ACC2002 Managerial Accounting Textbook Solution-Ch8 EXERCISE 8-15

ACC2002 Managerial Accounting
Textbook Solution-Ch8
EXERCISE 8-15
Inventory calculations (units):
Finished-goods inventory, January 1 .......................................................
Add: Units produced ................................................................................
Less: Units sold .......................................................................................
Finished-goods inventory, December 31 ..................................................
1.
2,000
20,000
21,000
1,000
units
units
units
units
Variable costing:
Inventoriable costs under variable costing:
Direct material used .................................................................................
Direct labor incurred .................................................................................
Variable manufacturing overhead ............................................................
Total .........................................................................................................
$ 600,000
300,000
200,000
$1,100,000
Cost per unit produced = $1,100,000/20,000 units = $55 per unit

Ending inventory: 1,000 units $55 per unit .........................................
$55,000
2. Absorption costing:
Predetermined fixed-overhead rate
fixed manufacturing overhead
$420,000
=
planned production
20,000 units
= $21 per unit
Difference in fixed
overhead expensed under
absorption and variable costing
change in predetermined
inventory fixed-overhead
in units
rate
(1,000 units) ($21 per unit)
$21,000
Difference in reported income:

Since inventory decreased during the year, income reported under absorption costing will be
$21,000 lower than income reported under variable costing.
EXERCISE 8-17
1.
a. Inventory decreases by 3,000 units, so income is greater under variable costing.

b.
Fixed overhead
rate per unit
Difference in
reported income
2.
$2,200,000
= $110
20,000
$110 3,000 = $330,000
a. Inventory remains unchanged, so there is no difference in reported income under the two
methods of product costing.
b. No difference.
3.
a. Inventory increases by 2,000 units, so income is greater under absorption costing.

b.
Fixed overhead
rate per unit
Difference in
reported income
$2,200,000
= $200
11,000
$200 2,000 = $400,000
EXERCISE 8-18
1.
Cost-volume profit graph:

Dollars (in millions)
$5
$4
Break-even point:
14,667 units
(rounded)
Total cost
Revenue
$3
$2
Fixed cost
($2,200,000)
$1
5
2.
10
15
Calculation of break-even point:

Break-even point
=
=
=
3.
Units (in
thousands)
fixed cost
unit contribution margin
$2,200,000
$350 $200
14,667 units (rounded)
Variable costing is more compatible with the cost-volume-profit chart, because it maintains the
distinction between fixed and variable costs as does CVP analysis.
Absorption costing, in contrast, does not maintain the separation of fixed and variable costs.
Fixed costs are unitized in the fixed overhead rate and inventoried as product costs along with
variable manufacturing costs.
3
PROBLEM 8-23
1.
Since the planned production volume was 100,000 units, actual production was also 100,000
units.
Beginning inventory .................................................................................
Production ................................................................................................
Ending inventory ......................................................................................
Sales ........................................................................................................
0 units
100,000 units
(20,000) units
80,000 units
Since inventory increased during the year, reported income is higher under absorption costing.
Difference in
reported income
$20,000
change in
inventory
20,000 units
fixed overhead
per unit
fixed overhead
100,000 units
Solving this equation: fixed overhead = $100,000

Now we can compute the contribution margin:
Reported income under variable costing ..................................................
Fixed overhead ........................................................................................
Total contribution margin .........................................................................
Contribution margin
per unit
Break-even point
in units
$220,000
100,000
$320,000
total contribution margin

sales in units
$320,000
= $4 per unit
80,000 units
fixed cost (overhead)

unit contribution margin
$100,000
= 25,000 units
$4 per unit
2.
Profit-volume graph:
Dollars
$250,000
Profit = $220,000 at
80,000 unit sales volume
$200,000
$150,000
$100,000
Break-even
point 25,000 units
$50,000
Profit
Loss
25,000
50,000
75, 000
$(50,000)
$(100,000)
$(150,000)
100,000
Sales in units
PROBLEM 8-24
Outback Corporations reported 20x1 income will be higher under absorption costing because actual
production exceeded actual sales. Therefore, inventory increased and some fixed costs will remain in
inventory under absorption costing which would be expensed under variable costing.
1.
Beginning inventory (in units) ...................................................................

Actual production (in units) ......................................................................
Available for sale (in units) .......................................................................
Sales (in units) .........................................................................................
Ending inventory (in units) .......................................................................
35,000
130,000
165,000
125,000
40,000
Budgeted manufacturing costs:

Direct material ..........................................................................................
Direct labor ..............................................................................................
Fixed manufacturing overhead .................................................................
Total .....................................................................................................
Total budgetedmanufacturing costs (variable and fixed)
Total planned production(in units)
Value of ending inventory
2.
quantity cost per unit
40,000 units $30 per unit
$1,200,000
$1,680,000
1,260,000
560,000
700,000
$4,200,000
$4,200,000
140,000
= $30 per unit
=
Budgeted variable manufacturing costs:

Direct material ..........................................................................................
Direct labor ..............................................................................................
Total .........................................................................................................
Total budgeted variable manufacturing costs
$3,500,000
=
Total planned production(in units)
140,000
= $25 per unit
$1,680,000
1,260,000
560,000
$3,500,000
Value of ending inventory
3.
Increase in inventory (in units)
quantity cost per unit
40,000 units $25 per unit
$1,000,000
=
production sales
130,000 units 125,000 units
5,000 units
Budgeted fixed manufacturing overhead per unit
$700,000
140,000 units
= $5 per unit
Difference in reported income
= budgeted fixed overhead per unit change in inventory (in units)
= $5 5,000 units = $25,000
Income reported under absorption costing will be higher than that reported under variable
costing, because inventory increased during the year.
4.
If Outback Corporation had adopted a JIT program at the beginning of 20x1:

a. It is unlikely that the company would have manufactured 5,000 more units than it sold.
Under JIT, production and sales would be nearly equal.
b. Reported income under variable and absorption costing would most likely be nearly the
same. Differences in reported income are caused by changes in inventory levels. Under
JIT, inventory levels would be minimal. Therefore, the change in these levels would be
minimal.
PROBLEM 8-25
1.
Cost per unit:

(a) Absorption Costing
(b) Variable Costing
Direct material ............................... $35 ....................................................... $35

Direct labor .................................... 16 ....................................................... 16
Manufacturing overhead
Variable ..................................... 10 ....................................................... 10
Fixed ($210,000 30,000) ........
7
Total absorption cost per unit..
$68
Total variable cost per unit ..................................................................................$61
2.
a.
STARS ABOVE LTD.

INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1
ABSORPTION COSTING
Sales revenue (27,000 at $95 per unit) ..............................................

$2,565,000
Less: Cost of goods sold (27,000 units at
absorption cost of $68 per unit) ........................................................
1,836,000
Gross margin .....................................................................................
729,000
Less: Selling and administrative expenses:
Variable (27,000 at $1 per unit) ..............................................
27,000
Fixed ......................................................................................
230,000
Operating income ..............................................................................
$ 472,000
b.
STARS ABOVE LTD.
INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1
VARIABLE COSTING
Sales revenue (27,000 units at $95 per unit) .....................................
Less: Variable expenses:
Variable manufacturing costs
(27,000 units at variable cost of $61 per unit) ......................
Variable selling and administrative costs
(27,000 units at $1 per unit) .................................................
Contribution margin ............................................................................
Less: Fixed expenses:
Fixed manufacturing overhead ...............................................
Fixed selling and administrative costs ....................................
Operating income ..............................................................................
3.
Change in
inventory
(in units)
3,000 unit increase
$2,565,000
1,647,000
27,000
891,000
210,000
230,000
$ 451,000
predetermined
fixed overhead
rate
absorption-costing income
minus variable-costing
income
$7
$21,000
4.
If Stars Above had implemented JIT and installed a flexible manufacturing system at the
beginning of 20x1, it is unlikely that reported income would have differed by as great a
magnitude. Under this scenario, production and sales would have been nearly the same. As a
result, reported income under variable and absorption costing would have been nearly equal.
Differences in reported income are caused by significant changes in inventory levels, which do
not occur under JIT because inventory is minimal.
PROBLEM 8-29
1.
a. Absorption-costing income statements:
Year 1
Year 2
Sales revenue (at $50 per case) ..............................................................
$4,000,000 $3,000,000
Less: Cost of goods sold (at
absorption cost of $42 per case*) ..........................................................
3,360,000
2,520,000
Gross margin ...........................................................................................
$ 640,000 $ 480,000
Less: Selling and administrative expenses:
Variable (at $1 per case) ..............................................................
80,000
60,000
Fixed ............................................................................................
75,000
75,000
Operating income ....................................................................................
$ 485,000 $ 345,000
Year 3
$4,500,000
3,780,000
$ 720,000
90,000
75,000
$ 555,000
*The absorption cost per case is $42, calculated as follows:

variable manufacturing
Budgeted fixed manufacturing overhead

Planned production
$800,000
80,000
$32
$10
$32 = $42
b. Variable-costing income statements:
cost per case
Year 1
Year 2
Sales revenue (at $50 per case) ..............................................................
$4,000,000 $3,000,000
Less: Variable expenses:
Variable manufacturing costs (at
variable cost of $32 per case)
2,560,000
1,920,000
Variable selling and administrative
costs (at $1 per case) ................................................................
80,000
60,000
Contribution margin ..................................................................................
$1,360,000 $1,020,000
Less Fixed expenses:
Fixed manufacturing overhead .....................................................
800,000
800,000
Fixed selling and administrative
expenses ...................................................................................
75,000
75,000
Operating income ....................................................................................
$ 485,000 $ 145,000
2.
2,880,000
90,000
$1,530,000
800,000
75,000
$ 655,000
Reconciliation:
Year
1
2
3
Difference In
Difference
Predetermined Fixed Overhead
Reported Income
in
Change in
Fixed
Expensed Under
Absorption Variable Reported

Inventory
Overhead
Absorption and
Costing
Costing
Income
(in units)
Rate*
Variable Costing
$485,000 $485,000
-0-0$10
0
345,000
145,000
$200,000
20,000
10
$200,000
555,000
655,000
(100,000)
(10,000)
10
(100,000)
*Predetermined fixed manufacturing overhead rate =

3.
Year 3
$4,500,000
$800,000
80,000
a. In year 4, the difference in reported operating income will be $100,000, calculated as

follows:
Change in
inventory
(in units)
Predetermined
fixed overhead
rate
(10,000)
$10
$(100,000)
Income reported under absorption costing will be lower, because inventory will decline
during year 4.
b. Over the four-year period, the total of all reported operating income will be the same under
absorption and variable costing. This result will occur because inventory does not change
over the four-year period. It starts out at zero on January 1 of year 1, and it ends up at zero
on December 31 of year 4.
10

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ACC2002 Managerial Accounting

Cost per unit produced = $1,100,000/20,000 units = $55 per unit

(1,000 units) ($21 per unit)

Difference in reported income: