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CHAPTER 9
CHAPTER 8Alternative Inventory Costing Methods: A Decision-Making Perspective
ASSIGNMENT CLASSIFICATION TABLE
Study ObjectivesQuestionsBrief
ExercisesDo It!ReviewExercisesA & B
Problems
1.Explain the difference between absorption costing and variable costing. 1, 2, 3, 4, 7, 8, 9, 10, 11 1, 2, 4, 5, 7, 8, 10, 1112, 14, 1516, 17, 18, 19, 20, 22, 23, 24, 2526A, 27A, 28A, 29A, 31A, 32A, 34A, 35A, 36B, 38B 44B
2.Discuss the effect that changes in the production level and sales level have on net income measured under absorption costing versus under variable costing.6, 8, 9, 10, 11, 1210, 11132226A, 27A, 28A, 29A, 31A, 32A, 34A, 35A, 36B, 38B 44B
3.Discuss the advantages of variable costing versus absorption costing for management decision-making.13, 14, 15, 1612, 1319, 22, 23, 24, 2527A, 28A, 29A, 31A, 32A, 34A, 35A, 38B, 39B, 40B, 41B, 42B, 44B
*4.Discuss the effect of a normal costing method on income reported under absorption costing and variable costing (Appendix 8A).91418, 2130A, 33A, 37B
*5.Discuss the effect of the throughput costing method on income reported under variable costing (Appendix 8A).1, 4, 5, 3, 6, 71516, 2526A, 29A, 32A, 36B, 40B
ASSIGNMENT CHARACTERISTICS TABLE
Problem
NumberDescriptionDifficulty
LevelTimeAllotted (min.)
26ACalculate the product cost; prepare an income statement under variable costing, absorption costing and throughput costing and reconcile the differences.Easy30-40
27APrepare income statements under absorption costing and variable costing for a company with beginning inventory.Moderate40-50
28APrepare absorption- and variable costing income statements; reconcile the differences between absorption- and variable-costing income statements when sales and production levels change; and discuss the usefulness of absorption costing versus variable costing.Easy30-40
29APrepare an income statement under variable costing, absorption costing, and throughput costing and reconcile the differences; discuss the usefulness of absorption costing versus variable costing.Moderate30-40
30ACalculate the product cost; and prepare income statements under normal costing. Moderate20-30
31ACalculate product cost; prepare income statements under variable costing and absorption costing and reconcile the difference when sales and production levels change.Easy20-30
32ACalculate the product cost; prepare income statements under variable costing, absorption costing, and throughput costing, and reconcile the differences.Moderate30-40
33ACalculate the product cost; and prepare income statements under normal costing.Easy20-30
34AExplain variable costing and absorption costing and reconcile the differences when sales and production levels change.Moderate20-30
35APrepare income statements under variable costing, absorption costing, and throughput costing and reconcile the differences when sales and production levels change; discuss the usefulness of absorption costing versus variable costing.Challenging40-50
36BCalculate the product cost; prepare income statements under variable costing, absorption costing, and throughput costing, and reconcile the differences.Moderate30-40
37BCalculate the product cost; and prepare income statements under normal costing.Moderate15-20
38BPrepare income statements under absorption costing and variable costing for a company with beginning inventory.Moderate50-60
39BPrepare absorption- and variable-costing income statements; reconcile the differences between the two income statements when sales and production levels change; discuss the usefulness of the two approaches to costing.Moderate30-40
ASSIGNMENT CHARACTERISTICS TABLE (Continued)Problem
NumberDescriptionDifficulty
LevelTimeAllotted (min.)
41BCalculate the product cost; prepare income statements under variable costing and absorption costing, and reconcile the differences when sales and production levels change.Challenging40-50
42BCalculate the product cost contribution margin under variable costing and the gross margin under absorption costing.Moderate15-20
43BPrepare an income statement under variable costing; discuss the advantages of variable costing over absorption costing.Easy15-20
44BCalculate product cost; prepare income statements under variable costing and absorption costing and reconcile the difference when sales and production levels change; discuss the usefulness of absorption costing versus variable costing.Challenging40-50
ANSWERS TO QUESTIONS
1.Variable costing is a system for determining product costs that is used primarily for making managerial decisions. Under variable costing, direct materials, direct labour, and variable manufacturing overhead are considered product costs. In contrast, absorption costing is required for external reporting purposes and is used by some managers for internal decisions. Under absorption costing, product costs include direct material, direct labour, and manufacturing overhead (both fixed and variable) costs. Throughput costing treats all costs as period expenses except for direct materials. It is suitable only for companies engaged in a manufacturing process in which conversion costs such as direct labour and manufacturing overhead are fixed costs and do not vary proportionately with the units of production. Assembly-line and continuous processes that are highly automated are most likely to meet this criterion. 2.The costs that are included as product costs under a variable costing system are direct materials, direct labour, and variable manufacturing overhead.
3.Fixed manufacturing overhead costs are treated as a period cost, similar to selling and administrative costs. These costs are expensed each period, as they are incurred.
4.Under variable costing, direct materials, direct labour and variable manufacturing overhead are included as product costs. Under throughput costing, only direct material costs are considered product costs.
5.In throughput costing, the conversion costsdirect labour and variable manufacturing overheadare considered to be fixed, and are expensed in the month they are incurred. 6. Some of the fixed manufacturing overhead costs are deferred to a future period in the inventory account under absorption costing when inventory increases.
7.The main difference is the timing of some expenses. Variable costing treats fixed manufacturing overhead costs as a period cost and therefore expenses these costs each period. Absorption costing treats fixed manufacturing overhead costs as a product cost and therefore will defer some of these costs to future periods when production exceeds sales. Conversely, when sales exceeds production, more fixed costs will be charged to cost of goods sold than under variable costing.
8.The difference is going to be in the value of the ending inventory. Under absorption costing the fixed manufacturing overhead will be included, so ending inventory will be $210,000 (10,500 units $20). Variable costing does not include fixed manufacturing overhead as a period cost, so the per unit cost of inventory will be $15, and the value of the ending inventory will be $157,500. The difference is $52,500, that is, absorption costing will report a $52,500 higher net income than variable costing because a portion of the fixed manufacturing overhead costs are deferred in inventory.Questions Chapter 8 (Continued)
9.If production equals sales in any given period, the net incomes under both methods will be equal. In this case, there is no increase or decrease in the ending inventory when compared to the beginning inventory. So fixed manufacturing overhead costs in the current period are not deferred to future periods through an increase in the ending inventory, or released into expenses in the current period in the case of an inventory decrease.
10.If production is greater than sales, absorption costing net income will be greater than variable costing net income. Absorption costing net income is higher because some of the fixed manufacturing overhead costs will be deferred in the inventory account until the products are sold.
11.In the long run, neither method will produce a higher net income amount. Over a long period of time, sales can never exceed production, nor should production exceed sales by significant amounts. For this reason, over the lifetime of a corporation, variable costing and absorption costing will tend to yield the same net income amounts.
12.Production changes do not affect the amount of fixed manufacturing overhead costs in a given period. However, production changes affect the expensing of fixed manufacturing overhead costs. When production exceeds sales, a portion of fixed manufacturing overhead is deferred to a future period when using absorption costing. If variable costing is used, all fixed manufacturing overhead incurred in the period is expensed in the current period.
13.No, variable costing is generally just a managerial technique. Under generally accepted accounting principles (GAAP), variable costing is not allowed for external financial statements.
14.Some of the benefits include:
(1)Net income computed under variable costing is unaffected by changes in production levels. As a result, it is much easier to understand the impact of fixed and variable costs on the computation of net income when variable costing is used.
(2)The use of variable costing is consistent with cost-volume-profit analysis and incremental analysis.
(3)Net income computed under variable costing is closely tied to changes in sales levels (not production levels), and therefore provides a more realistic assessment of the companys success or failure during a period.
(4)The presentation of fixed and variable cost components on the face of the variable costing income statement makes it easier to identify these costs and understand their effect on the business. Under absorption costing, the allocation of fixed costs to inventory makes it difficult to evaluate the impact of fixed costs on the companys results.
15.The differences between absorption costing and variable costing techniques occur when inventory levels change between two periods of time. Since just-in-time inventory management reduces finished goods inventory, the differences between absorption and variable costing are greatly reduced, if not totally offset.
Questions Chapter 8 (Continued)
16.Both systems can be useful to management but variable costing has several advantages for internal decision making. Variable costing is consistent with cost-volume-profit analysis and incremental analysis. It also makes it easier to understand the impact of fixed and variable costs on net income. Since net income computed under variable costing is closely tied to changes in sales levels (not production levels as is the case with absorption costing), it provides a more realistic assessment of success or failure during a period.
Companies that use variable costing for internal decision making must also maintain absorption costing systems for external reporting as required under GAAP.SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8-1
ProductCostPeriodCost
Variable costing:
Commission fees for salespersonsX
Glue for wooden chairsvariableX
Fabric for T-shirtsX
Labour costs for producing TVsX
Factory rent expensefixedX
Factory utility costsvariable X
Car mileage costs for salespersonsX
Administrative expensesfixedX
Administrative Internet connection feesX
Wagesassembly lineX
BRIEF EXERCISE 8-2
Product CostPeriod Cost
Absorption costing:
Commission fees for salespersonsX
Glue for wooden chairsvariableX
Fabric for T-shirtsX
Labour costs for producing TVsX
Factory rent expensefixed X
Factory utility costsvariableX
Car mileage costs for salespersonsX
Administrative expensesfixedX
Administrative Internet connection feesX
Wagesassembly lineX
*BRIEF EXERCISE 8-3
Throughput costing:Product CostPeriod Cost
Commission fees for salespersonsX
Glue for wooden chairsvariableX
Fabric for T-shirtsX
Labour costs for producing TVsX
Factory rent expensefixed X
Factory utility costsvariableX
Car mileage costs for salespersonsX
Administrative expensesfixedX
Administrative Internet connection feesX
Wagesassembly lineX
BRIEF EXERCISE 8-4
Variable Costing
Direct materials$28,980
Direct labour51,060
Variable manufacturing overhead64,840
Total product costs$144,880
BRIEF EXERCISE 8-5Absorption Costing
Direct materials$28,980
Direct labour51,060
Variable manufacturing overhead64,840
Fixed manufacturing overhead20,000
Total product costs$164,880
*BRIEF EXERCISE 8-6
Throughput Costing
Direct materials$28,980
Total product costs$28,980
*BRIEF EXERCISE 8-7(a) Absorption Costing Per Unit
Direct materials$20.00
Direct labour12.00
Variable manufacturing overhead15.00
Fixed manufacturing overhead ($120,000 12,000)10.00
Total product cost per unit$57.00
(b) Variable Costing Per Unit
Direct materials$20.00
Direct labour12.00
Variable manufacturing overhead15.00
Total product cost per unit$47.00
(c) Throughput Costing Per Unit
Direct materials$20.00
Total product cost per unit$20.00
BRIEF EXERCISE 8-8Rafael Corp.
Income StatementVariable Costing
For the Year Ended December 31, 2012_______________________________________________________________
Sales (40,000 units $15)$600,000
Less: variable costs
Variable COGS (40,000 units $6)$240,000
Variable S&A expenses (40,000 units $2)80,000320,000
Contribution margin280,000
Less: fixed costs
Fixed manufacturing overhead80,000
Fixed selling and administration expenses20,000100,000
Operating income before tax$180,000
*BRIEF EXERCISE 8-9(a) Manufacturing cost per unit:
Variable costs $6.00
Fixed costs ($80,000 50,000 units) 1.60
$ 7.60
(b) Rafael Corp.
Income StatementNormal Costing
For the Year Ended December 31, 2012Sales (40,000 units $15)$600,000
Cost of goods sold:
Beginning inventory
Plus: Cost of goods manufactured (50,000 $7.60)$380,000
Goods available for sale380,000
Less: Ending inventory (10,000 $7.60)76,000
Cost of goods sold304,000
Plus: volume variance [$80,000 (40,000 $1.60)]16,000320,000
Gross Margin280,000
Less: S&A [Variable (40,000 $2) + Fixed ($20,000)]100,000
Operating income before tax$180,000
BRIEF EXERCISE 8-9 (Continued)
(c)Rafael Corp.s production exceeded its sales by 10,000 units (50,000 40,000). It had fixed manufacturing costs per unit of $1.60. Under variable costing, fixed manufacturing overhead is expensed in the year incurred, while under absorption costing it is included in inventory. Therefore, $16,000 (10,000 $1.60) of fixed manufacturing overhead is included in Rafaels inventory under normal costing. As a result, absorption costing income exceeds variable costing income by $16,000. The statement shows both net incomes to be the same because the volume variance (which also amounted to $16,000) was added back to the normal cost of goods sold.BRIEF EXERCISE 8-10(a)
Rafael Corp.
Income StatementAbsorption Costing
For the Year Ended December 31, 2012
Sales (40,000 units $15)$600,000
Cost of goods sold:
Beginning inventory
Plus: Cost of goods manufactured (50,000 $7.60)$380,000
Goods available for sale380,000
Less: ending inventory (10,000 $7.60)76,000304,000
Gross Margin296,000
Less: S&A [Variable (40,000 x $2) + Fixed ($20,000)]100,000
Operating income before tax$196,000
(b)
Variable costing net income$180,000
Plus: fixed manufacturing overhead costs deferred
in ending inventory (10,000 units $1.60)16,000
Absorption costing operating income$196,000
BRIEF EXERCISE 8-11
When production is greater than sales, absorption costing net income is greater than variable costing net income by an amount equal to the number of units in ending inventory times the fixed overhead rate per unit.
Fixed overhead rate per unit = $190,000 20,000 units = $9.50 per unit
Absorption costing operating income$25,000
Less: Fixed overhead in ending inventory (2,000 $9.50)19,000
Variable costing operating income$ 6,000
SOLUTIONS TO DO IT! REVIEWDO IT! REVIEW 8-12
(a) Manufacturing cost per unitabsorption costing
Direct material $30.00
Direct labour 12.00
Variable overhead 3.00
Fixed overhead ($108,000 12,000 units) 9.00
$54.00
(b) Fresh Air Products
Income StatementAbsorption Costing
For the first month of operations
Sales (10,000 units $110)$1,100,000
Cost of goods sold:
Beginning inventory
Plus: Cost of goods manufactured (12,000 $54)$648,000
Goods available for sale648,000
Less: ending inventory (2,000 $54)108,000540,000
Gross Margin560,000
Less: S&A [(10,000 $4) + $200,000]240,000
Operating income before tax$320,000
DO IT! REVIEW 8-13
(a)(1) Manufacturing cost per unitvariable costing
Direct material $30.00
Direct labour 12.00
Variable overhead 3.00
$45.00
(a)(2) Fresh Air Products
Income StatementVariable Costing
For the first month of operations
Sales (10,000 units $110)$1,100,000
Less: variable costs
Variable COGS (10,000 units $45)$450,000
Variable S&A expenses (10,000 units $4)40,000490,000
Contribution margin610,000
Less: fixed costs
Fixed manufacturing overhead108,000
Fixed selling and administration expenses200,000308,000
Operating income before tax$302,000
(b) Variable costing operating income$302,000
Plus: fixed manufacturing overhead costs deferred
in ending inventory (2,000 units $9)18,000
Absorption costing operating income$320,000
DO IT! REVIEW 8-14(a)(1) Manufacturing cost per unitabsorption costing
Direct material $30.00
Direct labour 12.00
Variable overhead 3.00
Fixed overhead ($108,000 13,500 units) 8.00
$53.00
DO IT! REVIEW 8-14 (Continued)
(a)(2) Fresh Air Products
Income StatementNormal Costing
For the first month of operations
Sales (10,000 units $110)$1,100,000
Cost of goods sold:
Beginning inventory
Plus: Cost of goods manufactured (12,000 $53)$636,000
Goods available for sale636,000
Less: ending inventory (2,000 $53)106,000
Cost of goods sold530,000
Plus: volume variance [$108,000 (12,000 $8)]12,000542,000
Gross Margin558,000
Less: S&A [(10,000 $4) + $200,000]240,000
Operating income before tax$318,000
(b) Normal costing operating income$318,000
Plus:
Costs deferred in ending inventory [2,000 ($9 $8)]2,000
Absorption costing operating income$320,000
DO IT! REVIEW 8-15
(a)(1) Manufacturing cost per unitthroughput costing
Direct material $30.00
$30.00
DO IT! REVIEW 8-15 (Continued)
(a)(2) Fresh Air Products
Income StatementThroughput Costing
For the first month of operations
Sales (10,000 $110)$ 1,100,000
Variable cost of goods sold:
Beginning inventory $
Direct material costs (12,000 $30) 360,000
Cost of goods available for sale 360,000
Ending inventory (2,000 $30) 60,000 300,000
Throughput contribution margin 800,000
Other operating costs
Direct labour costs (12,000 $12) $144,000
Variable overhead costs (12,000 $3) 36,000
Variable S & A expenses (10,000 $4) 40,000
Fixed manufacturing overhead 108,000
Fixed selling and admin 200,000 528,000
Operating income $272,000
(b) Throughput costing operating income$272,000
Plus: costs deferred in ending inventory (2,000 $15)30,000
Variable costing operating income$302,000
SOLUTIONS TO EXERCISES
*EXERCISE 8-16(a) Manufacturing Cost Per UnitVariable costingDirect materials$ 800
Direct labour1,500
Variable manufacturing overhead300
Total product cost per unit$2,600
(b)WU EQUIPMENT COMPANY
Income Statement
For the Year-Ended December 31, 2012Variable Costing
_______________________________________________________________
Sales (1,200 units $4,500)$5,400,000
Less: variable costs
Variable COGS (1,200 units $2,600)$3,120,000
Variable S&A expense (1,200 units $70) 84,0003,204,000
Contribution margin2,196,000
Less: fixed costs
Fixed manufacturing overhead1,200,000
Fixed S&A expense100,0001,300,000
Net Income $ 896,000
(c) Manufacturing Cost Per UnitThroughput costingDirect materials$800
Total product cost per unit$800
EXERCISE 8-16 (Continued)(d)WU EQUIPMENT COMPANY
Income Statement
For the Year-Ended December 31, 2012Throughput Costing
_______________________________________________________________
Sales (1,200 units $4,500)$5,400,000
Less: COGS (1,200 units $800)960,000
Throughput contribution margin4,440,000
Less: Operating expenses
Direct labour (1,500 $1,500)$2,250,000
Variable MOH (1,500 $300)450,000
Variable S&A (1,200 $70)84,000
Fixed MOH1,200,000
Fixed selling and administration expenses100,0004,084,000
Net Income $356,000
(e) When production is greater than sales, variable costing net income is greater than throughput costing net income by an amount equal to the number of units in ending inventory times the per unit variable conversion costs (direct labour and variable overhead). Per unit cost = $1,500 + $300 = $1,800 Ending inventory = 1,500 produced 1,200 sold = 300 units
Costs deferred in ending inventory = 300 $1,800 = $540,000
Variable costing net income$896,000
Less: conversion costs deferred in ending inventory 540,000
Throughput costing net income$356,000
EXERCISE 8-17(a) Absorption costing: First determine per unit absorption costing COGSVariable manufacturing costs$40.00
Fixed manufacturing costs ($100,000 10,000)10.00
Per unit absorption costing COGS:$50.00
ASIAN WINDOWS
Income Statement
For the Year Ended December 31, 2012Absorption Costing
_______________________________________________________________
Sales (8,500 shades $90)$765,000
Less: COGS (8,500 shades $50)425,000
Gross profit340,000
Less: selling and administration expenses
Variable (8,500 $9)$76,500
Fixed 250,000326,500
Net Income $13,500
(b) ASIAN WINDOWS
Income Statement
For the Year Ended December 31, 2012Variable Costing
Sales (8,500 shades $90)$765,000
Less: variable costs
Variable COGS (8,500 shades $40)$340,000
Variable S&A (8,500 units $9)76,500 416,500
Contribution margin 348,500
Less: fixed costs
Fixed manufacturing overhead100,000
Fixed S&A expense250,000 350,000
Net Income before tax $(1,500)
EXERCISE 8-18(a)(1) Variable manufacturing costs$40.00
Fixed manufacturing costs ($100,000 8,000)12.50
Per unit normal cost$52.50
(a)(2) ASIAN WINDOWS
Income StatementNormal Costing
For the year ended December 31, 2012Sales (8,500 units $90)$765,000
Cost of goods sold:
Beginning inventory
Plus: Cost of goods manufactured (10,000 $52.50)$525,000
Goods available for sale525,000
Less: ending inventory (1,500 $52.50)78,750
Cost of goods sold446,250
Less: volume variance [$100,000 (10,000 $12.50)]25,000 421,250
Gross Margin 343,750
Less: S&A [(8,500 x $9) + $250,000] 326,500
Net Income $17,250
(b) Normal costing net income$17,250
Less:
Costs deferred in ending inventory [1,500 ($12.50 $10)] 3,750
Absorption costing net income$13,500
EXERCISE 8-19
(a) Manufacturing Cost Per UnitVariable Costing
Direct material$6.50
Direct labour2.75
Variable manufacturing overhead 5.75
Manufacturing cost per unit$15.00
EXERCISE 8-19 (Continued)
(b) BOBS COMPANY
Income StatementVariable CostingFor the Year Ended December 31, 2012
Sales (80,000 $25)$2,000,000
Less: variable costs
Variable COGS (80,000 $15)$1,200,000
Variable S&A (80,000 $3.90)312,000 1,512,000
Contribution margin 488,000
Less: fixed costs
Fixed manufacturing overhead285,000
Fixed S&A expense240,100 525,100
Net Income before tax $(37,100)
EXERCISE 8-20(a) Absorption costing per unit manufacturing cost:
Direct materials$ 6.50
Direct labour2.75
Variable manufacturing overhead5.75
Fixed manufacturing overhead ($285,000 95,000) 3.00
Absorption manufacturing cost per unit$18.00
(b) BOB'S COMPANY
Income StatementAbsorption CostingFor the Year Ended December 31, 2012Sales (80,000 lures $25)$2,000,000
Less: COGS (80,000 lures $18.00) 1,440,000
Gross profit 560,000
Less: selling and administration expenses
Variable (80,000 lures $3.90)$312,000
Fixed 240,100 552,100
Net Income $7,900
EXERCISE 8-21(a)(1) Normal costing per unit manufacturing cost:
Direct materials$ 6.50
Direct labour2.75
Variable manufacturing overhead5.75
Pre-determined overhead rate ($285,000 93,860) 3.04
Normal manufacturing cost per unit$18.04
(a)(2) BOBS COMPANYIncome StatementNormal Costing
For the year ended December 31, 2012
Sales (80,000 lures $25)$2,000,000
Cost of goods sold:
Beginning inventory
Plus: Cost of goods manufactured
(95,000 $18.04)$1,713,800
Goods available for sale 1,713,800
Less: ending inventory (15,000 $18.04) 270,600
Cost of goods sold 1,443,200
Plus: volume variance [$285,000 (95,000 $3.04)] 3,800 1,439,400
Gross Margin 560,600
Less: S&A [(80,000 $3.90) + $240,100] 552,100
Net Income $ 8,500
(b) Normal costing net income$ 8,500
Less:
Costs deferred in ending inventory [15,000 ($18.04 $18)] 600
Absorption costing net income$7,900
EXERCISE 8-22(a) & (b) Manufacturing Cost Per Unit
AbsorptionVariable
Direct material$0.26$0.26
Direct labour 0.34 0.34
Variable manufacturing overhead 0.38 0.38
Fixed manufacturing overhead
($96,459 260,700) 0.37
Manufacturing cost per unit$1.35$0.98
(c)
EMPEY MANUFACTURING
Income Statement
For the Year Ended December 31, 2012Absorption Costing
Sales (260,700 units $2)$521,400
Less: COGS (260,700 units $1.35) 351,945
Gross profit 169,455
Less: selling and administration expenses
Variable (260,700 units $0.26)$67,782
Fixed 81,125148,907
Net Income $20,548
(d)Net income is the same under both costing methods, $20,548. The net incomes are the same because production equals sales for the year. When this condition occurs, both methods deduct all of the fixed manufacturing overhead costs in the current year. There is no ending inventory in which fixed manufacturing overhead costs can be deferred. (e)It would be beneficial for Empey Manufacturing to prepare both a variable costing income statement and an absorption costing income statement for a variety of reasons. First, to satisfy the requirements of generally accepted accounting principles, the company is required to prepare an absorption costing income statement.
EXERCISE 8-22 (Continued) However, management frequently requests a variable costing income statement because it provides useful information for decision making purposes. The variable costing income statement provides information that is necessary for cost-volume-profit analysis as well as incremental analysis. In addition, net income calculated in a variable costing income statement more closely follows changes in sales, thus it is a better indicator of performance. Also, net income calculated in a variable costing income statement is not affected by changes in production the way absorption costing net income is. Finally, variable costing statements are more closely matched to the actual cash flow in an organization as the manufacturing overhead costs are expensed in the month in which the cash outlay occurs.EXERCISE 8-23(a) Manufacturing Cost Per UnitVariable Costing
Direct material ($70,000 10,000 units produced)$7.00
Direct labour ($30,000 10,000 units)3.00
Variable manufacturing overhead ($25,000 10,000 units) 2.50
Manufacturing cost per unit$12.50
Finished goods inventory = (10,000 8,500 units) $12.50 = $18,750(b)Absorption costing would show a higher net income because a portion of the fixed costs are deferred to future periods in the ending inventory. As illustrated below, FGI will be $6,000 higher under absorption costing which will cause its net income to be $6,000 higher.
Manufacturing Cost Per UnitAbsorption Costing
Variable costing per unit (from (a))$12.50
Fixed Manufacturing overhead ($40,000 10,000) 4.00
Manufacturing cost per unit$16.50
Finished goods inventory cost = (10,000 8,500 units) $16.50 = $24,750
EXERCISE 8-23 (Continued)
Inventory (absorption costing)$24,750
Inventory (variable costing)18,750
Fixed overhead deferred in ending inventory$6,000
Or, fixed manufacturing overhead per unit x ending inventory
$40,000 10,000 = $4.00 1,500 = $6,000EXERCISE 8-24(a)Variable utility expense: $3,000
(12 months x 500 hours per month x $0.50 per hour)
Fixed utility expense: $24,000
(12 months $2,000 per month)
Manufacturing cost using variable approach:
Direct material $54,000
Direct labour 37,000
Indirect material (nails) 350
Utilities (variable) 3,000
$94,350
(b)Manufacturing cost using absorption approach:
Variable cost from (a) $94,350
Utilities (fixed) 24,000
Rent 21,400
$139,750
(c)The entire difference in costs between the two methods results from having fixed overhead included as part of manufacturing costs only under the absorption costing method. This difference amounts to $45,400 (Fixed utilities cost, $24,000 + Fixed rent, $21,400).
EXERCISE 8-25First determine unit manufacturing costs:
TPCVCAC
Direct materials$8.00$8.00$8.00
Direct labour 9.00 9.00
Variable MOH12.00 12.00
Fixed MOH ($18,000 3,000) 6.00
Unit manufacturing cost$8.00$29.00$35.00
Then determine the value of ending inventory:
TPCVCAC
Beginning inventory (100 units)$800 $2,900$3,500
Finished goods added (3,000 units)24,00087,000105,000
Goods available for sale (3,100 units)24,80089,900108,500
Cost of goods sold (2,800 units)22,40081,20098,000
Value of ending inventory (300 units)$2,400$8,700$10,500
(a) Therefore, absorption costing net income will be $1,800 more than net income using variable costing: FMOH deferred in ending inventory equals 300 units $6.00 FMOH per unit, or ($10,500 $8,700).
(b) And, variable costing net income will be $6,300 more than net income using throughput costing: conversion costs deferred in ending inventory equals 300 units $21.00 per unit, or ($8,700 $2,400).SOLUTIONS TO PROBLEMSSet A*PROBLEM 8-26A
(a) (1) Manufacturing Cost Per UnitAbsorption Costing
Variable manufacturing costs ($40 + $16 + $4)$60.00
Fixed Manufacturing overhead ($200,000 10,000) 20.00
Manufacturing cost per unit$80.00
(2) BLUE MOUNTAIN PRODUCTSAbsorption Costing Income Statement
For the Month Ended June 30, 2012 _______________________________________________________________
Sales (9,000 units $150)$1,350,000
Less: COGS (9,000 units $80)720,000
Gross profit630,000
Less: selling and administration expenses
Variable (9,000 units $6)$54,000
Fixed 400,000454,000
Net Income $176,000
(b) (1) Manufacturing Cost Per UnitVariable CostingVariable manufacturing costs ($40 + $16 + $4) = $60
(2) BLUE MOUNTAIN PRODUCTSVariable Costing Income Statement
For the Month Ended June 30, 2012Sales (9,000 units $150)$1,350,000
Less: variable costs
Variable COGS (9,000 units $60)$540,000
Variable S&A (9,000 units $6)54,000594,000
Contribution margin756,000
Less: fixed costs ($200,000 + $400,000)600,000
Net Income before tax$156,000
PROBLEM 8-26A (Continued)(c)
When production exceeds sales, absorption costing net income will exceed variable costing net income by an amount equal to the fixed overhead rate times the number of units in ending inventory. The difference in net income is $20,000 ($176,000 $156,000) which equals the 1,000 tents in ending inventory times the $20 fixed overhead rate.
(d) (1) The throughput manufacturing cost consists of direct material only, so the per unit rate would be $40. (2) BLUE MOUNTAIN PRODUCTSThroughput Costing Income Statement
For the Month Ended June 30, 2012Sales (9,000 units $150)$1,350,000
Less: COGS (9,000 units $40)360,000
Throughput contribution margin990,000
Less: Operating expenses
Variable COGS (10,000 units ($16 + $4)) $200,000
Variable S&A (9,000 units $6)54,000
Fixed ($200,000 + $400,000)600,000$854,000
Net Income before tax$136,000
(e) The difference is $20,000 which is the per unit deferred variable conversion costs times the number of tents in ending inventory, or 1,000 tents (direct labour, $16 + variable MOH, $4). PROBLEM 8-27A
(a) Required calculations for variable costing, 2012:Sales ($2,500 6,000 units)$15,000,000
Per unit variable manufacturing costs: ($2,500 0.15)$375
Variable manufacturing costs (8,000 $375)$3,000,000
Ending inventory (8,000 manufactured 6,000 sold)2,000 units
Variable selling expenses (6,000 ($2,500 0.20))$3,000,000
Required calculations for variable costing, 2013
Variable manufacturing costs (6,000 $375)$2,250,000
Beginning inventory (2,000 units $375 per unit)$750,000
Ending inventory (2,000 + 6,000 8,000)
Variable selling expenses (8,000 ($2,500 0.20))$4,000,000
AFN COMPANY
Income StatementVariable Costing For the Years Ended December 31
____________________________________________________________
20122013
Sales (6,000; 8,000)$15,000,000$20,000,000
Less: Variable costs
Inventory, beginning 750,000
Plus: Cost of goods manufactured3,000,0002,250,000
Cost of goods available for sale3,000,0003,000,000
Less: Inventory, ending750,000
Variable cost of goods sold2,250,0003,000,000
Variable selling and administrative3,000,0004,000,000
Total variable costs$5,250,0007,000,000
Contribution margin9,750,00013,000,000
Less: fixed costs 3,800,0003,800,000
Net income $5,950,000$9,200,000
PROBLEM 8-27A (Continued)
(b) Required calculations for absorption costing, 2012:
Sales ($2,500 6,000 units)$15,000,000
Variable manufacturing costs per unit: ($2,500 0.15)]$375
Fixed manufacturing costs per unit: ($3,200,000 8,000)$400
Ending inventory (8,000 manufactured 6,000 sold)2,000 units
Variable selling expenses (6,000 ($2,500 0.20))$3,000,000
Required calculations for absorption costing, 2013
Variable manufacturing costs (6,000 $375)$2,250,000
Fixed manufacturing costs per unit: ($3,200,000 6,000)$533.33
Beginning inventory (2,000 units $775 per unit)$1,550,000
Ending inventory (2,000 + 6,000 8,000)
Variable selling expenses (8,000 ($2,500 0.20))$4,000,000
AFN COMPANY
Income StatementAbsorption Costing
For the Years Ended December 31
____________________________________________________________
20122013
Sales (6,000; 8,000)$15,000,000$20,000,000
Less: Cost of goods sold
Inventory, beginning1,550,000
Plus: Cost of goods manufactured6,200,0005,450,000
Cost of goods available for sale6,200,0007,000,000
Less: Inventory, ending1,550,000
Cost of goods sold$4,650,0007,000,000
Gross margin10,350,00013,000,000
Less: Selling and admin costs 3,600,0004,600,000
Net income $6,750,000$8,400,000
PROBLEM 8-27A (Continued)
(c)Reconciliation, 2012
Variable costing net income $5,950,000
Plus: Fixed MOH deferred in ending inventory
(2,000 units $400 per unit) 800,000
Absorption costing net income $6,750,000
Reconciliation, 2013
Variable costing net income $9,200,000
Less: Fixed MOH released from beginning
Inventory (2,000 $400) 800,000
Absorption costing net income $8,400,000
In 2012, with variable costing, fixed manufacturing overhead of $3.2 million is expensed. Under absorption costing, only $2.4 million is expensed through cost of goods sold, and the balance ($800,000) becomes part of the ending inventory. Therefore, absorption costing net income is $800,000 more than variable costing net income.
In the following year, all the units that were in inventory at the end of 2012 are sold. The result is an additional $800,000 cost of goods sold under the absorption costing method, and absorption costing net income is $800,000 less than variable costing net income.
Over the two years, when sales were equal to production, the two cumulative net incomes are equal.
($5,950,000 + $9,200,000 = $6,750,000 + $8,400,000)(d)Income parallels sales under variable costing as seen in the increase in net income in 2012 when 1,000 additional units were sold. In contrast, under absorption costing, income parallels production as seen in the higher net income in 2013 when production exceeded sales by 2,000 units.
PROBLEM 8-28A
(a) BASIC ELECTRIC MOTORS DIVISION
Income Statement
For the Year Ended 2012Absorption Costing
_______________________________________________________________
Units produced250,000200,000
Units sold200,000200,000
Sales ($8)$1,600,000$1,600,000
Less: Cost of goods sold ($5.00; $5.50)1,000,0001,100,000
Gross profit600,000500,000
Less: Selling and Administration
(200,000 $0.50) + $12,000112,000112,000
Net Income $488,000$388,000
(b) BASIC ELECTRIC MOTORS DIVISION
Income Statement
For the Year Ended 2012Variable Costing
_______________________________________________________________
Units produced250,000200,000
Units sold200,000200,000
Sales ($8)$1,600,000$1,600,000
Less: Variable cost of goods sold ($3.00)600,000600,000
Variable selling and admin ($0.50)100,000100,000
Contribution margin900,000900,000
Less: Fixed manufacturing 500,000500,000
Fixed selling and admin12,00012,000
Net Income $388,000$388,000
PROBLEM 8-28A (Continued)
(c)If the company produces 250,000 units, but only sells 200,000 units, then 50,000 units will remain in ending inventory. Under absorption costing these 50,000 units will each include $2 of fixed manufacturing overheada total of $100,000. However, under variable costing, fixed manufacturing overhead is expensed when incurred. This accounts for the $100,000 difference ($488,000 $388,000) in net income. This is summarized as:
Net income under variable costing$388,000
Plus: Fixed manufacturing overhead included in ending inventory (50,000 units $2) 100,000Net income under absorption costing$488,000
When production equals sales, there is no increase in ending inventory, so there is no opportunity to defer fixed overhead income is the same under both methods.(d)Variable costing has a number of advantages over absorption costing for decision making and evaluation purposes.
The use of variable costing is consistent with cost-volume-profit and incremental analysis.
Net income computed under variable costing is unaffected by changes in production levels. Note that in our example, under variable costing the companys net income is $388,000 no matter the level of production. Net income computed under variable costing is closely tied to changes in sales levels (not production levels), and therefore provides a more realistic assessment of the companys success or failure during a period. The presentation of fixed and variable cost components on the face of the variable costing income statement makes it easier to identify these costs and understand their effect on the business. Under absorption costing the allocation of fixed costs makes it difficult to evaluate the impact of fixed costs on the companys results.
PROBLEM 8-29A
(a)
Per unit product cost: $30 + $40 + $10 + ($70,000 2,000) = $115 ALTA PRODUCTS LTD.
Income StatementAbsorption CostingMonth ended August 31, 2012______________________________________________________________
Sales (1,700 $175)$297,500
Less: COGS
Inventory, beginning$
Plus: Cost of goods manufactured230,000
Cost of goods available for sale230,000
Less: Inventory, ending34,500195,500
Gross profit102,000
Less: Selling and Administration
[(6% $297,500) + $50,000] 67,850
Net income $34,150
(b) ALTA PRODUCTS LTD.
Income StatementVariable Costing Month ended August 31, 2012_____________________________________________________________
Sales $297,500
Less: Variable COGS
Inventory, beginning$
Plus: Cost of goods manufactured160,000
Cost of goods available for sale160,000
Less: Inventory, ending24,000
Variable cost of goods sold136,000
Variable selling and administrative17,850 153,850
Contribution margin 143,650
Less: fixed costs ($70,000 + $50,000) 120,000
Net income $23,650
PROBLEM 8-29A (Continued)
(c) Fixed overhead cost per unit = $70,000 2,000 = $35 per unit Reconciliation Income under variable costing$23,650 Plus: Fixed costs deferred in inventory (300 $35) 10,500 Income under absorption costing $34,150(d) ALTA PRODUCTS LTD.
Income StatementThroughput Costing Month ended August 31, 2012______________________________________________________________
Sales (1,700 units $175)$297,500
Less: COGS (1,700 units $30) 51,000
Throughput contribution margin 246,500
Less: Operating expenses
Variable COGS (2,000 ($40 + $10)) $100,000
Variable S&A (6% Sales)17,850
Fixed ($70,000 + $50,000)120,000 237,850
Net Income before tax $8,650
(e)Reconciliation, 2012
Variable costing net income $23,650
Less: costs deferred in ending inventory
[($40 + $10 ) 300 units] 15,000
Throughput costing net income$8,650
(f) The proponents of variable costing appeal to the cost avoidance criterion as a necessary condition for asset recognition. The incurrence of fixed manufacturing costs this period will not allow the firm to avoid or eliminate them next period, so fixed manufacturing costs should not be recognized as assets. It is also pointed out that use of absorption costing can lead to manipulation of the net income figure by managing levels of production and inventory.
PROBLEM 8-29A (Continued)
The proponents of absorption costing argue that the finished goods should bear a fair share of all the costs that were incurred to bring the goods to saleable condition, and that all costs should be properly included in inventory. Absorption costing is the only method allowed in Canada for externally reporting, and it is argued that in the long run, variable costing can be misleading for purposes of long-run costing and pricing.*PROBLEM 8-30A
(a)(1) Manufacturing cost per unit using normal costing:Direct material$30
Direct labour40
Variable overhead10
Fixed overhead ($70,000 2,500 units)28
$108
(a)(2)
ALTA PRODUCTS LTD.
Income StatementNormal CostingMonth ended August 31, 2012
______________________________________________________________
Sales (1,700 $175)$297,500
Less: COGS
Inventory, beginning$
Plus: Cost of goods manufactured216,000
Cost of goods available for sale216,000
Less: Inventory, ending32,400
Unadjusted cost of goods sold183,600
Plus: volume variance*14,000197,600
Gross profit99,900
Less: Selling and Administration
[(6% $297,500) + $50,000] 67,850
Net income $32,050
*(2,500 2,000) $28(b) Reconciliation
Normal costing net income$32,050
Plus: Additional fixed MOH deferred in ending inventory
[300 units ($35 $28)] 2,100
Absorption costing net income (from P8-29A)$34,150
PROBLEM 8-31A
(a) Variable Costing Income Statement
Year 1Year 2
Sales in units4,0005,000
Sales ($500)$2,000,000$2,500,000
Less: Variable costs ($320) 1,280,000 1,600,000
Contribution margin 720,000 900,000
Less: fixed costs 280,0001 350,0002
Net income $440,000 $550,000
1$180,000 + $100,000 2$210,000 + $140,000 (b)Ending inventory, Year 1: (6,000 4,000) 2,000 units
Fixed MOH per unit: ($180,000 6,000)$30
ReconciliationYear 1Year 2
Variable costing net income$440,000$550,000
Plus: Fixed MOH deferred in ending inventory
(2,000 units $30) 60,000
Less: Fixed MOH released from beginning 60,000
inventory (2,000 units $30)
Absorption costing net income $500,000$490,000
(c)Amanjeet lost her bonus because the company uses absorption costing. Since production was lower than sales in Year 2 and there was no inventory at year end, under absorption costing, all of Year 2's fixed overhead costs are expensed as well as the fixed overhead costs that were deferred into inventory as a result of production being greater than sales in Year 1. PROBLEM 8-31A (Continued)
Variable costing more accurately measures performance. Income for a period is not affected by changes in absorption of fixed overhead costs resulting from building or reducing inventory. Other things remaining equal, profits move in the same direction as sales when variable costing is in use. It follows management's thinking more closely than does absorption costing, and subsequently, management finds it easier to understand and to use variable cost reports.
Another reason for Amanjeet not receiving a bonus is the higher fixed manufacturing costs of production over the prior year. For the 6,000 units produced in Year 1 the fixed manufacturing costs were $180,000 whereas for the 3,000 units produced in Year 2 the fixed manufacturing costs (before factoring in the fixed manufacturing OH released from the units of beginning inventory) were $210,000 an increase of $30,000 (which would account for more than 1/5 of the shortfall of the 25% targeted increase in net income).*PROBLEM 8-32A
Unit product costs:AbsorptionVariableTPC
Direct materials ($50) $1,000,000 $1,000,000 $1,000,000
Direct labour ($37.50) 750,000 750,000
Variable MOH ($22.50) 450,000 450,000
Fixed manufacturing overhead 800,000
$3,000,000 $2,200,000 $1,000,000
Cost per unit (20,000 units) $150.00 $110.00$50.00
Fixed manufacturing overhead product cost under absorption costing: $800,000 20,000 units = $40 per unit
Marketing cost per unit: $180,000 18,000 units = $10 per unit
(a) XANTRA Corp.
Income Statement Year ended December 31, 2012 Absorption Costing______________________________________________________________
Production in units20,000
Sales in units
18,000
Sales (18,000 $200)$3,600,000
Less: COGS
Inventory, beginning$
Plus: Cost of goods manufactured ($150)3,000,000
Cost of goods available for sale3,000,000
Less: Inventory, ending ($150)300,000
Cost of goods sold2,700,000
Gross profit900,000
Less: Marketing costs
Variable180,000
Fixed200,000380,000
Net income $520,000
PROBLEM 8-32A (Continued) (b) XANTRA Corp.Variable Costing Income Statement Year ended December 31, 2012______________________________________________________________
Production in units20,000
Sales in units
18,000
Sales ($200)$3,600,000
Less: Variable COGS
Inventory, beginning$
Plus Cost of goods manufactured ($110)2,200,000
Cost of goods available for sale2,200,000
Less: Inventory, ending ($110)220,000
Variable cost of goods sold1,980,000
Variable marketing180,000 2,160,000
Contribution Margin 1,440,000
Less: fixed costs ($800,000 + $200,000) 1,000,000
Net income $440,000
(c) Reconciliation
Variable costing net income$440,000
Plus: Fixed MOH deferred in ending inventory
(2,000 units $40) 80,000
Absorption costing net income $520,000
(d) Break-even (BE) point: SP (X) VC (X) = FC
Where
SP is the selling price
X is the number of units
VC is the variable cost
$200(X) ($110X + $10X) = $800,000 + $200,000
$80X = $1,000,000
X = 12,500 units
PROBLEM 8-32A (Continued)
(e) XANTRA Corp. Income Statement
Year ended December 31, 2012Throughput Costing______________________________________________________________
Production in units20,000
Sales in units
18,000
Sales ($200)$3,600,000
Less: COGS ($50) 900,000
Throughput contribution margin 2,700,000
Less: Operating expenses
Variable COGS ($750,000 + $450,000)$1,200,000
Variable Marketing180,000
Fixed ($800,000 + $200,000)1,000,000 2,380,000
Net income $320,000
(f)Reconciliation
Throughput costing net income $320,000
Plus: costs deferred in ending inventory
[2,000 ($37.50 + $22.50)] 120,000
Variable costing net income$440,000
*PROBLEM 8-33A
(a)(1)Unit product cost:Normal
Direct materials ($1,000,000 20,000 units) $50.00
Direct labour ($750,000 20,000 units) 37.50
Variable MOH ($450,000 20,000 units) 22.50
Fixed MOH ($800,000 25,000 units) 32.00
Cost per unit $142.00
(a)(2) XANTRA Corp.
Income StatementNormal Costing Year ended December 31, 2012
______________________________________________________________
Production in units20,000
Sales in units
18,000
Sales (18,000 $200)$3,600,000
Less: COGS
Inventory, beginning$
Plus: Cost of goods manufactured 2,840,000
Cost of goods available for sale2,840,000
Less: Inventory, ending 284,000
Cost of goods sold2,556,000
Volume Variance ($800,000 (20,000 $32))160,0002,716,000
Gross profit884,000
Less: Marketing costs
Variable180,000
Fixed200,000380,000
Net income $504,000
(b) Reconciliation
Normal costing net income$504,000
Plus: Additional fixed MOH deferred in ending inventory
[2,000 units ($40 $32)] 16,000
Absorption costing net income $520,000
PROBLEM 8-34A
(a)Due to the shutdown arising from the material shortage, the firm has had to reduce inventory. In effect, fixed costs from beginning inventory are being expensed in the current period, and the firm has been unable to defer current period fixed costs because it has been unable to restore inventory levels.
(b)If the firm can restore inventory levels in the last month, they will be able to defer some of the current period's fixed costs and can eliminate the fixed overhead adjustment. Some may raise the issue of whether manipulating earnings in this way is ethical. Most managers feel it is ethical provided there is a real action takenactually increasing inventory, and the action is within the boundaries of normal operations. However, it is still manipulation.
(c)A variable cost statement would not be affected by the changing inventory. First determine variable costs for both statements. Variable cost, Jan 1 = Total cost less fixed costs
= $212,000 $30,000 = $182,000
As a percentage of sales = $182,000 $268,000 = 68%
Because sales and variable costs have remained constant, the November statement will also reflect 68% variable costs.
Variable cost, Nov = 68% $294,800 = $200,464
SUN COMPANY
Variable Costing Income Statement
Forecast of Operating Results______________________________________________________________
Year 1Year 2
Sales $268,000$294,800
Less: Variable costs 182,000200,464
Contribution margin 86,00094,336
Less: Fixed costs 70,200 71,540
Net income $15,800$22,796
PROBLEM 8-35A
(a)In order to apply variable costing to the Daniels Tool & Die operations, it is necessary to first remove fixed manufacturing costs from the inventory values and the cost of goods sold.
Fixed MOH per unit = $25,000 25,000 DLH = $1.00 per DLHBeginning finished goods inventory:
Using absorption costing $18,000
Less: Fixed MOH included
1,050 hours $1.00 1,050
Using variable costing $16,950
Ending finished goods inventory
Using absorption costing $14,000
Less: Fixed MOH included
820 hours $1.00 820
Using variable costing $13,180
Beginning work in process inventory:
Using absorption costing $48,000
Less: Fixed MOH included
1,600 hours $1.00 1,600
Using variable costing $46,400
Ending work in process inventory
Using absorption costing $64,000
Less: Fixed MOH included
2,100 hours $1.00 2,100
Using variable costing $61,900
PROBLEM 8-35A (Continued)
Variable cost of goods manufactured:
Raw materials put into production $370,000
Direct labour [23,000 ($150,000 25,000)] 138,000
Variable overhead [23,000 ($155,000 25,000)] 142,600
Total variable manufacturing costs 650,600
Plus: Variable beginning work in process 46,400
697,000
Less: Variable ending work in process 61,900
Variable cost of goods manufactured$635,100
Variable cost of goods sold:
Variable beginning finished goods inventory $16,950
Plus: Variable cost of goods manufactured635,100
Variable cost of goods available for sale$652,050
Less: Variable ending finished goods inventory13,180
Variable cost of goods sold$638,870
Daniels Tools & Die Corporation
Variable Costing Income Statement
For the year ended December 31, 2012
Sales$1,015,000
Less: Variable costs
Cost of goods sold$638,870
Sales commissions (5% Sales)50,750 689,620
Contribution margin325,380
Less: Fixed manufacturing overhead37,400
Selling & Admin ($95,000 $50,750 + $75,000)119,250 156,650
Operating income$168,730
PROBLEM 8-35A (Continued)
(b)The difference in the operating income of $270 is caused by the different treatment of fixed manufacturing overhead. Under absorption costing, fixed overhead costs are assigned to inventory and are not expensed until the goods are sold. Under variable costing, these costs are treated as expenses in the period incurred. Since the direct labour hours in the work in process and finished goods inventories had a net increase of 270 hours, the absorption costing operating profit is higher because the fixed factory overhead associated with the increased labour hours in inventory is not expensed when absorption costing is used.
Variable costing operating income$168,730
Plus: FMOH deferred in work in process
Inventory [$1.00 (2,100 1,600)] 500
169,230
Less: FMOH released from finished goods
inventory [$1.00 (1,050 820)] 230
Absorption costing operating income$169,000
(c) The advantages of using variable costing follow.
The fixed manufacturing costs are reported at incurred values, not at absorbed values, which increases the likelihood of better control over fixed costs.
Profits are directly influenced by changes in sales volume and not by changes in inventory levels.
Contribution margin by product line, territory, department, or division is emphasized and more readily ascertainable.
The disadvantages of using variable costing follow.
PROBLEM 8-35A (Continued) Variable costing is not recommended for tax reporting, for external financial reporting; therefore, companies need to adjust variable costing amounts for these purposes.
Costs other than variable costs (i.e., fixed costs and total production costs) may be ignored when making decisions, especially long-term decisions.
With the advancement of factory technology and the movement toward a fully automated factory, the fixed factory overhead may be a significant portion of the production costs. To ignore these significant costs in inventory valuation may not be acceptable.
SOLUTIONS TO PROBLEMSSet B
*PROBLEM 8-36B
(a)(1) Direct material$10
Direct labour10
Variable manufacturing overhead5
Fixed Manufacturing overhead ($150,000 50,000) 3
Manufacturing cost per unit$28
(2) SPONGEFUN PRODUCTS
Absorption Costing Income Statement
For the year ended December 31, 2012 _________________________________________________________
Sales (46,000 units $60)$2,760,000
Less: COGS (46,000 units $28)1,288,000
Gross profit1,472,000
Less: Variable S&A (46,000 $8)$368,000
Fixed S&A300,000668,000
Net Income before tax $804,000
(b) (1) Direct materials$10
Direct labour10
Variable manufacturing overhead5
Manufacturing cost per unit $25
(2) SPONGEFUN PRODUCTSVariable Costing Income Statement
For the year ended December 31, 2012
____________________________________________________________
Sales (46,000 units $60)$2,760,000
Less: variable costs
Variable COGS (46,000 units $25)$1,150,000
Variable S&A (46,000 units $8)368,0001,518,000
Contribution margin1,242,000
Less: fixed costs ($150,000 + $300,000)450,000
Net Income before tax$792,000
PROBLEM 8-36B (Continued)(c)
When production exceeds sales, absorption costing net income will exceed variable costing net income by an amount equal to the fixed overhead rate times the number of units in ending inventory. The difference in net income is $12,000 ($804,000 $792,000) which equals the 4,000 units in ending inventory times the $3 fixed overhead rate.
(d) (1) Throughput manufacturing cost consists of direct material only, so the rate would be $10 per unit.
(2) SPONGEFUN PRODUCTS
Throughput Costing Income Statement
For the year ended December 31, 2012
____________________________________________________________
Sales (46,000 units $60)$2,760,000
Less: COGS (46,000 units $10) 460,000
Throughput contribution margin 2,300,000
Less: Operating expenses
Variable COGS (50,000 units ($10 + $5)) $750,000
Variable S&A (46,000 units $8)368,000
Fixed ($150,000 + $300,000)450,000 1,568,000
Net Income before tax $732,000
(e) The difference is $60,000 which is the per unit deferred variable conversion costs times the number of units in ending inventory, or 4,000 (direct labour, $10 + variable MOH, $5).
PROBLEM 8-37B
(a)(1) Direct material$10.00
Direct labour10.00
Variable manufacturing overhead5.00
Fixed manufacturing overhead ($150,000 60,000) 2.50
Manufacturing cost per unit$27.50
(2) SPONGEFUN PRODUCTS
Normal Costing Income Statement
For the year ended December 31, 2012
_______________________________________________________
Sales (46,000 units $60)$2,760,000
Less: COGS (46,000 units $27.50)$1,265,000
Volume variance (10,000 $2.50) 25,0001,290,000
Gross profit1,470,000
Less: Variable S&A (46,000 $8)$368,000
Fixed S&A300,000668,000
Net income $802,000
(b) Reconciliation
Normal costing net income$802,000
Plus: Additional fixed MOH deferred in ending inventory
[4,000 units ($28.00 $27.50)] 2,000
Absorption costing net income $804,000
PROBLEM 8-38B
ZAKI METAL COMPANY
Variable Costing Income Statement
For the Year Ended December 31, 2012(a) Required calculations for variable costing 2012:Sales ($120 50,000 km)$6,000,000
Per unit variable manufacturing costs: ($120 0.25)$30
Variable manufacturing costs (60,000 $30)$1,800,000
Ending inventory (60,000 manufactured 50,000 sold)10,000 km
Variable selling expenses (50,000 $9)$450,000
ZAKI METAL COMPANY
Variable Costing Income Statement
For the Year Ended December 31, 2012Sales $6,000,000
Less: Variable COGS
Inventory, beginning$
Plus: Cost of goods manufactured1,800,000
Cost of goods available for sale1,800,000
Less: Inventory, ending300,000
Variable cost of goods sold1,500,000
Variable selling 450,0001,950,000
Contribution margin4,050,000
Less: fixed costs
Fixed manufacturing costs1,500,000
Fixed administrative costs300,0001,800,000
Net income $2,250,000
PROBLEM 8-38B (Continued)
Required calculations for variable costing, 2013:Sales ($120 60,000 units)$7,200,000
Per unit variable manufacturing costs: ($120 0.25)$30
Variable manufacturing costs (50,000 $30)$1,500,000
Beginning inventory (10,000 units $30 per unit)$300,000
Ending inventory (10,000 + 50,000 60,000)
Variable selling expenses (60,000 $9)$540,000
ZAKI METAL COMPANY
Variable Costing Income Statement
For the Year Ended December 31, 2013Sales $7,200,000
Less: Variable COGS
Inventory, beginning$300,000
Plus: Cost of goods manufactured1,500,000
Cost of goods available for sale1,800,000
Less: Inventory, ending
Variable cost of goods sold1,800,000
Variable selling and administrative540,0002,340,000
Contribution margin4,860,000
Less: Fixed costs
Fixed manufacturing costs1,500,000
Fixed administrative costs300,0001,800,000
Net income $3,060,000
(b) Required calculations for absorption costing 2012:
Sales ($120 50,000 units)$6,000,000
Per unit variable manufacturing costs: ($120 0.25)$30
Per unit fixed manufacturing costs: ($1,500,000 60,000)$25
Absorption manufacturing costs (60,000 $55)$3,300,000
Ending inventory (60,000 50,000) $55$550,000
Selling expenses (50,000 $9)$450,000
PROBLEM 8-38B (Continued)
ZAKI METAL COMPANY
Absorption Costing Income Statement
For the Year Ended December 31, 2012Sales $6,000,000
Less: COGS
Inventory, beginning$
Plus: Cost of goods manufactured3,300,000
Cost of goods available for sale3,300,000
Less: Inventory, ending550,0002,750,000
Gross profit3,250,000
Less: Selling and Administration
Selling costs450,000
Administrative costs300,000750,000
Net income $2,500,000
Required calculations for absorption costing for 2013:
Sales ($120 60,000 units)$7,200,000
Per unit variable manufacturing costs: ($120 0.25)$30
Per unit fixed manufacturing costs: ($1,500,000 50,000)$30
Absorption manufacturing costs (50,000 $60)$3,000,000
Beginning inventory (10,000 $55)$550,000
Variable selling expenses (60,000 $9)$540,000
PROBLEM 8-38B (Continued)
ZAKI METAL COMPANY
Absorption Costing Income Statement
For the Year Ended December 31, 2013Sales $7,200,000
Less: COGS
Inventory, beginning$550,000
Plus: Cost of goods manufactured3,000,000
Cost of goods available for sale3,550,000
Less: Inventory, ending3,550,000
Gross profit3,650,000
Less: Selling and Administration
Selling costs540,000
Administrative costs300,000840,000
Net income $2,810,000
(c)Fixed manufacturing overhead in ending
inventory, 2012: (10,000 $25)$250,000
Reconciliation, 2012
Variable costing net income $2,250,000
Plus: Fixed MOH deferred in ending inventory 250,000
Absorption costing net income $2,500,000
Reconciliation, 2013
Variable costing net income $3,060,000
Less: Fixed MOH released from beginning inventory 250,000
Absorption costing net income $2,810,000
PROBLEM 8-38B (Continued)(d)Income parallels sales under variable costing as seen in the increase in net income in 2013 when 10,000 additional units were sold. In contrast, under absorption costing, income parallels production as seen in the higher net income in 2012 when production exceeded sales by 10,000 units.PROBLEM 8-39B
(a) HARRISON PUMPS DIVISION
Absorption Costing Income Statement
For the Year Ended 2012_______________________________________________________________
Units produced60,000100,000
Sales ($20.00)$1,200,000$1,200,000
Less: Cost of Goods Sold ($13.00; $11.40)780,000684,000
Gross profit420,000516,000
Less: Selling and Administration
Variable ($1.00)60,00060,000
Fixed30,00030,000
Total fixed costs90,00090,000
Operating income $330,000$426,000
(b) HARRISON PUMPS DIVISION
Variable Costing Income Statement
For the Year Ended 2012
_____________________________________________________________Units produced60,000100,000
Sales ($20.00)$1,200,000$1,200,000
Less: Variable cost of goods sold ($9.00)540,000540,000
Variable selling and admin ($1.00)60,00060,000
600,000600,000
Contribution margin600,000600,000
Less: Fixed manufacturing 240,000240,000
Fixed selling and admin30,00030,000
270,000270,000
Net income $330,000$330,000
PROBLEM 8-39B (Continued)
(c) If the company produces 100,000 units, but only sells 60,000 units, then 40,000 units will remain in ending inventory. Under absorption costing these 40,000 units will each include $2.40 of fixed manufacturing overheada total of $96,000. However, under variable costing fixed manufacturing overhead is expensed when incurred. This accounts for the $96,000 difference ($426,000 $330,000) in net income. This is summarized as shown below.
Net income under absorption costing
$426,000
Less: Fixed manufacturing overhead included in
ending inventory (40,000 units $2.40 per unit) 96,000Net income under variable costing$330,000(d)Variable costing has a number of advantages over absorption costing for decision making and evaluation purposes.
The use of variable costing is consistent with cost-volume-profit and incremental analysis.
Net income computed under variable costing is unaffected by changes in production levels. Note that in our example, under variable costing the companys net income is $330,000 no matter what the level of production is.
Net income computed under variable costing is closely tied to changes in sales levels (not production levels), and therefore provides a more realistic assessment of the companys success or failure during a period.
The presentation of fixed and variable cost components separately on the variable costing income statement makes it easier to identify these costs and understand their effect on the business. Under absorption costing the allocation of fixed costs makes it difficult to evaluate the impact of fixed costs on the companys results.
PROBLEM 8-40B
(a)Variable production costs$20.00
Fixed MOH ($120,000 30,000)4.00
Cost per unitabsorption costing$ 24.00
Allerdyce Corporation Ltd.
Absorption Costing Income Statement
For the Years Ended December 31
_______________________________________________________________
20112012Total
Units Sold25,00035,00060,000
Sales ($35.00)$875,000$1,225,000 $2,100,000
Less: Cost of Goods Sold ($24)600,000840,0001,440,000
Gross profit275,000385,000 660,000
Less: Marketing costs50,00050,000100,000
Operating income $225,000$335,000 $560,000
(b) Allerdyce Corporation Ltd.
Variable Costing Income Statement
For the Years Ended December 31
_______________________________________________________________
20112012Total
Units Sold25,00035,00060,000
Sales ($35.00)$875,000$1,225,000 $2,100,000
Less: Variable COGS ($20)500,000700,0001,200,000
Contribution margin375,000525,000 900,000
Less: fixed costs ($120,000 + $50,000)170,000170,000340,000
Operating income $205,000$355,000 $560,000
PROBLEM 8-40B (Continued)
(c)Ending inventory2011: 30,000 produced 25,000 sold5,000 units
Ending inventory2012: 5,000 + 30,000 35,000nil units
FMOH per unit: $120,000 30,000 units$4.00 /unit
Reconciliation of net income
20112012Total
Variable costing net income$205,000 355,000$560,000
Plus: FMOH stored in ending
inventory (5,000 $4) 20,00020,000
Less: FMOH released in
beginning inventory
(5,000 $4) (20,000)(20,000)
Absorption costing net income$225,000 335,000$560,000
PROBLEM 8-41B
(a)Contribution margin per unit:
Sales $25.00
Less: Variable costs
Manufacturing $9.00
Selling and Administration 6.0015.00
Contribution margin per unit $10.00
Fixed costs:July
Fixed manufacturing overhead$595,000
Adjust for under (over) applied fixed overhead (35,000)
Fixed manufacturing costs 560,000
Total selling and administrative 620,000
Less: variable selling and
administrative (70,000 $6) 420,000
Fixed selling and admin costs 200,000
Total fixed costs (same each month)$760,000
Break-even = $760,000 $10 = 76,000 units or
76,000 $25 = $1,900,000 Sales.
PROBLEM 8-41B (Continued)
(b)(1)Abscorp Ltd.
Variable Costing Income Statements
JulyAugSep
Sales in units70,00075,00080,000
Sales ($25)$1,750,000$1,875,000$2,000,000
Variable production costs ($15)1,050,000 1,125,0001,200,000
Contribution margin 700,000 750,000800,000
Less: Fixed costs 760,000 760,000760,000
Operating income $(60,000) $(10,000)$40,000
(2)Inventory valuesJulyAugSep
Beginning inventory 5,000 20,00025,000
Plus: units manufactured85,000 80,00060,000
Units available for sale90,000100,00085,000
Less: units sold70,000 75,00080,000
Ending inventory20,000 25,0005,000
Fixed MOH per unitJulyAugSepTotal
Total fixed MOH costs$560,000$560,000$560,000$1,680,000
Budgeted production80,00080,00080,000240,000
Per unit cost$7.00$7.00$7.00$7.00
Reconciliation of net income
JulyAugSep
Variable costing net income $(60,000)$(10,000) $40,000
Plus: FMOH deferredend. inv. 140,000175,000 35,000
Less: FMOH released in beg. inv. (35,000)(140,000) (175,000)
Absorption costing net income $45,000$25,000$(100,000)
PROBLEM 8-41B (Continued)
(3) In July, production exceeded sales by 15,000 units and, as a result, $105,000 ($7 15,000 units) of fixed manufacturing overhead cost was converted to inventory assets on the balance sheet under absorption costing.
In August, production exceeded sales by 5,000 units and, as a result, $35,000 ($7 5,000 units) of fixed manufacturing overhead cost was converted to inventory assets on the balance sheet under absorption costing.
In September, sales exceeded production by 20,000 units and, as a result, $140,000 ($7 20,000 units) of inventory assets were converted to expenses on the income statement under absorption costing.
PROBLEM 8-42B
(a)Fixed MOH per unit = $600,000 2,000 units = $300.
Absorption costing net income$400,000
Variable costing net income310,000
Difference$90,000
Since absorption costing net income exceeds variable costing net income, this means sales must have been less than production, and $90,000 fixed manufacturing overhead was deferred in the ending inventory at $300 per unit. $90,000 $300 = 300 units
If 300 units are left in finished goods ending inventory, and there was no beginning inventory, then sales must have been 1,700 units
(2,000 300 = 1,700).
(b)Contribution margin = net income + fixed costs
Contribution margin = $310,000 + $1,000,000 = $1,310,000
(c)Gross margin = net income + selling and administrative expenses
Gross margin = $400,000 + $400,000 = $800,000
(d)Variable costs = Sales - contribution margin
Variable costs = $3,400,000 $1,310,000 = $2,090,000
Cost per unit = $2,090,000 1,700 = $1,229.41
(e)Absorption costs = Sales gross profit
Absorption costs = $3,400,000 $800,000 = $2,600,000
Cost per unit = $2,600,000 1,700 = $1,529.41
PROBLEM 8-43B
Variable cost per unit:
Direct material (2 kg. $10 per kg.)$20.00
Direct labour (1 hr $8 per hr)8.00
Variable MOH [($15,000 $6,000) 18,000 units]0.50
Variable manufacturing cost per unit28.50
Variable selling and admin [($40,000 $4,000) 10,000] 3.60
$32.10
WINGFOOT CO.
Variable Costing Income Statement
For the Year Ended June 30, 2012Sales in units10,000
Sales ($100)$1,000,000
Less:
Variable COGS ($28.50)$285,000
Variable selling and administrative ($3.60)36,000321,000
Contribution Margin679,000
Less:
Fixed manufacturing overhead6,000
Fixed administrative costs4,00010,000
Operating income before tax$669,000
Income tax (40%)267,600
Net income$401,400
PROBLEM 8-44B
(a)In order to apply variable costing to the Portland Optics operations, it is necessary to first remove fixed manufacturing costs from the inventory values and the cost of goods sold.
Beginning finished goods inventory:
Using absorption costing $25,000
Less: Fixed MOH included
1,080 hours ($130,000 32,500) 4,320
Using variable costing $20,680
Ending finished goods inventory
Using absorption costing $14,000
Less: Fixed MOH included
550 hours ($176,000 44,000) 2,200
Using variable costing $11,800
Beginning work in process inventory:
Using absorption costing $34,000
Less: Fixed MOH included
1,400 hours $4.00 5,600
Using variable costing $28,400
Ending work in process inventory
Using absorption costing $60,000
Less: Fixed MOH included
2,500 hours $4.00 10,000
Using variable costing $50,000
PROBLEM 8-44B (Continued)
Variable cost of goods manufactured:
Raw materials put into production $210,000
Direct labour 435,000
Variable overhead [42,000 ($198,000 44,000)] 189,000
Total variable manufacturing costs 834,000
Plus: Variable beginning work in process 28,400
862,400
Less: Variable ending work in process 50,000
Variable cost of goods manufactured $812,400
Variable cost of goods sold:
Variable beginning finished goods inventory $ 20,680
Plus: Variable cost of goods manufactured 812,400
Variable cost of goods available for sale830,080
Less: Variable ending finished goods inventory11,800
Variable cost of goods sold $821,280
PROBLEM 8-44B (Continued)
PORTLAND OPTICS INC.
Variable Costing Income Statement
For the year ended December 31, 2012
Sales$1,520,000
Less: Variable costs
Cost of goods sold$821,280
Sales commissions121,600 942,880
Contribution margin 577,120
Less: Manufacturing overhead 175,000
Selling ($190,000 $121,600) 68,400
Administrative 187,000 430,400
Operating income $146,720
(b) Two of the several advantages of using variable costing
rather than absorption costing are as follows.
Financial statements using variable costing are more easily understood because they show that profits move in the same direction as sales. This effect is more logical than that shown with absorption costing, where profit is affected by changes in inventory.
Variable costing facilitates the analysis of cost-volume-profit relationships by separating fixed and variable costs on the income statement.
SOLUTIONS TO CASES
CASE 8-45
(a)
Sales (20,000 seats $680)$13,600,000
Variable costs (20,000 seats $340)6,800,000
Contribution margin6,800,000
Fixed costs4,420,000
Net income$2,380,000
(b)Contribution margin ratio = $6,800,000 $13,600,000 = 50%
Break-even point in dollars = $4,420,000 0.50 = $8,840,000Margin of safety ratio = ($13,600,000 $8,840,000) $13,600,000 = 35%Degree of operating leverage = $6,800,000 $2,830,000 = 2.857(c)
Sales (20,000 seats $680)$13,600,000
Variable costs (20,000 seats $280)5,600,000
Contribution margin8,000,000
Fixed costs5,000,000
Net income$3,000,000
(d)Contribution margin ratio = $8,000,000 $13,600,000 = 58.82%
Break-even point = $5,000,000 0.5882 = $8,500,000 (rounded)Margin of safety = ($13,600,000 $8,500,000) $13,600,000 = 37.5%Degree of operating leverage = $8,000,000 $3,000,000 = 2.6667CASE 8-45 (Continued)
(e)By automating its manufacturing process the company will replace some of its variable costs with fixed costs. This shift toward more fixed costs will decrease its break-even point from $8,840,000 to $8,500,000 and increase its margin of safety from 35% to 37.5%. This means that under the old system sales could fall by 35% percent before the company would operate at a loss, whereas under the automated system they could only fall by 37.5%. Both of these findings suggest that the operations would be less risky with the automated system. However, the companys degree of operating leverage would decrease from 2.857 to 2.667. This would be bad if the company expects sales to increase, but would be good if the companys sales fall.
CASE 8-46
(a) Manufacturing cost per unit:
Direct materialsrubber$2.75
Direct labourball makers5.60
Variable manufacturing overhead
Other materialsindirect$1.40
Electricity usagefactory0.50
Water usagefactory0.15
Other labourindirect0.272.32
Manufacturing cost per unit$10.67
(b)
BIG SPORTS MANUFACTURING
Variable Costing Income Statement
For the Year Ended December 31, 2012
Sales in units72,500
Sales ($18)$1,305,000
Less: Variable COGS
Beginning inventory (85,000 $9.67)$821,950
Units produced (35,000 $10.67)373,450
Total available for sale1,195,400
Ending inventory1494,325
Variable cost of goods sold701,075
Variable sell & admin ($0.40)29,000730,075
Contribution margin574,925
Less: Fixed costs
Fixed manufacturing overhead210,000
Fixed administrative costs83,000293,000
Operating income before tax$281,925
1Ending inventory = (12,500 x $9.67) + (35,000 x $10.67)
CASE 8-46 (Continued)
(c) Throughput costing per unit: Direct materialrubber$2.75
(d) This solution is prepared based on the assumption that the inventory system in use is first-in, first-out; and the $1.00 increase in variable manufacturing costs from 2011 to 2012 was not caused by any increase in the cost of the direct material. That is, the direct material rate remained the same for both years.
BIG SPORTS MANUFACTURING
Throughput Costing Income Statement
For the Year Ended December 31, 2012
Sales in units72,500
Sales ($18)$1,305,000
Less: Throughput COGS ($2.75) 199,375
Throughput contribution margin 1,105,625
Less: Operating expenses
Variable COGS ($5.60 + $2.32) $574,200
Variable S&A ($0.40)29,000
Fixed 293,000 896,200
Net Income before tax $209,425
(e)Unit product costs: Absorption costing
Total variable production costs-from (a)$10.67
Fixed MOH ($210,000 35,000)6.00
Cost per unit for 2012$16.67
Total variable production costs for 2011$9.67
Fixed MOH 4.00
Cost per unit for 2011$13.67
CASE 8-46 (Continued)
(f)
BIG SPORTS MANUFACTURING
Absorption Costing Income Statement
For the Year Ended December 31, 2012Sales in units72,500
Sales ($18)$1,305,000
Less: COGS
Beginning inventory (85,000 $13.67)$1,161,950
Units produced (35,000 $16.67)583,450
Total available for sale1,745,400
Ending inventory 754,325991,075
Gross margin313,925
Less: selling and administrative costs
Variable ($0.40)29,000
Fixed 83,000112,000
Operating income $201,925
Ending inventory = (12,500 $13.67) + (35,000 $16.67)
(g)(1) Reconciliation of net income
Variable costing net income$281,925
Plus: FMOH deferred in ending inventory
(12,500 $4) + (35,000 $6) 260,000
Less: FMOH released in beginning inventory
(85,000 $4) (340,000)
Absorption costing net income$201,925
(2) Break-even point = fixed costs CM ratio*
$293,000 (574,925 $1,305,000) = $666,000 (rounded)
$666,000 $18 = 37,000 units
*Cannot use CM per unit because variable costs are two different amounts.
CASE 8-46 (Continued) (3) Mr. Swetkowski is right in his thinking that variable costing has many advantages over the more traditional absorption costing technique. However, his conclusion that absorption costing should be stopped at Big Sports Manufacturing is incorrect. The company can learn many things about their operations by preparing the variable costing income statement, however they cannot simply discard absorption costing altogether. Absorption costing is recommended for external financial statements produced under generally accepted accounting principles (GAAP). With these standards in place, it would be better for Big Sports Manufacturing to produce both sets of financial statements.
CASE 8-47
(a)Per unit manufacturing costs: 2011 2012
Direct material$80.00 $80.00
Direct labour40.00 40.00
Variable manufacturing overhead35.00 35.00
Total variable unit cost155.00 155.00
Plus: fixed manufacturing overhead
($2,500,000 60,000 units)41.67
Plus: fixed manufacturing overhead
($2,500,000 50,000 units)50.00
$196.67 $205.00
Cost of goods sold: 2011
Beginning finished goods inventory$
Plus: cost of goods manufactured
(60,000 $196.67)rounded11,800,000
Cost of goods available for sale11,800,000
Less: ending inventory
[(60,000 54,000) 196.67]1,180,000
Cost of goods sold$10,620,000
Cost of goods sold: 2012
Beginning finished goods inventory$1,180,000
Plus: cost of goods manufactured
(50,000 $205.00)10,250,000
Cost of goods available for sale11,430,000
Less: ending inventory
[(110,000 108,000) $205.00]410,000
Cost of goods sold$11,020,000
CASE 8-47 (Continued)
WEI NAN COMPANY
Absorption Costing Income Statement
For the Years Ended December 31
2011 2012
Sales in units 54,000 54,000
Sales ($250 per unit)$13,500,000 $13,500,000
Cost of goods sold:10,620,000 11,020,000
Gross Profit2,880,000 2,480,000
Less: selling and administrative costs
[(54,000 $30) + $300,000]1,920,000 1,920,000
Net income$ 960,000 $
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