COMM305/DD

CHAPTER 8

March 1, 2012

1. Conan Company produces sporting equipment. In 2005, the first year of operations, Conan produced 25,000 units and sold 18,000 units. In 2007, the production and sales results were exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $540,000, and fixed administrative expenses were $200,000. Required: (a) Calculate net income under variable costing for each year. (b) Calculate net income under absorption costing for each year. (c) Reconcile the differences each year in income from operations under the two costing approaches

2.

During its first year of operations, Kima Corp. experienced the following: Units manufactured 70,000 Units sold 60,000 Product costs: Variable Costs Direct materials $5.00/unit Direct labour 3.50/unit Variable overhead 2.00/unit Fixed $315,000 Selling and Administrative: Variable $1.60/unit Fixed $140,000 Required: (a) What are the total production costs under the throughput costing approach? (b) What is the cost of goods sold under absorption costing approach? (c) What is the cost of ending inventory under Variable costing approach? (d) What will be the operating income under the variable costing method as compared to the absorption costing method? (e) What will be the operating income under the absorption costing method as compared to the throughput costing method?

COMM305/DD

CHAPTER 8

March 1, 2012

3. McCartney Pumps is a division of UK Controls Corporation. The division manufactures and sells a pump used in a wide variety of applications. During the coming year it expects to sell 30,000 units for $10 per unit. George Harrison manages the division. He is considering producing either 30,000 or 50,000 units during the period. Other information is presented in the schedule. Division information - 2009 Beginning inventory Expected sales in units Selling price per unit Variable manufacturing cost per unit Fixed manufacturing overhead cost (total) Fixed manufacturing overhead costs per unit Based on 30,000 units Based on 50,000 units Manufacturing cost per unit Based on 30,000 units Based on 50,000 units Selling and administrative expense (all fixed) 0 30,000 $ 15.00 $ 7.00 $ 150,000 $ 5.00 per unit ($150,000 30,000) $ 3.00 per unit ($150,000 50,000) $ 12.00 per unit ($7 variable + $5 fixed) $ 10.00 per unit ($7 variable + $3 fixed) $25,000

Required: (a) Prepare an absorption costing income statement with one column showing the results if 30,000 units are produced, and one column showing the results if 50,000 units are produced. (b) Why is income different for the two production levels, when sales is 30,000 units either way?