DO IT!

REVIEW 8-12
(a)

(b)

Manufacturing cost per unitabsorption costing

Direct material
Direct labour
Variable overhead
Fixed overhead ($108,000 12,000 units)

$30.00
12.00
3.00
9.00
$54.00

Fresh Air Products

Income StatementAbsorption Costing
For the first month of operations

Sales (10,000 units $110)

Cost of goods sold:
Beginning inventory
Plus: Cost of goods manufactured (12,000 $54)
Goods available for sale
Less: ending inventory (2,000 $54)
Gross Margin
Less: S&A [(10,000 $4) + $200,000]
Operating income before tax

$1,100,000

$648,000
648,000
108,000

540,000
560,000
240,000
$320,000

DO IT! REVIEW 8-13

(a)(1)

(a)(2)

Manufacturing cost per unitvariable costing

Direct material
Direct labour
Variable overhead

$30.00
12.00
3.00
$45.00

Fresh Air Products

Income StatementVariable Costing
For the first month of operations

Sales (10,000 units $110)

Less: variable costs
Variable COGS (10,000 units $45)
Variable S&A expenses (10,000 units $4)
Contribution margin
Less: fixed costs
Fixed manufacturing overhead
Fixed selling and administration expenses
Operating income before tax

$1,100,000
$450,000
40,000
108,000
200,000

(b) Variable costing operating income

Plus: fixed manufacturing overhead costs deferred
in ending inventory (2,000 units $9)
Absorption costing operating income

490,000
610,000
308,000
$302,000

$302,000
18,000
$320,000

DO IT! REVIEW 8-14

(a)(1) Manufacturing cost per unitabsorption costing
Direct material
Direct labour
Variable overhead
Fixed overhead ($108,000 13,500 units)

(a)(2)

$30.00
12.00
3.00
8.00
$53.00

Fresh Air Products

Income StatementNormal Costing
For the first month of operations

Sales (10,000 units $110)

Cost of goods sold:
Beginning inventory
Plus: Cost of goods manufactured (12,000 $53)
Goods available for sale
Less: ending inventory (2,000 $53)
Cost of goods sold
Plus: volume variance [$108,000 (12,000 $8)]
Gross Margin
Less: S&A [(10,000 $4) + $200,000]
Operating income before tax

$1,100,000

$636,000
636,000
106,000
530,000
12,000

(b) Normal costing operating income

Plus:
Costs deferred in ending inventory [2,000 ($9 $8)]
Absorption costing operating income

542,000
558,000
240,000
$318,000
$318,000
2,000
$320,000

DO IT! REVIEW 8-15

(a)(1) Manufacturing cost per unitthroughput costing
Direct material

(a)(2)

$30.00
$30.00

Fresh Air Products

Income StatementThroughput Costing
For the first month of operations

Sales (10,000 $110)

Variable cost of goods sold:
Beginning inventory
Direct material costs (12,000 $30)
Cost of goods available for sale
Ending inventory (2,000 $30)
Throughput contribution margin
Other operating costs
Direct labour costs (12,000 $12)
Variable overhead costs (12,000 $3)
Variable S & A expenses (10,000 $4)
Fixed manufacturing overhead
Fixed selling and admin
Operating income

$ 1,100,000
$

360,000
360,000
60,000

$144,000
36,000
40,000
108,000
200,000

(b) Throughput costing operating income

Plus: costs deferred in ending inventory (2,000 $15)
Variable costing operating income

300,000
800,000

528,000
$272,000

$272,000
30,000
$302,000

*EXERCISE 8-16
(a)

Manufacturing Cost Per UnitVariable costing

Direct materials
Direct labour
Variable manufacturing overhead
Total product cost per unit

$ 800
1,500
300
$2,600

(b)

WU EQUIPMENT COMPANY
Income Statement
For the Year-Ended December 31, 2012
Variable Costing
____________________________________________________________
Sales (1,200 units $4,500)
Less: variable costs
Variable COGS (1,200 units $2,600)
Variable S&A expense (1,200 units $70)
Contribution margin
Less: fixed costs
Fixed manufacturing overhead
Fixed S&A expense
Net Income

(c)

$5,400,000
$3,120,000
84,000
1,200,000
100,000

Manufacturing Cost Per UnitThroughput costing

Direct materials
Total product cost per unit

$800
$800

3,204,000
2,196,000
1,300,000
$ 896,000

EXERCISE 8-16 (Continued)

(d)

WU EQUIPMENT COMPANY
Income Statement
For the Year-Ended December 31, 2012
Throughput Costing
____________________________________________________________
Sales (1,200 units $4,500)
Less: COGS (1,200 units $800)
Throughput contribution margin
Less: Operating expenses
Direct labour (1,500 $1,500)
Variable MOH (1,500 $300)
Variable S&A (1,200 $70)
Fixed MOH
Fixed selling and administration expenses
Net Income
(e)

$5,400,000
960,000
4,440,000
$2,250,000
450,000
84,000
1,200,000
100,000

4,084,000
$356,000

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
Less: conversion costs deferred in ending inventory
Throughput costing net income

$896,000
540,000
$356,000

PROBLEM 8-29A
(a)

Per unit product cost: $30 + $40 + $10 + ($70,000 2,000) = $115

ALTA PRODUCTS LTD.

Income StatementAbsorption Costing
Month ended August 31, 2012
___________________________________________________________
Sales (1,700 $175)
Less: COGS
Inventory, beginning
Plus: Cost of goods manufactured
Cost of goods available for sale
Less: Inventory, ending
Gross profit
Less: Selling and Administration
[(6% $297,500) + $50,000]
Net income
(b)

$297,500
$

230,000
230,000
34,500

195,500
102,000
67,850
$34,150

ALTA PRODUCTS LTD.

Income StatementVariable Costing
Month ended August 31, 2012

__________________________________________________________
Sales
Less: Variable COGS
Inventory, beginning
Plus: Cost of goods manufactured
Cost of goods available for sale
Less: Inventory, ending
Variable cost of goods sold
Variable selling and administrative
Contribution margin
Less: fixed costs ($70,000 + $50,000)
Net income

$297,500
$

160,000
160,000
24,000
136,000
17,850

153,850
143,650
120,000
$23,650

PROBLEM 8-29A (Continued)

(c) Fixed overhead cost per unit = $70,000 2,000 = $35 per unit
Reconciliation
Income under variable costing
Plus: Fixed costs deferred in inventory (300 $35)
Income under absorption costing
(d)

$23,650
10,500
$34,150

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
Less: costs deferred in ending inventory
[($40 + $10 ) 300 units]
Throughput costing net income

$23,650
15,000
$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
Direct labour
Variable overhead
Fixed overhead ($70,000 2,500 units)

$30
40
10
28
$108

(a)(2)
ALTA PRODUCTS LTD.
Income StatementNormal Costing
Month ended August 31, 2012
____________________________________________________________
__
Sales (1,700 $175)
Less: COGS
Inventory, beginning
Plus: Cost of goods manufactured
Cost of goods available for sale
Less: Inventory, ending
Unadjusted cost of goods sold
Plus: volume variance*
Gross profit
Less: Selling and Administration
[(6% $297,500) + $50,000]
Net income
*(2,500 2,000) $28

$297,500
$

216,000
216,000
32,400
183,600
14,000

197,600
99,900
67,850
$32,050

(b) Reconciliation
Normal costing net income
Plus: Additional fixed MOH deferred in ending inventory
[300 units ($35 $28)]
Absorption costing net income (from P8-29A)

$32,050
2,100
$34,150