PROBLEM 6–16BVariable and Absorption Costing Unit Product Costs and Income Statements;Explanation of Difference in Net Operating Income [LO1 , LO2, LO3]
CHECK FIGURE
(1b) Net operating income: $801,000
(2b) Net operating loss: $711,000
McCrackenAerial, Inc., produces and sells a unique type of TV antenna. The company has just opened anew plant to manufacture the antenna, and the following cost and revenue data have been provided for thefirst month of the plant’s operation in the form of a worksheet.
Beginning inventory ...... / 0Units produced ...... / 49,000
Units sold ...... / 44,000
Selling price per unit ...... / $78
Selling and administrative expenses:
Variable per unit ...... / $3
Fixed (total) ...... / $563,000
Manufacturing costs
Direct materials cost per unit ...... / $17
Direct labor cost per unit ...... / $8
Variable manufacturing overhead cost per unit ... / $1
Fixed manufacturing overhead cost (total) ...... / $882,000
Because the new antenna is unique in design, management is anxious to see how profitable it will beand has asked that an income statement be prepared for the month.
Required:
1.Assume that the company uses absorption costing.
a.Determine the unit product cost.
b.Prepare an income statement for the month.
2.Assume that the company uses variable costing.
a.Determine the unit product cost.
b.Prepare a contribution format income statement for the month.
3.Explain the reason for any difference in the ending inventory balances under the two costingmethodsand the impact of this difference on reported net operating income.
PROBLEM 6–17BVariable and Absorption Costing Unit Product Costs and Income Statements[LO1 , LO2]
CHECK FIGURE
(3b) Year 3 net operating income: $(50,000)
Roberts Company manufactures and sells one product. The following information pertains to each of thecompany’s first three years of operations:
Variable costs per unit:Manufacturing:
Direct materials ...... / $22
Direct labor ...... / $14
Variable manufacturing overhead ...... / $5
Variable selling and administrative ...... / $3
Fixed costs per year:
Fixed manufacturing overhead ...... / $270,000
Fixed selling and administrative expenses ..... / $210,000
During its first year of operations Roberts produced 60,000 units and sold 60,000 units. During its secondyear of operations it produced 75,000 units and sold 50,000 units. In its third year, Robertsproduced40,000 units and sold 65,000 units. The selling price of the company’s product is $52 per unit.
Required:
1.Compute the company’s break-even point in units sold.
2.Assume the company uses variable costing:
a.Compute the unit product cost for year 1, year 2, and year 3.
b.Prepare an income statement for year 1, year 2, and year 3.
3.Assume the company uses absorption costing:
a.Compute the unit product cost for year 1, year 2, and year 3.
b.Prepare an income statement for year 1, year 2, and year 3.
4.Compare the net operating income figures that you computed in requirements 2 and 3 to thebreak-even point that you computed in requirement 1. Which net operating income figures seemcounterintuitive? Why?
PROBLEM 6–18BVariable Costing Income Statement; Reconciliation [LO2, LO3]
CHECK FIGURE
(1) Year 2 net operating income: $383,000
During Gates Company’s first two years of operations, the company reported absorption costing netoperating income as follows:
Year 1 / Year 2Sales (@ $62 per unit) ...... / $992,000 / $1,612,000
Cost of goods sold (@ $38 per unit) ...... / 608,000 / 988,000
Gross margin ...... / 384,000 / 624,000
Selling and administrative expenses* ...... / 296,000 / 326,000
Net operating income ...... / $ 88,000 / $ 298,000
* $3 per unit variable; $248,000 fixed each year.
The company’s $38 unit product cost is computed as follows:
Direct materials ...... / $ 7Direct labor ...... / 12
Variable manufacturing overhead ...... / 2
Fixed manufacturing overhead ($357,000 ÷ 21,000 units) .... / 17
Absorption costing unit product cost...... / $38
Production and cost data for the two years are given below:
Year 1 / Year 2Units produced ...... / 21,000 / 21,000
Units sold ...... / 16,000 / 26,000
Required:
1.Prepare a variable costing contribution format income statement for each year.
2.Reconcile the absorption costing and variable costing net operating income figures for each year.
PROBLEM 6–19BComprehensive Problem with Labor Fixed [LO1 , LO2, LO3]
CHECK FIGURE
(2) Net operating income: $359,760
Tabletops Products, Inc., has just organized a new division to manufacture and sell specially designed tablesusing select hardwoods for personal computers. The division’s monthly costs are shown in the schedule below:
Manufacturing costs:Variable costs per unit:
Direct materials ...... / $83
Variable manufacturing overhead ...... / $5
Fixed manufacturing overhead costs (total) ... / $252,000
Selling and administrative costs:
Variable ...... / 8% of sales
Fixed (total) ...... / $158,000
TabletopsProducts regards all of its workers as full-time employees and the company has a long-standingno-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes itslabor costs in its fixed manufacturing overhead. The tables sell for $340 each.
During the first month of operations, the following activity was recorded:
Units produced ...... / 4,000Units sold ...... / 3,200
Required:
1.Compute the unit product cost under:
a.Absorption costing.
b.Variable costing.
2.Prepare an income statement for the month using absorption costing.
3.Prepare a contribution format income statement for the month using variable costing.
4.Assume that the company must obtain additional financing. As a member of top management, whichof the statements that you have prepared in (2) and (3) above would you prefer to take with you tonegotiate with the bank? Why?
5.Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.
PROBLEM 6–20BPrepare and Reconcile Variable Costing Statements [LO1 , LO2, LO3]
CHECK FIGURE
(2) June net operating income: $470,000
Bell Company manufactures and sells a single product. Cost data for the product follow:
Variable costs per unit:Direct materials ...... / $ 3
Direct labor ...... / 12
Variable factory overhead ...... / 3
Variable selling and administrative ...... / 3
Total variable costs per unit ...... / $21
Fixed costs per month:
Fixed manufacturing overhead ...... / $120,000
Fixed selling and administrative ...... / 166,000
Total fixed cost per month ...... / $286,000
The product sells for $48 per unit. Production and sales data for May and June, the first two monthsof operations, are as follows:
UnitsProduced / Units
Sold
May ...... / 24,000 / 20,000
June ...... / 24,000 / 28,000
Income statements prepared by the accounting department, using absorption costing, are presented below:
May / JuneSales ...... / $960,000 / $1,344,000
Cost of goods sold ...... / 460,000 / 644,000
Gross margin ...... / 500,000 / 700,000
Selling and administrative expenses ...... / 226,000 / 250,000
Net operating income ...... / $274,000 / $ 450,000
Required:
1.Determine the unit product cost under:
a. Absorption costing.
b. Variable costing.
2.Prepare contribution format variable costing income statements for May and June.
3.Reconcile the variable costing and absorption costing net operating incomes.
PROBLEM 6–21BAbsorption and Variable Costing; Production Constant, Sales Fluctuate[LO1 , LO2, LO3]
CHECK FIGURE
(1b) Net operating loss: $(42,600)
(3a) Net operating income: $32,100
Alice Bohne obtained a patent on a small electronic device and organized Bohne Products, Inc., to produceand sell the device. During the first month of operations, the device was very well received on the market,so Ms. Bohne looked forward to a healthy profit. For this reason, she was surprised to see a loss for themonth on her income statement. This statement was prepared by her accounting service, which takes greatpride in providing its clients with timely financial data. The statement follows:
Bohne Products, Inc.Income Statement
Sales (21,000 units) ...... / $762,300
Variable expenses:
Variable cost of goods sold ...... / $254,100
Variable selling and administrative expenses ..... / 161,700 / 415,800
Contribution margin ...... / 346,500
Fixed expenses:
Fixed manufacturing overhead ...... / 194,400
Fixed selling and administrative expenses ...... / 219,000 / 413,400
Net operating loss ...... / $(66,900)
Ms. Bohne is discouraged over the loss shown for the month, particularly because she had planned touse the statement to encourage investors to purchase stock in the new company. A friend, who is a CPA,insists that the company should be using absorption costing rather than variable costing. He argues that ifabsorption costing had been used, the company would probably have reported a profit for the month.
Selected cost data relating to the product and to the first month of operations follow:
Units produced ...... / 24,000Units sold ...... / 21,000
Variable costs per unit:
Direct materials ...... / $7.40
Direct labor ...... / $3.00
Variable manufacturing overhead ...... / $1.70
Variable selling and administrative expenses .... / $7.70
Required:
1.Complete the following:
a.Compute the unit product cost under absorption costing.
b.Redo the company’s income statement for the month using absorption costing.
c.Reconcile the variable and absorption costing net operating income (loss) figures.
2.During the second month of operations, the company again produced 24,000 units but sold 27,000 units.(Assume no change in total fixed costs.)
a.Prepare a contribution format income statement for the month using variable costing.
b.Prepare an income statement for the month using absorption costing.
c.Reconcile the variable costing and absorption costing net operating incomes.
PROBLEM 6–22BRestructuring a Segmented Income Statement [LO4]
CHECK FIGURE
(3) Middle Europe segment margin: €189,000
DrentheBV of the Netherlands is a wholesale distributor of Dutch cheeses that it sells throughout theEuropean Community. Unfortunately, the company’s profits have been declining, which has caused considerableconcern. To help understand the condition of the company, the managing director of the companyhas requested that the monthly income statement be segmented by sales territory. Accordingly, thecompany’s accounting department has prepared the following statement for March, the most recent month.(The Dutch currency is the euro which is designated by €.)
Sales TerritorySouthern Europe / Middle Europe / Northern Europe
Sales ...... / €311,000 / €804,000 / €698,000
Territorial expenses (traceable):
Cost of goods sold ...... / 98,000 / 240,000 / 311,000
Salaries ...... / 55,000 / 52,000 / 105,000
Insurance ...... / 8,700 / 16,000 / 13,500
Advertising ...... / 105,000 / 241,000 / 242,000
Depreciation ...... / 19,000 / 32,000 / 29,000
Shipping ...... / 13,000 / 34,000 / 39,000
Total territorial expenses ...... / 298,700 / 615,000 / 739,500
Territorial income (loss)
before corporate expenses ...... / 12,300 / 189,000 / (41,500)
Corporate expenses:
Advertising (general) ...... / 18,000 / 38,000 / 38,000
General administrative ...... / 20,000 / 20,000 / 20,000
Total corporate expenses...... / 38,000 / 58,000 / 58,000
Net operating income (loss) ...... / €(25,700) / €131,000 / €(99,500)
Cost of goods sold and shipping expenses are both variable; other costs are all fixed. DrentheBVpurchases cheeses at auction and from farmers’ cooperatives, and it distributes them in the three territorieslisted above. Each of the three sales territories has its own manager and sales staff. The cheeses varywidely in profitability; some have a high margin and some have a low margin. (Certain cheeses, after havingbeen aged for long periods, are the most expensive and carry the highest margins.)
Required:
1.List any disadvantages or weaknesses that you see to the statement format illustrated above.
2.Explain the basis that is apparently being used to allocate the corporate expenses to the territories. Doyou agree with these allocations? Explain.
3.Prepare a new segmented contribution format income statement for May. Show a Total column as wellas data for each territory. In addition, for the company as a whole and for each sales territory, showeach item on the segmented income statement as a percent of sales.
4.Analyze the statement that you prepared in (3) above. What points that might help to improve thecompany’s performance would you bring to management’s attention?
PROBLEM 6–23BPrepare and Interpret Statements; Changes in Both Sales and Production; LeanProduction [LO1 , LO2, LO3]
CHECK FIGURE
(1) Year 3 net operating income: $10,000
Electromix, Inc., manufactures and sells a unique electronic part. Operating results for the first three years ofactivity were as follows (absorption costing basis):
Year 1 / Year 2 / Year 3Sales ...... / $1,000,000 / $800,000 / $1,000,000
Cost of goods sold ...... / 760,000 / 512,000 / 788,500
Gross margin ...... / 240,000 / 288,000 / 211,500
Selling and administrative expenses ...... / 230,000 / 198,000 / 230,000
Net operating income (loss) ...... / $ 10,000 / $ 90,000 / $ (18,500)
Sales dropped by 20% during Year 2 due to the entry of several foreign competitors into the market.Electromixhad expected sales to remain constant at 40,000 units for the year; production was set at 50,000 unitsin order to build a buffer of protection against unexpected spurts in demand. By the start of Year 3, managementcould see that spurts in demand were unlikely and that the inventory was excessive. To work offthe excessive inventories, Electromixcut back production during Year 3, as shown below:
Year 1 / Year 2 / Year 3Production in units ...... / 40,000 / 50,000 / 32,000
Sales in units ...... / 40,000 / 32,000 / 40,000
Additional information about the company follows:
a.The company’s plant is highly automated. Variable manufacturing costs (direct materials, direct labor,and variable manufacturing overhead) total only $4 per unit, and fixed manufacturing overhead coststotal $600,000 per year.
b.Fixed manufacturing overhead costs are applied to units of product on the basis of each year’sproduction. That is, a new fixed overhead rate is computed each year.
c.Variable selling and administrative expenses are $4 per unit sold. Fixed selling andadministrativeexpenses total $70,000 per year.
d.The company uses a FIFO inventory flow assumption.
Electromix’s management can’t understand why profits tripled during Year 2 when sales dropped by20%, and why a loss was incurred during Year 3 when sales recovered to previous levels.
Required:
1.Prepare a contribution format variable costing income statement for each year.
2.Refer to the absorption costing income statements.
a.Compute the unit product cost in each year under absorption costing. (Show how much of this costis variable and how much is fixed.)
b.Reconcile the variable costing and absorption costing net operating incomes for each year.
3.Refer again to the absorption costing income statements. Explain why net operating income washigher in Year 2 than it was in Year 1 under the absorption approach, in light of the fact that fewer unitswere sold in Year 2 than in Year 1.
4.Refer again to the absorption costing income statements. Explain why the company suffered a loss inYear 3 but reported a profit in Year 1, although the same number of units was sold in each year.
5. a.Explain how operations would have differed in Year 2 and Year 3 if the company had been usingLean Production with the result that ending inventory was zero.
b.If Lean Production had been in use during Year 2 and Year 3, and the predetermined overheadrate is based on 40,000 units per year, what would the company’s net operating income (orloss) have been in each year under absorption costing? Explain the reason for any differencesbetween these income figures and the figures reported by the company in the statements on theprevious page.
PROBLEM 6–24BSegmented Income Statements [LO4]
CHECK FIGURE
(1) Flour segment margin: $74,800
Streeterville Foods, Inc., has recently purchased a small mill that it intends to operate as one of its subsidiaries.The newly acquired mill has three products that it offers for sale—wheat cereal, pancake mix, and flour.Each product sells for $10 per package. Materials, labor, and other variable production costs are $4.90 per bag of wheat cereal, $6.10 per bag of pancake mix, and $3.10 per bag of flour. Sales commissions are 10%of sales for any product. All other costs are fixed.
The mill’s income statement for the most recent month is given below:
Product LineTotal
Company / Wheat
Cereal / Pancake Mix / Flour
Sales ...... / $1,170,000 / $390,000 / $490,000 / $290,000
Expenses:
Materials, labor, and other .... / 579,900 / 191,100 / 298,900 / 89,900
Sales commissions ...... / 117,000 / 39,000 / 49,000 / 29,000
Advertising ...... / 156,050 / 73,000 / 50,000 / 33,050
Salaries ...... / 98,500 / 43,300 / 10,200 / 45,000
Equipment depreciation ...... / 58,500 / 19,500 / 24,500 / 14,500
Warehouse rent ...... / 23,400 / 7,800 / 9,800 / 5,800
General administration ...... / 84,000 / 28,000 / 28,000 / 28,000
Total expenses ...... / 1,117,350 / 401,700 / 470,400 / 245,250
Net operating income (loss) ..... / $ 52,650 / $(11,700) / $ 19,600 / $ 44,750
The following additional information is available about the company:
a.The same equipment is used to mill and package all three products. In the above income statement,equipment depreciation has been allocated on the basis of sales dollars. An analysis of equipmentusage indicates that it is used 40% of the time to make wheat cereal, 50% of the time to make pancakemix, and 10% of the time to make flour.
b.All three products are stored in the same warehouse. In the above income statement, the warehouserent has been allocated on the basis of sales dollars. The warehouse contains 46,800 square feet of space, of which 8,000 square feet are used for wheat cereal, 14,000 square feet are used for pancake mix, and 24,800 square feet are used for flour. The warehouse space costs the company $0.50 persquare foot per month to rent.
c.The general administration costs relate to the administration of the company as a whole. In the aboveincome statement, these costs have been divided equally among the three product lines.
d.All other costs are traceable to the product lines.
StreetervilleFoods’ management is anxious to improve the mill’s 4.5% margin on sales.
Required:
1.Prepare a new contribution format segmented income statement for the month. Adjust the allocationof equipment depreciation and warehouse rent as indicated by the additional information provided.
2.After seeing the income statement in the main body of the problem, management has decided toeliminate the wheat cereal because it is not returning a profit, and to focus all available resources onpromoting the pancake mix.
a.Based on the statement you have prepared, do you agree with the decision to eliminate the wheatcereal? Explain.
b.Based on the statement you have prepared, do you agree with the decision to focus all availableresources on promoting the pancake mix? Assume that an ample market is available for all threeproducts. (Hint: compute the contribution margin ratio for each product.)
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Chapter 6 Alternate Problems6-1