Chapter19–VariableCos2ngandAnalysisClickonlinks

Exercise19-1page859 Compu2ngunitandinventorycostsunderabsorp2oncos2ng

Exercise19-1 Exercise19-1Alt.

Exercise19-1page859 Compu2ngunitandinventorycostsundervariablecos2ng

Exercise19-2 Exercise19-2Alt.

Exercise19-3page860 Incomerepor2ngunderabsorp2oncos2ngandvariablecos2ng

Exercise19-3 Exercise19-3Alt.

Exercise19-4page860 Variablecos2ngincomestatement Exercise19-4 Exercise19-4Alt.

Exercise19-5page860 Absorp2oncos2ngandvariablecos2ngincomestatements

Exercise19-5 Exercise19-5Alt.

Exercise19-6page861 Absorp2oncos2ngincomestatement Exercise19-6 Exercise19-6Alt.

Exercise19-7page861 Incomerepor2ngunderabsorp2oncos2ngandvariablecos2ng

Exercise19-7 Exercise19-7Alt.

Exercise19-8page861 Contribu2onmarginformatincomestatement

Exercise19-8 Exercise19-8Alt.

Exercise19-9page862 Incomerepor2ngunderabsorp2oncos2ngandvariablecos2ng

Exercise19-9 Exercise19-9Alt.

Copyright © 2016 by McGraw-Hill Education, Inc. All rights reserved.

Chapter19–VariableCos2ngandPerformanceRepor2ngClickonlinks

Exercise19-10page862 Compu2ngabsorp2oncos2ngincome Exercise19-10 Exercise19-10Alt.

Exercise19-11page862 Absorp2oncos2ngandproductpricing

Exercise19-11 Exercise19-11Alt.

Exercise19-12page862 Absorp2oncos2ngandover-produc2on

Exercise19-12 Exercise19-12Alt.

Copyright © 2015 by McGraw-Hill Education, Inc. All rights reserved.

Exercise19-1page859

19-3

Exercise 19-1 page 859 19-4

Trio Company reports the following information for the current year, which is its first year of operations.

Direct materials $15.00 per unit Direct labor $16.00 per unit Overhead costs for the year:

Variable overhead $80,000 per year Fixed overhead $160,000 per year

Units produced this year 20,000 units Units sold this year 14,000 units Ending finished goods inventory in units 6,000 units

1) Compute the cost per unit of finished goods using absorption costing.

Exercise 19-1 page 859 19-5

Trio Company reports the following information for the current year, which is its first year of operations.

Direct materials $15.00 per unit Direct labor $16.00 per unit Overhead costs for the year:

Variable overhead $80,000 per year Fixed overhead $160,000 per year

Units produced this year 20,000 units Units sold this year 14,000 units Ending finished goods inventory in units 6,000 units

1) Compute the cost per unit of finished goods using absorption costing.

Unit cost - Absorption costing Direct materials per unit $15.00 Direct labor per unit 16.00 Variable overhead per unit ($80,000 / 20,000 units) 4.00 Fixed overhead per unit ($160,000 / 20,000 units) 8.00 Cost per unit of finished goods $43.00

Exercise 19-1 page 859 19-6

Units produced this year 20,000 units Units sold this year 14,000 units Ending finished goods inventory in units 6,000 units

1) Compute the cost per unit of finished goods using absorption costing.

Unit cost - Absorption costing Direct materials per unit $15.00 Direct labor per unit 16.00 Variable overhead per unit ($80,000 / 20,000 units) 4.00 Fixed overhead per unit ($160,000 / 20,000 units) 8.00 Cost per unit of finished goods $43.00

2) Determine the cost of ending finished goods inventory using absorption costing.

Finished Goods - Absorption costing Number of units in finished goods 6,000 Cost per unit of finished goods $43.00 Total cost of finished goods inventory $258,000

3) Determine the cost of goods sold using absorption costing.

Cost of Goods Sold - Absorption costing Number of units sold 14,000 Cost per unit of finished goods $43.00 Total cost of goods sold $602,000

Exercise 19-1 page 859 Alternate 19-7

Trio Company reports the following information for the current year, which is its first year of operations. Direct materials $11.00 per unit Direct labor $17.00 per unit Overhead costs for the year:

Variable overhead $45,000 per year Fixed overhead $112,500 per year

Units produced this year 22,500 units Units sold this year 17,000 units Ending finished goods inventory in units 5,500 units

1) Compute the cost per unit of finished goods using absorption costing.

Exercise 19-1 page 859 Alternate 19-8

Trio Company reports the following information for the current year, which is its first year of operations. Direct materials $11.00 per unit Direct labor $17.00 per unit Overhead costs for the year:

Variable overhead $45,000 per year Fixed overhead $112,500 per year

Units produced this year 22,500 units Units sold this year 17,000 units Ending finished goods inventory in units 5,500 units

1) Compute the cost per unit of finished goods using absorption costing.

Unit cost - Absorption costing Direct materials per unit $11.00 Direct labor per unit 17.00 Variable overhead per unit ($45,000 / 22,500 units) 2.00 Fixed overhead per unit ($112,500 / 22,500 units) 5.00 Cost per unit of finished goods $35.00

Exercise 19-1 page 859 Alternate 19-9

Units produced this year 22,500 units Units sold this year 17,000 units Ending finished goods inventory in units 5,500 units

1) Compute the cost per unit of finished goods using absorption costing.

Unit cost - Absorption costing Direct materials per unit $11.00 Direct labor per unit 17.00 Variable overhead per unit ($45,000 / 22,500 units) 2.00 Fixed overhead per unit ($112,500 / 22,500 units) 5.00 Cost per unit of finished goods $35.00

2) Determine the cost of ending finished goods inventory using absorption costing.

Finished Goods - Absorption costing Number of units in finished goods 5,500 Cost per unit of finished goods $35.00 Total cost of finished goods inventory $192,500

3) Determine the cost of goods sold using absorption costing.

Cost of Goods Sold - Absorption costing Number of units sold 17,000 Cost per unit of finished goods $35.00 Total cost of goods sold $595,000

Exercise19-2page859

19-10

Exercise 19-2 page 859 19-11

Trio Company reports the following information for the current year, which is its first year of operations.

Direct materials $15.00 per unit Direct labor $16.00 per unit Overhead costs for the year:

Variable overhead $80,000 per year Fixed overhead $160,000 per year

Units produced this year 20,000 units Units sold this year 14,000 units Ending finished goods inventory in units 6,000 units

1) Compute the cost per unit of finished goods using variable costing.

Exercise 19-2 page 859 19-12

Trio Company reports the following information for the current year, which is its first year of operations.

Direct materials $15.00 per unit Direct labor $16.00 per unit Overhead costs for the year:

Variable overhead $80,000 per year Fixed overhead $160,000 per year

Units produced this year 20,000 units Units sold this year 14,000 units Ending finished goods inventory in units 6,000 units

1) Compute the cost per unit of finished goods using variable costing.

Unit cost - Variable costing Direct materials per unit $15.00 Direct labor per unit 16.00 Variable overhead per unit ($80,000 / 20,000 units) 4.00 Fixed overhead - expensed as incurred 0.00 Cost per unit of finished goods $35.00

Exercise 19-2 page 859 19-13

Units produced this year 20,000 units Units sold this year 14,000 units Ending finished goods inventory in units 6,000 units

1) Compute the cost per unit of finished goods using variable costing.

Unit cost - Variable costing Direct materials per unit $15.00 Direct labor per unit 16.00 Variable overhead per unit ($80,000 / 20,000 units) 4.00 Fixed overhead - expensed as incurred 0.00 Cost per unit of finished goods $35.00

2) Determine the cost of ending finished goods inventory using variable costing.

Finished Goods - Variable costing Number of units in finished goods 6,000 Cost per unit of finished goods $35.00 Total cost of finished goods inventory $210,000

3) Determine the cost of goods sold using variable costing.

Cost of Goods Sold - Variable costing Number of units sold 14,000 Cost per unit of finished goods $35.00 Total cost of goods sold $490,000

Exercise 19-2 page 859 Alternate 19-14

Trio Company reports the following information for the current year, which is its first year of operations. Direct materials $11.00 per unit Direct labor $17.00 per unit Overhead costs for the year:

Variable overhead $45,000 per year Fixed overhead $112,500 per year

Units produced this year 22,500 units Units sold this year 17,000 units Ending finished goods inventory in units 5,500 units

1) Compute the cost per unit of finished goods using variable costing.

Exercise 19-2 page 859 Alternate 19-15

Trio Company reports the following information for the current year, which is its first year of operations. Direct materials $11.00 per unit Direct labor $17.00 per unit Overhead costs for the year:

Variable overhead $45,000 per year Fixed overhead $112,500 per year

Units produced this year 22,500 units Units sold this year 17,000 units Ending finished goods inventory in units 5,500 units

1) Compute the cost per unit of finished goods using variable costing.

Unit cost - Variable costing Direct materials per unit $11.00 Direct labor per unit 17.00 Variable overhead per unit ($45,000 / 22,500 units) 2.00 Fixed overhead - expensed as incurred 0.00 Cost per unit of finished goods $30.00

2) Determine the cost of ending finished goods inventory using variable costing.

Finished Goods - Variable costing Number of units in finished goods 5,500 Cost per unit of finished goods $30.00 Total cost of finished goods inventory $165,000

Exercise 19-2 page 859 Alternate 19-16

Units produced this year 22,500 units Units sold this year 17,000 units Ending finished goods inventory in units 5,500 units

1) Compute the cost per unit of finished goods using variable costing.

Unit cost - Variable costing Direct materials per unit $11.00 Direct labor per unit 17.00 Variable overhead per unit ($45,000 / 22,500 units) 2.00 Fixed overhead - expensed as incurred 0.00 Cost per unit of finished goods $30.00

2) Determine the cost of ending finished goods inventory using variable costing.

Finished Goods - Variable costing Number of units in finished goods 5,500 Cost per unit of finished goods $30.00 Total cost of finished goods inventory $165,000 3) Determine the cost of goods sold using variable costing.

Cost of Goods Sold - Variable costing Number of units sold 17,000 Cost per unit of finished goods $30.00 Total cost of goods sold $510,000

Exercise19-3page860

19-17

Exercise 19-3 page 860

Production costs Direct materials $40.00 per unit Direct labor $60.00 per unit Overhead costs for the year Variable overhead $3,000,000 / 100,000 units produced = $30.00 per unit Fixed overhead 7,000,000 / 100,000 units produced = $70.00 per unit

Nonproduction costs for the year Variable selling and administrative $770,000 Fixed selling and administrative 4,250,000

Production and sales for the year Units produced 100,000 units Units sold 70,000 units Sales price per unit $350.00 per unit

1) Prepare an income statement for the company using variable costing.

Sims Company, a manufacturer of tablet computers, began operations on January 1 of the current year. Its cost and sales information for this year follows.

19-18

Exercise 19-3 page 860

Production costs Direct materials $40.00 per unit Direct labor $60.00 per unit Variable overhead $3,000,000 / 100,000 units produced = $30/unit Fixed overhead 7,000,000

Nonproduction costs for the year Variable selling and administrative $770,000 Fixed selling and administrative 4,250,000

Production and sales for the year Units produced 100,000 units Units sold 70,000 units Sales price per unit $350.00 per unit

Sales (70,000 units @ $350.00) $24,500,000 Less: Variable costs

Direct materials (70,000 units @ $40.00) $2,800,000 Direct labor (70,000 units @ $60.00) 4,200,000 Variable overhead (70,000 units @ $30.00) 2,100,000 Variable selling and administrative (70,000 units @ $11.00) 770,000

Total variable costs 9,870,000 Contribution margin 14,630,000 Less: Fixed expenses

Fixed selling and administrative 4,250,000 Fixed overhead 7,000,000

Total fixed costs 11,250,000 Net income (loss) $3,380,000

Sims Company Variable Costing Income Statement

For the year ended December 31

19-19

Exercise 19-3 page 860

Production costs Direct materials $40.00 per unit Direct labor $60.00 per unit Variable overhead $3,000,000 / 100,000 units produced = $30/unit Fixed overhead 7,000,000

Nonproduction costs for the year Variable selling and administrative $770,000 Fixed selling and administrative 4,250,000

Production and sales for the year Units produced 100,000 units Units sold 70,000 units Sales price per unit $350.00 per unit

2) Prepare an income statement for the company using absorption costing.

Sales (70,000 units @ $350.00) $24,500,000 Less: Cost of goods sold

Direct materials (70,000 units @ $40.00) $2,800,000 Direct labor (70,000 units @ $60.00) 4,200,000 Variable overhead (70,000 units @ $30.00) 2,100,000 Fixed overhead (70,000 units @ $70.00 per unit) 4,900,000

Cost of goods sold 14,000,000 Gross margin 10,500,000 Selling general and administrative expenses

Variable selling and administrative (70,000 units @ $11.00) 770,000 Fixed selling and administrative 4,250,000

Total selling, general and administrative expenses 5,020,000 Net income (loss) $5,480,000

Net income (loss) Variable Costing method $3,380,000 Net income (loss) Absorption Costing method 5,480,000 Reconciliation: 30,000 units @ $70.00 Fixed OH per unit explains difference in income of $2,100,000

Absorption Costing Income Statement For the year ended December 31

Sims Company

/ 100,000 units produced = $70/unit

19-20

Exercise 19-3 page 860 Alternate

Production costs Direct materials $35.00 per unit Direct labor $53.00 per unit Overhead costs for the year Variable overhead $3,520,000 Fixed overhead 7,700,000

Nonproduction costs for the year Variable selling and administrative $800,000 Fixed selling and administrative 4,160,000

Production and sales for the year Units produced 110,000 units Units sold 80,000 units Sales price per unit $350.00 per unit

1) Prepare an income statement for the company using variable costing.

Sims Company, a manufacturer of tablet computers, began operations on January 1 of the current year. Its cost and sales information for this year follows.

19-21

Exercise 19-3 page 860 Alternate

Production costs Direct materials $35.00 per unit Direct labor $53.00 per unit

Overhead costs for the year Variable overhead $3,520,000 / 110,000 units produced = $32.00 per unit Fixed overhead 7,700,000

Nonproduction costs for the year Variable selling and administrative $800,000 Fixed selling and administrative 4,160,000

Production and sales for the year Units produced 110,000 units Units sold 80,000 units Sales price per unit $350.00 per unit

Sales (80,000 units @ $350.00) $28,000,000 Less: Variable costs

Direct materials (80,000 units @ $35.00) $2,800,000 Direct labor (80,000 units @ $53.00) 4,240,000 Variable overhead (80,000 units @ $32.00) 2,560,000 Variable selling and administrative 800,000

Total variable costs 10,400,000 Contribution margin 17,600,000 Less: Fixed expenses

Fixed selling and administrative 4,160,000 Fixed overhead 7,700,000

Total fixed costs 11,860,000 Net income (loss) $5,740,000

Sims Company Variable Costing Income Statement

For the year ended December 31

19-22

Exercise 19-3 page 860 Alternate

Production costs Direct materials $35.00 per unit Direct labor $53.00 per unit

Overhead costs for the year Variable overhead $3,520,000 / 110,000 units produced = $32.00 per unit Fixed overhead 7,700,000 / 110,000 units produced = $70.00 per unit

Nonproduction costs for the year Variable selling and administrative $800,000 Fixed selling and administrative 4,160,000

Production and sales for the year Units produced 110,000 units Units sold 80,000 units Sales price per unit $350.00 per unit

2) Prepare an income statement for the company using absorption costing.

Sales (80,000 units @ $350.00) $28,000,000 Less: Cost of goods sold

Direct materials (80,000 units @ $35.00) $2,800,000 Direct labor (80,000 units @ $53.00) 4,240,000 Variable overhead (80,000 units @ $32.00) 2,560,000 Fixed overhead (80,000 units @ $70.00 per unit) 5,600,000

Cost of goods sold 15,200,000 Gross margin 12,800,000 Selling general and administrative expenses

Variable selling and administrative 800,000 Fixed selling and administrative 4,160,000

Total selling, general and administrative expenses 4,960,000 Net income (loss) $7,840,000

Absorption Costing Income Statement For the year ended December 31

Sims Company

19-23

Exercise 19-3 page 860 Alternate

Net income (loss) Variable Costing method $5,740,000 Net income (loss) Absorption Costing method 7,840,000 Reconciliation: 30,000 units @ $70.00 Fixed OH per unit explains difference in income of $2,100,000

Production costs Direct materials $35.00 per unit Direct labor $53.00 per unit

Overhead costs for the year Variable overhead $3,520,000 / 110,000 units produced = $32.00 per unit Fixed overhead 7,700,000 / 110,000 units produced = $70.00 per unit

Nonproduction costs for the year Variable selling and administrative $800,000 Fixed selling and administrative 4,160,000

Production and sales for the year Units produced 110,000 units Units sold 80,000 units Sales price per unit $350.00 per unit

19-24

Exercise19-4page860

19-25

Exercise 19-4 page 860

Sales (800 units @ $1,050) $840,000 Cost of goods sold (800 x $500 / unit) 400,000 Gross margin 440,000 Selling general and administrative expenses 230,000 Net income (loss) $210,000

Additional Information

1) Prepare an income statement for the company using variable costing.

Kenzi Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,050 kayaks and sold 800. At the current year-end, the company reported the following income statement information using absorption costing.

Kenzi Kayaking Absorption Costing Income Statement

a. Production cost per kayak totals $500, which consists of $400 in variable production cost and $100 in fixed production cost—the latter amount is based on $105,000 of fixed production costs allocated to the 1,050 kayaks produced.

b. The $230,000 in selling and administrative expense consists of $75,000 that is variable and $155,000 that is fixed.

19-26

Exercise 19-4 page 860

Sales (800 units @ $1,050) $840,000 Cost of goods sold (800 x $500 / unit) 400,000 Gross margin 440,000 Selling general and administrative expenses 230,000 Net income (loss) $210,000

Sales (800 units @ $1,050) $840,000 Less: Variable costs

Variable production costs (800 x $400/ unit) $320,000 Variable selling and administrative 75,000

Total variable costs 395,000 Contribution margin 445,000 Less: Fixed expenses

Fixed selling and administrative 155,000 Fixed overhead 105,000

Total fixed costs 260,000 Net income (loss) $185,000

Kenzi Kayaking Absorption Costing Income Statement

Kenzi Kayaking Variable Costing Income Statement

a. Production cost per kayak totals $500, which consists of $400 in variable production cost and $100 in fixed production cost—the latter amount is based on $105,000 of fixed production costs allocated to the 1,050 kayaks produced. b. The $230,000 in selling and administrative expense consists of $75,000 that is variable and $155,000 that is fixed.

19-27

Exercise 19-4 page 860

Sales (800 units @ $1,050) $840,000 Cost of goods sold (800 x $500 / unit) 400,000 Gross margin 440,000 Selling general and administrative expenses 230,000 Net income (loss) $210,000

Sales (800 units @ $1,050) $840,000 Less: Variable costs

Variable production costs (800 x $400/ unit) $320,000 Variable selling and administrative 75,000

Total variable costs 395,000 Contribution margin 445,000 Less: Fixed expenses

Fixed selling and administrative 155,000 Fixed overhead 105,000

Total fixed costs 260,000 Net income (loss) $185,000

Net income (loss) Absorption Costing method $210,000 Net income (loss) Variable Costing method 185,000 Reconciliation: 250 units @ $100.00 Fixed OH per unit explains difference in income of $25,000

Fixed OH expensed under absorption costing, as part of cost of goods sold (800 units sold at $100 per unit) = $80,000 Fixed OH expensed under variable costing, equals amount incurred = $105,000

Kenzi Kayaking Absorption Costing Income Statement

Kenzi Kayaking Variable Costing Income Statement

19-28

Exercise 19-4 page 860 Alternate

Sales (720 units @ $1,090) $784,800 Cost of goods sold (720 x $450 / unit) 324,000 Gross margin 460,800 Selling general and administrative expenses 237,600 Net income (loss) $223,200

Additional Information

1) Prepare an income statement for the company using variable costing.

Kenai Kayaking Absorption Costing Income Statement

a. Production cost per kayak totals $450, which consists of $350 in variable production cost and $100 in fixed production cost—the latter amount is based on $102,500 of fixed production costs allocated to the 1,025 kayaks produced.

b. The $237,600 in selling and administrative expense consists of $86,400 that is variable and $151,200 that is fixed.

Kenai Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,025 kayaks and sold 720. At the current year-end, the company reported the following income statement information using absorption costing.

19-29

Exercise 19-4 page 860 Alternate

a. Production cost per kayak totals $450, which consists of $350 in variable production cost and $100 in fixed production cost—the latter amount is based on $102,500 of fixed production costs allocated to the 1,025 kayaks produced. b. The $237,600 in selling and administrative expense consists of $86,400 that is variable and $151,200 that is fixed.

Sales (720 units @ $1,090) $784,800 Less: Variable costs

Variable production costs (720 x $350/ unit) $252,000 Variable selling and administrative 86,400

Total variable costs 338,400 Contribution margin 446,400 Less: Fixed expenses

Fixed selling and administrative 151,200 Fixed overhead 102,500

Total fixed costs 253,700 Net income (loss) $192,700

Kenai Kayaking Variable Costing Income Statement

Sales (720 units @ $1,090) $784,800 Cost of goods sold (720 x $450 / unit) 324,000 Gross margin 460,800 Selling general and administrative expenses 237,600 Net income (loss) $223,200

Kenai Kayaking Absorption Costing Income Statement

Kenai Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,025 kayaks and sold 720. At the current year-end, the company reported the following income statement information using absorption costing.

19-30

Exercise 19-4 page 860 Alternate

Sales (720 units @ $1,090) $784,800 Cost of goods sold (720 x $450 / unit) 324,000 Gross margin 460,800 Selling general and administrative expenses 237,600 Net income (loss) $223,200

Kenai Kayaking Absorption Costing Income Statement

Sales (720 units @ $1,090.00) $784,800 Less: Variable costs

Variable production costs (720 x $350/ unit) $252,000 Variable selling and administrative 86,400

Total variable costs 338,400 Contribution margin 446,400 Less: Fixed expenses

Fixed selling and administrative 151,200 Fixed overhead 102,500

Total fixed costs 253,700 Net income (loss) $192,700

Kenai Kayaking Variable Costing Income Statement

Net income (loss) Absorption Costing method (FOH expensed = 720 units @ $100/unit) $223,200 Net income (loss) Variable Costing method (FOH expensed = $102,500) 192,700 Reconciliation: 305 units @ $100.00 Fixed OH per unit explains difference in income of $30,500

Fixed OH expensed under absorption costing, as part of cost of goods sold (720 units sold at $100 per unit) = $72,000

Fixed OH expensed under variable costing, equals amount incurred = $102,500

19-31

Exercise19-5page860

19-32

Exercise 19-5 page 860 19-33

Production costs Nonproduction costs for the year Direct materials $20.00 per unit Variable selling and administrative $18.00 per unit Direct labor $28.00 per unit Fixed selling and administrative 200,000 per year Overhead costs for the year Production and sales for the year Variable overhead $6.00 per unit Units produced 20,000 units Fixed overhead $160,000 per year Units sold 20,000 units

Sales price per unit $216.00 per unit 1) Prepare an income statement for the company using variable costing.

Sales (20,000 units @ $216.00) $4,320,000 Less: Variable costs

Direct materials (20,000 units @ $20.00) $400,000 Direct labor (20,000 units @ $28.00) 560,000 Variable overhead (20,000 units @ $6.00) 120,000 Variable selling and administrative (20,000 units @ $18.00) 360,000

Total variable costs 1,440,000 Contribution margin 2,880,000 Less: Fixed expenses

Fixed selling and administrative 200,000 Fixed overhead 160,000

Total fixed costs 360,000 Net income (loss) $2,520,000

Rey Company's single product sells at a price of $216 per unit. Data for its single product for its first year of operations follow. Prepare an income statement for the year assuming (a) absorption costing and (b) variable costing.

Rey Company Variable Costing Income Statement

For the year ended December 31

Exercise 19-5 page 860 19-34

Production costs Nonproduction costs for the year Direct materials $20.00 per unit Variable selling and administrative $18.00 per unit Direct labor $28.00 per unit Fixed selling and administrative 200,000 per year Overhead costs for the year Production and sales for the year Variable overhead $6.00 per unit Units produced 20,000 units Fixed overhead $160,000 per year Units sold 20,000 units

Sales price per unit $216.00 per unit 2) Prepare an income statement for the company using absorption costing.

Sales (20,000 units @ $216.00) $4,320,000 Less: Cost of goods sold

Direct materials (20,000 units @ $20.00) $400,000 Direct labor (20,000 units @ $28.00) 560,000 Variable overhead (20,000 units @ $6.00) 120,000 Fixed overhead (20,000 units @ $8.00 per unit) 160,000

Cost of goods sold 1,240,000 Gross margin 3,080,000 Selling general and administrative expenses

Variable selling and administrative (20,000 units @ $18.00) 360,000 Fixed selling and administrative 200,000

Total selling, general and administrative expenses 560,000 Net income (loss) $2,520,000

When the number of units produced is equal to the number of units sold, net income under variable costing is equal to net income under absorption costing.

Rey Company Absorption Costing Income Statement

For the year ended December 31

Exercise 19-5 page 860 Alternate 19-35

Production costs Nonproduction costs for the year Direct materials $10.00 per unit Variable selling and administrative $9.00 per unit Direct labor $14.00 per unit Fixed selling and administrative 60,000 per year Overhead costs for the year Production and sales for the year Variable overhead $3.00 per unit Units produced 12,000 units Fixed overhead $48,000 per year Units sold 12,000 units

Sales price per unit $150.00 per unit 1) Prepare an income statement for the company using variable costing.

Sales (12,000 units @ $150.00) $1,800,000 Less: Variable costs

Direct materials (12,000 units @ $10.00) $120,000 Direct labor (12,000 units @ $14.00) 168,000 Variable overhead (12,000 units @ $3.00) 36,000 Variable selling and administrative (12,000 units @ $9.00) 108,000

Total variable costs 432,000 Contribution margin 1,368,000 Less: Fixed expenses

Fixed selling and administrative 60,000 Fixed overhead 48,000

Total fixed costs 108,000 Net income (loss) $1,260,000

Rey Company's single product sells at a price of $150 per unit. Data for its single product for its first year of operations follow. Prepare an income statement for the year assuming (a) absorption costing and (b) variable costing.

Rey Company Variable Costing Income Statement

For the year ended December 31

Exercise 19-5 page 860 Alternate 19-36

Production costs Nonproduction costs for the year Direct materials $10.00 per unit Variable selling and administrative $9.00 per unit Direct labor $14.00 per unit Fixed selling and administrative 60,000 per year Overhead costs for the year Production and sales for the year Variable overhead $3.00 per unit Units produced 12,000 units Fixed overhead $48,000 per year Units sold 12,000 units

Sales price per unit $150.00 per unit 2) Prepare an income statement for the company using absorption costing.

Sales (12,000 units @ $150.00) $1,800,000 Less: Cost of goods sold

Direct materials (12,000 units @ $10.00) $120,000 Direct labor (12,000 units @ $14.00) 168,000 Variable overhead (12,000 units @ $3.00) 36,000 Fixed overhead (12,000 units @ $4.00 per unit) 48,000

Cost of goods sold 372,000 Gross margin 1,428,000 Selling general and administrative expenses

Variable selling and administrative (12,000 units @ $9.00) 108,000 Fixed selling and administrative 60,000

Total selling, general and administrative expenses 168,000 Net income (loss) $1,260,000

Rey Company Absorption Costing Income Statement

For the year ended December 31

When the number of units produced is equal to the number of units sold, net income under variable costing is equal to net income under absorption costing.

Exercise19-6page861

19-37

Exercise 19-6 page 861

Sales (225 units @ $1,600) $360,000 Less: Variable costs

Variable production costs (225 x $625/ unit) $140,625 Variable selling and administrative (225 x $65/ unit) 14,625

Total variable costs 155,250 Contribution margin 204,750 Less: Fixed expenses

Fixed overhead ($56,250 / 375 units = $150 per unit) 56,250 Fixed selling and administrative 75,000

Total fixed costs 131,250 Net income (loss) $73,500

Hayek Bikes prepares the income statement under variable costing for its managerial reports, and it prepares the income statement under absorption costing for external reporting. For its first month of operations, 375 bikes were produced and 225 were sold; this left 150 bikes in ending inventory. The income statement information under variable costing follows.

Hayek Bikes Variable Costing Income Statement

Prepare this company's income statement for its first month of operations under absorption costing.

19-38

Exercise 19-6 page 861

Fixed OH expensed under absorption costing, as part of cost of goods sold (225 units sold at $150 per unit) = $33,750 Fixed OH expensed under variable costing, equals amount incurred = $56,250

Sales (225 units @ $1,600) $360,000 Less: Variable costs

Variable production costs (225 x $625/ unit) $140,625 Variable selling and administrative (225 x $65/ unit) 14,625

Total variable costs 155,250 Contribution margin 204,750 Less: Fixed expenses

Fixed overhead ($56,250 / 375 units = $150 per unit) 56,250 Fixed selling and administrative 75,000

Total fixed costs 131,250 Net income (loss) $73,500

Sales (225 units @ $1,600) $360,000 Less: Cost of goods sold Variable production costs (225 x $625 / unit) $140,625 Fixed overhead costs (225 x $150 / unit) 33,750 Cost of goods sold 174,375 Gross margin 185,625 Selling general and administrative expenses Variable selling and administrative (225 x $65/ unit) 14,625 Fixed selling and administrative 75,000 89,625 Net income (loss) $96,000

Hayek Bikes prepares the income statement under variable costing for its managerial reports, and it prepares the income statement under absorption costing for external reporting. For its first month of operations, 375 bikes were produced and 225 were sold; this left 150 bikes in ending inventory. The income statement information under variable costing follows.

Hayek Bikes Absorption Costing Income Statement

Hayek Bikes Variable Costing Income Statement

19-39

Exercise 19-6 page 861 Alternate

Sales (240 units @ $1,700) $408,000 Less: Variable costs

Variable production costs (240 x $600/ unit) $144,000 Variable selling and administrative (240 x $50/ unit) 12,000

Total variable costs 156,000 Contribution margin 252,000 Less: Fixed expenses

Fixed overhead 48,000 Fixed selling and administrative 60,000

Total fixed costs 108,000 Net income (loss) $144,000

Hayek Bikes prepares the income statement under variable costing for its managerial reports, and it prepares the income statement under absorption costing for external reporting. For its first month of operations, 400 bikes were produced and 240 were sold; this left 160 bikes in ending inventory. The income statement information under variable costing follows:

Hayek Bikes Variable Costing Income Statement

Prepare this company's income statement for its first month of operations under absorption costing.

19-40

Exercise 19-6 page 861 Alternate

Sales (240 units @ $1,700) $408,000 Less: Variable costs

Variable production costs (240 x $600/ unit) $144,000 Variable selling and administrative (240 x $50/ unit) 12,000

Total variable costs 156,000 Contribution margin 252,000 Less: Fixed expenses

Fixed overhead 48,000 Fixed selling and administrative 60,000

Total fixed costs 108,000 Net income (loss) $144,000

Sales (240 units @ $1,700) $408,000 Less: Cost of goods sold

Variable production costs (240 x $600 / unit) $144,000 Fixed overhead costs (240 x $120 / unit) 28,800 Cost of goods sold 172,800

Gross margin 235,200 Selling general and administrative expenses Variable selling and administrative (240 x $50/ unit) 12,000 Fixed selling and administrative 60,000 72,000 Net income (loss) $163,200

400 bikes were produced and 240 were sold; this left 160 bikes in ending inventory.

Hayek Bikes Absorption Costing Income Statement

Hayek Bikes Variable Costing Income Statement

$48,000 / 400 units = $120 per unit

Income under Absorption Costing is higher by $19,200 Reconciliation: 160 units added to inventory @ $120 Fixed OH per unit = $19,200

Fixed OH expensed under absorption costing, as part of cost of goods sold (240 units sold at $120 per unit) = $28,800

Fixed OH expensed under variable costing, equals amount incurred = $48,000

19-41

Exercise19-7page861

19-42

Exercise 19-7 page 861

Sales price per unit $320 per unit Units produced this year 115,000 units Units sold this year 118,000 units Units in beginning inventory 3,000 units Beginning inventory costs

Variable (3,000 units x $135) $405,000 Fixed (3,000 units x $80) $240,000

Production costs this year: Direct materials $40.00 per unit Direct labor $62.00 per unit Variable overhead $3,220,000 / 115,000 units produced = $28.00 per unit Fixed manufacturing overhead 7,400,000 / 115,000 units produced = $62.00 per unit

Nonproduction costs for the year Variable selling and administrative $1,416,000 Fixed selling and administrative 4,600,000

1) Prepare the current year income statement for the company using variable costing.

Oak Mart Company, a producer of solid oak tables, reports the following data from its current year operations, which is its second year of business.

19-43

Exercise 19-7 page 861

Sales price per unit $320 per unit Units produced this year 115,000 units Units sold this year 118,000 units Units in beginning inventory 3,000 units Beginning inventory costs

Variable (3,000 units x $135) $405,000 Fixed (3,000 units x $80) $240,000

Production costs this year: Direct materials $40.00 per unit Direct labor $62.00 per unit Variable overhead $3,220,000 / 115,000 units = $28.00 per unit Fixed manufacturing overhead 7,400,000 / 115,000 units = $62.00 per unit

Nonproduction costs for the year Variable selling and administrative $1,416,000 Fixed selling and administrative 4,600,000

Sales (118,000 units @ $320) $37,760,000 Less: Variable costs Beginning inventory (3,000 x $135) $405,000 Plus: Current variable production costs:

Direct materials (115,000 units @ $40) $4,600,000 Direct labor (115,000 units @ $62) 7,130,000 Variable overhead (115,000 units @ $28) 3,220,000 Total variable production costs 14,950,000 Total variable costs available 15,355,000 Less: Ending inventory 0 Variable production costs of goods sold 15,355,000 Variable selling and administrative expenses 1,416,000

Total variable costs 16,771,000 Contribution margin 20,989,000 Less: Fixed expenses

Fixed selling and administrative 4,600,000 Fixed manufacturing overhead 7,400,000

Total fixed costs 12,000,000 Net income (loss) $8,989,000

Oak Mart Company Variable Costing Income Statement

19-44

Exercise 19-7 page 861

Sales price per unit $320 per unit Units produced this year 115,000 units Units sold this year 118,000 units Units in beginning inventory 3,000 units Beginning inventory costs

Variable (3,000 units x $135) $405,000 Fixed (3,000 units x $80) $240,000

Production costs this year: Direct materials $40.00 per unit Direct labor $62.00 per unit Variable overhead $3,220,000 / 115,000 units = $28.00 per unit Fixed manufacturing overhead 7,400,000 / 115,000 units = $62.00 per unit

Nonproduction costs for the year Variable selling and administrative $1,416,000 Fixed selling and administrative 4,600,000

2) Prepare the current year income statement for the company using absorption costing.

Sales (118,000 units @ $320) $37,760,000 Less: Cost of goods sold

Beginning inventory (3,000 units x ($135 + $80)) $645,000 Production costs this year:

Direct materials (115,000 units @ $40) $4,600,000 Direct labor (115,000 units @ $62) 7,130,000 Variable overhead (115,000 units @ $28) 3,220,000 Fixed manufacturing overhead (115,000 units @ $62) 7,400,000

Cost goods available for sale 22,995,000 Less: Ending inventory 0

Cost of goods sold 22,995,000 Gross margin 14,765,000 Selling general and administrative expenses

Variable selling and administrative expenses 1,416,000 Fixed selling and administrative 4,600,000

Total selling, general and administrative expenses 6,016,000 Net income (loss) $8,749,000

Oak Mart Company Absorption Costing Income Statement

19-45

Exercise 19-7 page 861

Sales price per unit $320 per unit Units produced this year 115,000 units Units sold this year 118,000 units Units in beginning inventory 3,000 units Beginning inventory costs

Variable (3,000 units x $135) $405,000 Fixed (3,000 units x $80) $240,000

Production costs this year: Direct materials $40.00 per unit Direct labor $62.00 per unit Variable overhead $3,220,000 / 115,000 units = $28.00 per unit Fixed manufacturing overhead 7,400,000 / 115,000 units = $62.00 per unit

Nonproduction costs for the year Variable selling and administrative $1,416,000 Fixed selling and administrative 4,600,000

Net income (loss) Variable Costing method $8,989,000 Net income (loss) Absorption Costing method 8,749,000 Reconciliation: 3,000 units @ $80.00 Fixed OH per unit explains difference in income of $240,000

Fixed OH expensed under absorption costing, as part of cost of goods sold = ($240,000 + $7,400,000) Fixed OH expensed under variable costing, equals amount incurred = $7,400,000

19-46

Exercise 19-7 page 861 Alternate

Sales price per unit $320 per unit Units produced this year 110,000 units Units sold this year 112,000 units Units in beginning inventory 2,000 units Beginning inventory costs

Variable (2,000 units x $147) $294,000 Fixed (2,000 units x $70) $140,000

Production costs this year: Direct materials $42.00 per unit Direct labor $64.00 per unit Overhead costs for the year: Variable overhead $3,740,000 Fixed manufacturing overhead 8,250,000

Nonproduction costs for the year Variable selling and administrative $1,344,000 Fixed selling and administrative 4,256,000

1) Prepare the current year income statement for the company using variable costing.

Oak Mart Company, a producer of solid oak tables, reports the following data from its current year operations, which is its second year of business.

19-47

Exercise 19-7 page 861 Alternate

Sales price per unit $320 per unit Units produced this year 110,000 units Units sold this year 112,000 units Units in beginning inventory 2,000 units

Beginning inventory costs: Variable (2,000 units x $147) $294,000 Fixed (2,000 units x $70) $140,000

Production costs this year: Direct materials $42.00 per unit Direct labor $64.00 per unit Variable overhead $3,740,000 / 110,000 units produced = $34.00 per unit Fixed manufacturing overhead 8,250,000

Nonproduction costs for the year Variable selling and administrative $1,344,000 Fixed selling and administrative 4,256,000

Sales (112,000 units @ $320) $35,840,000 Less: Variable costs Beginning inventory (2,000 x $147) $294,000 Plus: Current variable production costs:

Direct materials (110,000 units @ $42) $4,620,000 Direct labor (110,000 units @ $64) 7,040,000 Variable overhead (110,000 units @ $34) 3,740,000 Total variable production costs 15,400,000 Total variable costs available 15,694,000 Less: Ending inventory 0 Variable production costs of goods sold 15,694,000 Variable selling and administrative expenses 1,344,000

Total variable costs 17,038,000 Contribution margin 18,802,000 Less: Fixed expenses

Fixed selling and administrative 4,256,000 Fixed manufacturing overhead 8,250,000

Total fixed costs 12,506,000 Net income (loss) $6,296,000

Oak Mart Company Variable Costing Income Statement

19-48

Exercise 19-7 page 861 Alternate

Sales price per unit $320 per unit Units produced this year 110,000 units Units sold this year 112,000 units Units in beginning inventory 2,000 units

Beginning inventory costs: Variable (2,000 units x $147) $294,000 Fixed (2,000 units x $70) $140,000

Production costs this year: Direct materials $42.00 per unit Direct labor $64.00 per unit Variable overhead $3,740,000 / 110,000 units produced = $34.00 per unit Fixed manufacturing overhead 8,250,000

Nonproduction costs for the year Variable selling and administrative $1,344,000 Fixed selling and administrative 4,256,000

2) Prepare the current year income statement for the company using absorption costing.

Sales (112,000 units @ $320) $35,840,000 Less: Cost of goods sold

Beginning inventory (2,000 units x ($147 + $70)) $434,000 Production costs this year:

Direct materials (110,000 units @ $42) $4,620,000 Direct labor (110,000 units @ $64) 7,040,000 Variable overhead (110,000 units @ $34) 3,740,000 Fixed manufacturing overhead 8,250,000

Cost goods available for sale 24,084,000 Less: Ending inventory 0

Cost of goods sold 24,084,000 Gross margin 11,756,000 Selling general and administrative expenses

Variable selling and administrative expenses 1,344,000 Fixed selling and administrative 4,256,000

Total selling, general and administrative expenses 5,600,000 Net income (loss) $6,156,000

Oak Mart Company Absorption Costing Income Statement

19-49

Exercise 19-7 page 861 Alternate

Sales price per unit $320 per unit Units produced this year 110,000 units Units sold this year 112,000 units Units in beginning inventory 2,000 units

Beginning inventory costs: Variable (2,000 units x $147) $294,000 Fixed (2,000 units x $70) $140,000

Production costs this year: Direct materials $42.00 per unit Direct labor $64.00 per unit Variable overhead $3,740,000 / 110,000 units produced = $34.00 per unit Fixed manufacturing overhead 8,250,000

Nonproduction costs for the year Variable selling and administrative $1,344,000 Fixed selling and administrative 4,256,000

Net income (loss) Variable Costing method $6,296,000 Net income (loss) Absorption Costing method 6,156,000 Reconciliation: 2,000 units @ $70.00 Fixed OH per unit explains difference in income of $140,000

Fixed OH expensed under absorption costing, as part of cost of goods sold = ($140,000 + $8,250,000) Fixed OH expensed under variable costing, equals amount incurred = $8,250,000

19-50

Exercise19-8page861

19-51

Exercise 19-8 page 861

Sales $646,000 Cost of goods sold 311,100 Gross margin 334,900 Operating expenses Selling expenses $135,000 Administrative expenses 59,500 194,500 Net income $140,400

1) Prepare an income statement for this current year using the contribution margin format.

Polarix is a retailer of ATVs (all terrain vehicles) and accessories. An income statement for its Consumer ATV Department for the current year follows. ATVs sell, on average, for $3,800. Variable selling expenses are $270 each. The remaining selling expenses are fixed. Administrative expenses are 40% variable and 60% fixed. The company does not manufacture its own ATVs; it purchases them from a supplier for $1,830 each.

Polarix Income Statement—Consumer ATV Department

For Year Ended December 31, 2015

19-52

Exercise 19-8 page 861

Sales $646,000 Cost of goods sold 311,100 Gross margin 334,900 Operating expenses Selling expenses $135,000 Administrative expenses 59,500 194,500 Net income $140,400

Sales (170 units @ $3,800) $646,000 Less: Variable costs

Variable cost of good sold (170 units @ $1,830) $311,100 Variable selling expenses (170 units @ $270) 45,900 Variable administrative expenses ($59,500 x 40%) 23,800

Total variable costs 380,800 Contribution margin 265,200 Fixed expenses:

Fixed selling expenses ($135,000 - $45,900) 89,100 Fixed administrative expenses ($59,500 x 60%) 35,700

Total fixed expenses 124,800 Net income 140,400

Polarix is a retailer of ATVs (all terrain vehicles) and accessories. An income statement for its Consumer ATV Department for the current year follows. ATVs sell, on average, for $3,800. Variable selling expenses are $270 each. The remaining selling expenses are fixed. Administrative expenses are 40% variable and 60% fixed. The company does not manufacture its own ATVs; it purchases them from a supplier for $1,830 each.

Polarix Income Statement—Consumer ATV Department

For Year Ended December 31, 2015

Polarix Income Statement—Consumer ATV Department

For Year Ended December 31, 2015

19-53

Exercise 19-8 page 861

Sales (170 units @ $3,800) $646,000 Less: Variable costs

Variable cost of good sold (170 units @ $1,830) $311,100 Variable selling expenses (170 units @ $270) 45,900 Variable administrative expenses ($59,500 x 40%) 23,800

Total variable costs 380,800 Contribution margin 265,200 Fixed expenses:

Fixed selling expenses ($135,000 - $45,900) 89,100 Fixed administrative expenses ($59,500 x 60%) 35,700

Total fixed expenses 124,800 Net income 140,400

Total contribution margin ($265,200 / 170 units) $1,560 per ATV

2) For each ATV sold during this year, what is the contribution toward covering fixed expenses and earning income?

Polarix Income Statement—Consumer ATV Department

For Year Ended December 31, 2015

19-54

Exercise 19-8 page 861 Alternate

1) Prepare an income statement for this current year using the contribution margin format.

Sales $864,000 Cost of goods sold 448,800 Gross margin 415,200 Operating expenses Selling expenses $126,700 Administrative expenses 43,200 169,900 Net income $245,300

Polarix is a retailer of ATVs (all terrain vehicles) and accessories. An income statement for its Consumer ATV Department for the current year follows. ATVs sell, on average, for $3,600. Variable selling expenses are $220 each. The remaining selling expenses are fixed. Administrative expenses are 70% variable and 30% fixed. The company does not manufacture its own ATVs; it purchases them from a supplier for $1,870 each.

Polarix Income Statement—Consumer ATV Department

For Year Ended December 31, 2015

19-55

Exercise 19-8 page 861 Alternate

Sales $864,000 Cost of goods sold 448,800 Gross margin 415,200 Operating expenses Selling expenses $126,700 Administrative expenses 43,200 169,900 Net income $245,300

Sales (240 units @ $3,600) $864,000 Less: Variable costs

Variable cost of good sold (240 units @ $1,870) $448,800 Variable selling expenses (240 units @ $220) 52,800 Variable administrative expenses ($43,200 x 70%) 30,240

Total variable costs 531,840 Contribution margin 332,160 Fixed expenses:

Fixed selling expenses ($126,700 - $52,800) 73,900 Fixed administrative expenses ($43,200 x 30%) 12,960

Total fixed expenses 86,860 Net income 245,300

Polarix is a retailer of ATVs (all terrain vehicles) and accessories. An income statement for its Consumer ATV Department for the current year follows. ATVs sell, on average, for $3,600. Variable selling expenses are $220 each. The remaining selling expenses are fixed. Administrative expenses are 70% variable and 30% fixed. The company does not manufacture its own ATVs; it purchases them from a supplier for $1,870 each.

Polarix Income Statement—Consumer ATV Department

For Year Ended December 31, 2015

Polarix Income Statement—Consumer ATV Department

For Year Ended December 31, 2015

19-56

Exercise 19-8 page 861 Alternate

Sales (240 units @ $3,600) $864,000 Less: Variable costs

Variable cost of good sold (240 units @ $1,870) $448,800 Variable selling expenses (240 units @ $220) 52,800 Variable administrative expenses ($43,200 x 70%) 30,240

Total variable costs 531,840 Contribution margin 332,160 Fixed expenses:

Fixed selling expenses ($126,700 - $52,800) 73,900 Fixed administrative expenses ($43,200 x 30%) 12,960

Total fixed expenses 86,860 Net income 245,300

Total contribution margin ($332,160 / 240 units) $1,384 per ATV

2) For each ATV sold during this year, what is the contribution toward covering fixed expenses and earning income?

Polarix Income Statement—Consumer ATV Department

For Year Ended December 31, 2015

19-57

Exercise19-9page862

19-58

Exercise 19-9 page 862

Production costs Direct materials per unit $60 Direct labor per unit $22 Variable overhead per unit $8 Fixed overhead for the year $528,000 Selling and administrative cost Variable selling and administrative cost per unit $11 Fixed selling and administrative cost per year $105,000

1a. Assume that this company uses absorption costing. Determine its unit product cost.

Per unit product cost using: Direct materials per unit Direct labor per unit Variable overhead per unit Fixed overhead per unit ($528,000 / 44,000 units produced)

Cost per unit

Cool Sky Company reports the following costing data on its product for its first year of operations. During this first year, the company produced 44,000 units and sold 36,000 units at a price of $140 per unit.

Absorption costing $60.00

22.00 8.00

12.00 $102.00

19-59

Exercise 19-9 page 862

Direct materials per unit $60 Direct labor per unit $22 Variable overhead per unit $8 Fixed overhead for the year $528,000 ($12 per unit)

Selling and administrative cost Variable selling and administrative cost per unit $11 Fixed selling and administrative cost per year $105,000

The company produced 44,000 units and sold 36,000 units at a price of $140 per unit.

Sales (36,000 units @ $140) $5,040,000 Less: Cost of goods sold

Direct materials (36,000 units @ $60) $2,160,000 Direct labor (36,000 units @ $22) 792,000 Variable overhead (36,000 units @ $8) 288,000 Fixed Overhead (36,000 units @ $12) 432,000

Cost of goods sold 3,672,000 Gross margin 1,368,000 Selling, general and administrative expenses:

Variable selling and administrative expenses (36,000 x $11) 396,000 Fixed selling and administrative expenses 105,000 Total selling, general and administrative expenses 501,000

Net income (loss) $867,000

Cool Sky Company Absorption Costing Income Statement

19-60

Exercise 19-9 page 862

Direct materials per unit $60 Direct labor per unit $22 Variable overhead per unit $8 Fixed overhead for the year $528,000 ($12 per unit)

Selling and administrative cost Variable selling and administrative cost per unit $11 Fixed selling and administrative cost per year $105,000

The company produced 44,000 units and sold 36,000 units at a price of $140 per unit.

2a. Assume that this company uses variable costing. Determine its unit product cost. Per unit product cost using:

Direct materials per unit Direct labor per unit Variable overhead per unit

Cost per unit

Sales (36,000 units @ $140) $5,040,000 Less: Variable costs

Variable production costs (36,000 x $90 per unit) $3,240,000 Variable selling and administrative expenses (36,000 x $11) 396,000

Total variable costs 3,636,000 Contribution margin 1,404,000 Less: Fixed expenses

Fixed overhead costs 528,000 Fixed selling and administrative expenses 105,000 Total fixed expenses 633,000

Net income (loss) $771,000

$90.00 2b. Assume that this company uses variable costing. Prepare its income statement for the year under variable costing.

Cool Sky Company Variable Costing Income Statement

Variable costing $60.00

22.00 8.00

19-61

Exercise 19-9 page 862 Alternate

Production costs Direct materials per unit $53 Direct labor per unit $20 Variable overhead per unit $6 Fixed overhead for the year $480,000 Selling and administrative cost Variable selling and administrative cost per unit $11 Fixed selling and administrative cost per year $96,000

1a. Assume that this company uses absorption costing. Determine its unit product cost.

Per unit product cost using: Direct materials per unit Direct labor per unit Variable overhead per unit Fixed overhead per unit ($480,000 / 40,000 units produced)

Cost per unit

Cool Sky Company reports the following costing data on its product for its first year of operations. During this first year, the company produced 40,000 units and sold 32,000 units at a price of $130 per unit.

1b. Assume that this company uses absorption costing. Prepare its income statement for the year under absorption costing.

Absorption costing $53.00

20.00 6.00

12.00 $91.00

19-62

Exercise 19-9 page 862 Alternate

Production costs Direct materials per unit $53 Direct labor per unit $20 Variable overhead per unit $6 Fixed overhead for the year $480,000 / 40,000 units = $12 per unit Selling and administrative cost Variable selling and administrative cost per unit $11 Fixed selling and administrative cost per year $96,000

Sales (32,000 units @ $130) $4,160,000 Less: Cost of goods sold

Direct materials (32,000 units @ $53) $1,696,000 Direct labor (32,000 units @ $20) 640,000 Variable overhead (32,000 units @ $6) 192,000 Fixed Overhead (32,000 units @ $12) 384,000

Cost of goods sold 2,912,000 Gross margin 1,248,000 Selling general and administrative expenses

Variable selling and administrative expenses (32,000 x $11) 352,000 Fixed selling and administrative expenses 96,000 Total selling, general and administrative expenses 448,000

Net income (loss) $800,000

Cool Sky Company reports the following costing data on its product for its first year of operations. During this first year, the company produced 40,000 units and sold 32,000 units at a price of $130 per unit.

Cool Sky Company Absorption Costing Income Statement

19-63

Exercise 19-9 page 862 Alternate

Production costs Direct materials per unit $53 Direct labor per unit $20 Variable overhead per unit $6 Fixed overhead for the year $480,000 / 40,000 units = $12 per unit Selling and administrative cost Variable selling and administrative cost per unit $11 Fixed selling and administrative cost per year $96,000

Cool Sky Company reports the following costing data on its product for its first year of operations. During this first year, the company produced 40,000 units and sold 32,000 units at a price of $130 per unit.

2a. Assume that this company uses variable costing. Determine its unit product cost.

Per unit product cost using: Direct materials per unit Direct labor per unit Variable overhead per unit

Cost per unit $79.00

2b. Assume that this company uses variable costing. Prepare its income statement for the year under variable costing.

Variable costing $53.00

20.00 6.00

19-64

Exercise 19-9 page 862 Alternate

Production costs Direct materials per unit $53 Direct labor per unit $20 Variable overhead per unit $6 Fixed overhead for the year $480,000 / 40,000 units = $12 per unit Selling and administrative cost Variable selling and administrative cost per unit $11 Fixed selling and administrative cost per year $96,000

Cool Sky Company reports the following costing data on its product for its first year of operations. During this first year, the company produced 40,000 units and sold 32,000 units at a price of $130 per unit.

Sales (32,000 units @ $130) $4,160,000 Less: Variable costs

Variable production costs (32,000 x $79 per unit) $2,528,000 Variable selling and administrative expenses (32,000 x $11) 352,000

Total variable costs 2,880,000 Contribution margin 1,280,000 Less: Fixed expenses

Fixed overhead costs 480,000 Fixed selling and administrative expenses 96,000 Total fixed expenses 576,000

Net income (loss) $704,000

Cool Sky Company Variable Costing Income Statement

19-65

Exercise 19-9 page 862 Alternate

Sales (32,000 units @ $130) $4,160,000 Less: Variable costs

Variable production costs (32,000 x $79 per unit) $2,528,000 Variable selling and administrative expenses (32,000 x $11) 352,000

Total variable costs 2,880,000 Contribution margin 1,280,000 Less: Fixed expenses

Fixed overhead costs 480,000 Fixed selling and administrative expenses 96,000 Total fixed expenses 576,000

Net income (loss) $704,000

Fixed OH = $0 Inventory, $480,000 expense Variable Costing Income Statement

Sales (32,000 units @ $130) $4,160,000 Less: Cost of goods sold

Direct materials (32,000 units @ $53) $1,696,000 Direct labor (32,000 units @ $20) 640,000 Variable overhead (32,000 units @ $6) 192,000 Fixed Overhead (32,000 units @ $12) 384,000

Cost of goods sold 2,912,000 Gross margin 1,248,000 Selling general and administrative expenses

Variable selling and administrative expenses (32,000 x $11) 352,000 Fixed selling and administrative expenses 96,000 Total fixed expenses 448,000

Net income (loss) $800,000

Fixed OH = $96,000 Inventory, $384,000 expense Absorption Costing Income Statement

19-66

Exercise19-10page862

19-67

Exercise 19-10 page 862 19-68

A manufacturer reports the information below for three recent years. Compute income for each of the three years using absorption costing.

Year 1 Year 2 Year 3 Variable costing income $110,000 $114,400 $118,950 Beginning finished goods inventory (units) 0 1,200 700 Ending finished goods inventory (units) 1,200 700 800 Fixed manufacturing overhead per unit $2.50 $2.50 $2.50

Variable costing income $110,000 $114,400 $118,950 Less: Fixed overhead in beginning finished goods inventory 0 (3,000) (1,750) Add: Fixed overhead in ending finished goods inventory 3,000 1,750 2,000 Absorption costing income $113,000 $113,150 $119,200

Year 1 – When a company produces more units than it sells, absorption income is higher than variable costing income. 1,200 units added to inventory x $2.50 per unit = $3,000 of expense is deferred.

Year 2 – When a company sells more units than it produces, absorption income is less than variable costing income. 500 units removed from inventory x $2.50 per unit = $1,250 of expense is recognized.

Year 3 – When a company produces more units than it sells, absorption income is higher than variable costing income. 100 units added to inventory x $2.50 per unit = $250 of expense is deferred.

Exercise 19-10 page 862 Alternate 19-69

Year 1 – When a company produces more units than it sells, absorption costing income is higher than variable costing income. 2,000 units added to inventory x $3.00 per unit = $6,000 of expense is deferred.

Year 2 – When a company sells more units than it produces, absorption costing income is less than variable costing income. 500 units removed from inventory x $3.00 per unit = $1,500 of expense is recognized. Year 3 – When a company produces more units than it sells, absorption costing income is higher than variable costing income. 1,000 units added to inventory x $3.00 per unit = $3,000 of expense is deferred.

A manufacturer reports the information below for three recent years. Compute income for each of the three years using absorption costing.

Year 1 Year 2 Year 3 Variable costing income $80,000 $90,000 $105,000 Beginning finished goods inventory (units) 0 2,000 1,500 Ending finished goods inventory (units) 2,000 1,500 2,500 Fixed manufacturing overhead per unit $3.00 $3.00 $3.00

Variable costing income $80,000 $90,000 $105,000 Less: Fixed overhead in beginning finished goods inventory 0 (6,000) (4,500) Add: Fixed overhead in ending finished goods inventory 6,000 4,500 7,500 Absorption costing income $86,000 $88,500 $108,000

Exercise19-11page862

19-70

$100

$30

$8

$12

$150 per unit

Exercise 19-11 page 862

Sirhuds Inc., a maker of smartwatches, reports the information below on its product. The company uses absorption costing and has a target markup of 40% of absorption cost per unit. Compute the target selling price per unit under absorption costing.

Direct materials cost $100 per unit Direct labor cost $30 per unit Variable overhead cost $8 per unit Fixed overhead cost $600,000 per year Variable selling and administrative expenses $3 per unit Fixed selling and administrative expenses $120,000 per year Expected production (and sales) 50,000 units per year

$600,000 / 50,000 units = $12

Exercise 19-11 page 862 19-72

Sirhuds Inc., a maker of smartwatches, reports the information below on its product. The company uses absorption costing and has a target markup of 40% of absorption cost per unit. Compute the target selling price per unit under absorption costing.

Direct materials cost $100 per unit Direct labor cost $30 per unit Variable overhead cost $8 per unit Fixed overhead cost $600,000 per year Variable selling and administrative expenses $3 per unit Fixed selling and administrative expenses $120,000 per year Expected production (and sales) 50,000 units per year

Direct materials cost $100 Direct labor cost 30 Variable overhead cost 8 Fixed overhead cost ($600,000 / 50,000 units) 12 Total cost $150 Target profit ($150 x 40%) 60 Target selling price $210

Sirhuds Inc., a maker of smartwatches, reports the information below on its product. The company uses absorption costing and has a target markup of 30% of absorption cost per unit. Compute the target selling price per unit under absorption costing.

Direct materials cost $150 per unit Direct labor cost $60 per unit Variable overhead cost $10 per unit Fixed overhead cost $420,000 per year Variable selling and administrative expenses $3 per unit Fixed selling and administrative expenses $120,000 per year Expected production (and sales) 21,000 units per year

$150

$60

$10

$20

$240 per unit

$420,000 / 21,000 units = $20

Exercise 19-11 page 862 Alternate

Exercise 19-11 page 862 Alternate 19-74

Sirhuds Inc., a maker of smartwatches, reports the information below on its product. The company uses absorption costing and has a target markup of 30% of absorption cost per unit. Compute the target selling price per unit under absorption costing.

Direct materials cost $150 per unit Direct labor cost $60 per unit Variable overhead cost $10 per unit Fixed overhead cost $420,000 per year Variable selling and administrative expenses $3 per unit Fixed selling and administrative expenses $120,000 per year Expected production (and sales) 21,000 units per year

Direct materials cost $150 Direct labor cost 60 Variable overhead cost 10 Fixed overhead cost ($420,000 / 21,000 units) 20 Total cost $240 Target profit ($240 x 30%) 72 Target selling price $312

Exercise19-12page838

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Exercise 19-12 page 838

Jacquie Inc. reports the following annual cost data for its single product. Normal production and sales level 60,000 units Sales price $56.00 per unit Direct materials $9.00 per unit Direct labor $6.50 per unit Variable overhead $11.00 per unit Fixed overhead $720,000 in total

Cost of goods sold at production volumes of: 60,000 units 80,000 units Direct materials per unit $9.00 $9.00 Direct labor per unit 6.50 6.50 Variable overhead per unit 11.00 11.00 Fixed overhead per unit ($720,000 / 60,000 units) 12.00 Fixed overhead per unit ($720,000 / 80,000 units) 9.00 Product cost per unit $38.50 $35.50

Contribution margin (Sales of 60,000 units) 60,000 units 80,000 units Sales (60,000 units x $56.00 per unit) $3,360,000 $3,360,000 Cost of goods sold (60,000 units x $38.50 per unit) 2,310,000 Cost of goods sold (60,000 units x $35.50 per unit) 2,130,000 Gross margin $1,050,000 $1,230,000

$180,000 = 60,000 units x $3.00 ($38.50 - $35.50)

If Jacquie increases its production to 80,000 units, while sales remain at the current 60,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production.

-----Production Volume -----

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Exercise 19-12 page 838 Alternate

Normal production and sales level 64,000 units Sales price $60.00 per unit Direct materials $9.00 per unit Direct labor $7.20 per unit Variable overhead $10.80 per unit Fixed overhead $1,305,600 in total

Jacquie, Inc. reports the following annual cost data for its single product.

If Jacquie increases its production to 76,800 units, while sales remain at the current 64,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production.

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Exercise 19-12 page 838 Alternate

Normal production and sales level 64,000 units Sales price $60.00 per unit Direct materials $9.00 per unit Direct labor $7.20 per unit Variable overhead $10.80 per unit Fixed overhead $1,305,600 in total

If Jacquie increases its production to 76,800 units, while sales remain at the current 64,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production.

Cost of goods sold at production volumes of: 64,000 units 76,800 units Direct materials per unit $9.00 $9.00 Direct labor per unit 7.20 7.20 Variable overhead per unit 10.80 10.80 Fixed overhead per unit ($1,305,600 / 64,000 units) 20.40 Fixed overhead per unit ($1,305,600 / 76,800 units) 17.00 Product cost per unit $47.40 $44.00

Contribution margin (Sales of 64,000 units) 64,000 units 76,800 units Sales (64,000 units x $60.00 per unit) $3,840,000 $3,840,000 Cost of goods sold (64,000 units x $47.40 per unit) 3,033,600 Cost of goods sold (64,000 units x $44.00 per unit) 2,816,000

Gross margin $806,400 $1,024,000

$217,600 difference = 64,000 units x $3.40 ($47.40 - $44.00)

-----Production Volume -----

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