Solutions (10/27)

Exercise 5A-5
1. Sales (35,000 units $25 per unit)...............................................
Variable expenses:
Variable cost of goods sold
(35,000 units $12 per unit*)...............................................
Variable selling and administrative expenses
(35,000 units $2 per unit)...................................................
Contribution margin......................................................................
Fixed expenses:
Fixed manufacturing overhead..................................................
Fixed selling and administrative expenses................................
Net operating income....................................................................
* Direct materials.....................................................
Direct labor...........................................................
Variable manufacturing overhead..........................
Total variable manufacturing cost.........................

$875,000
$420,000
70,000
160,000
210,000

490,000
385,000
370,000
$ 15,000

$5
6
1
$12

2. The difference in net operating income can be explained by the $20,000 in fixed manufacturing
overhead deferred in inventory under the absorption costing method:
Variable costing net operating income.........................................................
Add fixed manufacturing overhead cost deferred in inventory under
absorption costing (5,000 units $4 per unit in fixed manufacturing
cost)...........................................................................................................
Absorption costing net operating income.....................................................

$15,000
20,000
$35,000

Problem 5A-8
1. The unit product cost under variable costing is computed as follows:
Direct materials.................................................
Direct labor........................................................
Variable manufacturing overhead......................
Variable costing unit product cost......................

$4
7
1
$12

With this figure, the variable costing income statements can be prepared:
Year 1
Unit sales...................................................................................
40,000 units
Sales...........................................................................................
Variable expenses:
Variable cost of goods sold
(@ $12 per unit).................................................................
Variable selling and administrative expenses (@ $2 per unit)
Total variable expenses..............................................................
Contribution margin...................................................................
Fixed expenses:
Fixed manufacturing overhead...............................................
Fixed selling and administrative expenses.............................
Total fixed expenses...................................................................
Net operating income.................................................................

Year 2
50,000 units

$1,000,000

$1,250,000

480,000
80,000
560,000
440,000

600,000
100,000
700,000
550,000

270,000
130,000
400,000
$ 40,000

270,000
130,000
400,000
$ 150,000

2. The reconciliation of absorption and variable costing follows:

Variable costing net operating income.......................................
Add (deduct) fixed manufacturing overhead deferred in
(released from) inventory under absorption costing (5,000
units $6 per unit in Year 1; 5,000 units $6 per unit in
Year 2)...................................................................................
Absorption costing net operating income...................................

Year 1
$40,000

30,000
$70,000

Year 2
$150,000

(30,000)
$120,000