 180 220 40
2. Because absorption costing net operating income was greater than variable costing net operating income in Year 4, inventories must have increased during the year and hence fixed manufacturing overhead was deferred in inventories. The amount of the deferral is the difference between the two net operating incomes, or $28,000 = $1,012,400 $984,400.
Exercise 7-4 1. a. By assumption, the unit selling price, unit variable costs, and total fixed costs are constant from year to year. Consequently, variable costing net operating income will vary with sales. If sales increase, variable costing net operating income will increase. If sales decrease, variable costing net operating income will decrease. If sales are constant, variable costing net operating income will be constant. Because variable costing net operating income was $41,694 each year, unit sales must have been the same in each year. The same is not true of absorption costing net operating income. Sales and absorption costing net operating income do not necessarily move in the same direction because changes in inventories also affect absorption costing net operating income.
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b. When variable costing net operating income exceeds absorption costing net operating income, sales exceeds production. Inventories shrink and fixed manufacturing overhead costs are released from inventories. In contrast, when variable costing net operating income is less than absorption costing net operating income, production exceeds sales. Inventories grow and fixed manufacturing overhead costs are deferred in inventories. The year-by-year effects are shown below. Year 1 Variable costing NOI = Absorption costing NOI Production = Sales Inventories remain the same Inventories grow Inventories shrink Year 2 Variable costing NOI < Absorption costing NOI Production > Sales Year 3 Variable costing NOI > Absorption costing NOI Production < Sales
2.
a. As discussed in part (1 a) above, unit sales and variable costing net operating income move in the same direction when unit selling prices and the cost structure are constant. Because variable costing net operating income declined, unit sales must have also declined. This is true even though the absorption costing net operating income increased. How can that be? By manipulating production (and inventories) it may be possible to maintain or increase the level of absorption costing net operating income even though unit sales decline. However, eventually inventories will grow to be so large that they cannot be ignored. b. As stated in part (1 b) above, when variable costing net operating income is less than absorption net costing operating income, production exceeds sales. Inventories grow and fixed manufacturing overhead costs are deferred in inventories. The year-by-year effects are shown below. Year 1 Variable costing NOI = Absorption costing NOI Production = Sales Inventories remain the same Inventories grow Inventories grow Year 2 Variable costing NOI < Absorption costing NOI Production > Sales Year 3 Variable costing NOI < Absorption costing NOI Production > Sales
3. Variable costing appears to provide a much better picture of economic reality than absorption costing in the examples above. In the first case, absorption costing net operating income fluctuates wildly even though unit sales are the same each year and unit selling prices, unit variable costs, and total fixed costs remain the same. In the second case, absorption costing net operating income increases from year to year even though unit sales decline. Absorption costing is much more subject to manipulation than variable costing. Simply by changing production levels (and thereby deferring or releasing costs from inventory) absorption costing net operating income can be manipulated upward or downward.
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Note: This exercise is based on the following data: Common data: Annual fixed manufacturing costs ......................................................... Contribution margin per unit.................................................................. Annual fixed selling and administrative expenses ................................ Scenario A: Year 1 Beginning inventory...................................................... Production .................................................................... Sales ............................................................................ Ending .......................................................................... Variable costing net operating income ......................... Fixed manufacturing overhead in beginning inventory* ............................................................... Fixed manufacturing overhead in ending inventory ..... Absorption costing net operating income ..................... $30,631 $30,631 $41,694 $30,631 $55,692 $66,755 $55,692 $34,034 $20,036 1 10 10 1 $41,694 Year 2 1 11 10 2 $41,694 Year 3 2 9 10 1 $41,694 $306,306 $71,000 $362,000
* Fixed manufacturing overhead in beginning inventory is assumed in both parts 1 and 2 for Year 1. A FIFO inventory flow assumption is used. Scenario B: Year 1 Beginning inventory............................................ Production .......................................................... Sales .................................................................. Ending ................................................................ Variable costing net operating income (loss) ..... Fixed manufacturing overhead in beginning inventory* ..................................................... Fixed manufacturing overhead in ending inventory ...................................................... Absorption costing net operating income ........... $30,631 $41,694 $102,102 $42,165 $245,045 $42,637 $30,631 $30,631 $102,102 1 10 10 1 $41,694 Year 2 1 12 9 4 ($29,306) Year 3 4 20 8 16 ($100,306)
* Fixed manufacturing overhead in beginning inventory is assumed in both parts 1 and 2 for Year 1. A FIFO inventory flow assumption is used.
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Exercise 7-6 1. The company is using variable costing. The computations are: Variable Costing Direct materials .................................................... Direct labor .......................................................... Variable manufacturing overhead ........................ Fixed manufacturing overhead ($150,000 25,000 units) ................................ Unit product cost .................................................. Total cost, 3,000 units .......................................... $24 $72,000 6 $30 $90,000 $9 10 5 Absorption Costing $9 10 5
2. a. No, $72,000 is not the correct figure to use because variable costing is not generally accepted for external reporting purposes or for tax purposes. b. The Finished Goods inventory account should be stated at $90,000, which represents the absorption cost of the 3,000 unsold units. Thus, the account should be increased by $18,000 for external reporting purposes. This $18,000 consists of the amount of fixed manufacturing overhead cost that is allocated to the 3,000 unsold units under absorption costing (3,000 units $6 per unit fixed manufacturing overhead cost = $18,000).
Exercise 7-10 Sales were above the companys break-even sales and yet the company sustained a loss. The apparent contradiction is explained by the fact that the CVP analysis is based on variable costing, whereas the income reported to shareholders is prepared using absorption costing. Because sales were above the breakeven, the variable costing net operating income would have been positive. However, the absorption costing net operating income was negative. Ordinarily, this would only happen if inventories decreased and fixed manufacturing overhead deferred in inventories was released to the income statement on the absorption costing income statement. This added fixed manufacturing overhead cost resulted in a loss on an absorption costing basis even though the company operated at its breakeven on a variable costing basis.
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Problem 7-11 1. The unit product cost under variable costing is computed as follows: Direct materials .................................................. Direct labor ......................................................... Variable manufacturing overhead ...................... Variable costing unit product cost ...................... $4 7 1 $12
With this figure, the variable costing income statements can be prepared: Year 1 Unit sales ........................................................................... Sales .................................................................................. Variable expenses: Variable cost of goods sold (@ $12 per unit) ......................................................... Variable selling and administrative expenses (@ $2 per unit) ...................................................................... Total variable expenses ..................................................... Contribution margin............................................................ Fixed expenses: Fixed manufacturing overhead ...................................... Fixed selling and administrative expenses .................... Total fixed expenses .......................................................... Net operating income ......................................................... 2. The reconciliation of absorption and variable costing follows: Year 1 Variable costing net operating income................................ Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing (5,000 units $6 per unit in Year 1; 5,000 units $6 per unit in Year 2)............................................................ Absorption costing net operating income ........................... 30,000 $70,000 (30,000) $120,000 $40,000 Year 2 $150,000 $ 270,000 130,000 400,000 40,000 270,000 130,000 400,000 $ 150,000 80,000 560,000 440,000 100,000 700,000 550,000 480,000 600,000 40,000 units $1,000,000 Year 2 50,000 units $1,250,000
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