Financial and Managerial Accounting

Managerial Accounting 1B

 

Financial and Managerial Accounting

 

Chapter 19

 

1.

 

Exercise 19-1 Income reporting under absorption costing and variable costing L.O. P2

 

Adams Company, a manufacturer of in-home decorative fountains, began operations on September 1 of the current year. Its cost and sales information for this year follows.

 

 

 

       
  Production costs      
     Direct materials $ 40   per unit
     Direct labor $ 60   per unit
     Overhead costs for the year      
         Variable overhead $ 3,000,000  
         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  per unit

 

 

 

1. Prepare an income statement for the company using absorption costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)

 

 

 

 

 

2. Prepare an income statement for the company using variable costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)

 

 

 

 

 

3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

 

 

 

 

 

Exercise 19-4 Income reporting under absorption costing and variable costing L.O. P2

 

[The following information applies to the questions displayed below.]

 

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

 

 

 

       
  Sales price per unit $ 320  per unit
  Units produced this year   115,000  units
  Units sold this year   118,000  units
  Units in beginning-year inventory   3,000  units
  Beginning inventory costs      
       Variable (3,000 units × $135) $ 405,000  
       Fixed (3,000 units × $80)   240,000  
 


 
       Total $ 645,000  
  Production costs this year      
       Direct materials $ 40  per unit
       Direct labor $ 62  per unit
       Overhead costs this year      
           Variable overhead $ 3,220,000  
           Fixed overhead $ 7,400,000  
  Nonproduction costs this year      
       Variable selling and administrative $ 1,416,000  
       Fixed selling and administrative   4,600,000  

 

 

 

 

 

2.Exercise 19-4 Part 1

 

1. Prepare the current year income statement for the company using absorption costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.)

 

 

 

3.Exercise 19-4 Part 2

 

2. Prepare the current year income statement for the company using variable costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.)

 

 

 

4.Exercise 19-6 Converting variable costing income to absorption costing income L.O. P2, P4

 

Lyon Furnaces 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 furnaces were produced and 225 were sold; this left 150 furnaces in ending inventory. The income statement information under variable costing follows.

 

 

 

     
  Sales (225 × $1,600) $ 360,000
  Variable production cost (225 × $625)   140,625
  Variable selling and administrative expenses (225 × $65)   14,625
 


  Contribution margin   204,750
  Fixed overhead cost   56,250
  Fixed selling and administrative expense   75,000
 


  Net income $ 73,500
 





 

 

 

1. Prepare this company’s income statement for its first month of operations under absorption costing.(Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)

 

 

 

5.

 

Exercise 19-9 Contribution margin format income statement L.O. P3

 

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 21, 2011
  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
     





 

 

 

Required:

 

 

 

1. Prepare an income statement for this current year using the contribution margin format. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)

 

 

 

 

 

2. For each ATV sold during this year, what is the contribution toward covering fixed expenses and that toward earning income? (Omit the “$” sign in your response.)

 

 

 

  Contribution margin per ATV  

 

6.

 

Exercise 19-11 Absorption costing and over-production L.O. C2

 

Rourke 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  
  Direct labor $ 6.50  per unit
  Variable overhead $ 11.00  per unit
  Fixed overhead $ 720,000  in total

 

 

 

If Rourke 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. (Omit the “$” sign in your response.)

 

 

 

  Gross margin    

 

7.Problem 19-1A Variable costing income statement and conversion to absorption costing income L.O. P2, P4

 

Torres Company began operations this year. During this first year, the company produced 100,000 units and sold 80,000 units. The absorption costing income statement for its first year of operations follows.

 

 

 

 
  Sales (80,000 units × $50 per unit)     $ 4,000,000
  Cost of goods sold        
     Beginning inventory $ 0    
     Cost of goods manufactured (100,000 units × $30 per unit)   3,000,000    
 


   
     Cost of good available for sale   3,000,000    
     Ending inventory (20,000 × $30)   600,000    
 


   
     Cost of goods sold       2,400,000
     


  Gross margin       1,600,000
  Selling and administrative expenses       530,000
     


  Net income     $ 1,070,000
     




 

 

 

Additional Information

 

 

 

a. Selling and administrative expenses consist of $350,000 in annual fixed expenses and $2.25 per unit in variable selling and administrative expenses.
b. The company’s product cost of $30 per unit is computed as follows.

 

 

 

 
  Direct materials $ 5  per unit
  Direct labor $ 14  per unit
  Variable overhead $ 2  per unit
  Fixed overhead ($900,000 / 100,000 units) $ 9  per unit

 

 

 

Required:

 

 

 

1. Prepare an income statement for the company under variable costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)
 
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