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Management Accounting Tauseef A.Qureshi

SOLUTIONS
Assignment No 2 (Variable Costing)

Problem No 1: (Price Company)

(A) F.MOH = 240,000 ÷ 100,000 = $2.40

1. AC: 2.40(DM) + 1.60 (DL) + 0.80 (V.MOH) + 2.40 (F.MOH) = $7.20
2. VC: 2.40(DM) + 1.60 (DL) + 0.80 (V.MOH) = $4.80

Ending Inventory = 100,000 – 90,000 = 10,000 P≥S

Ending Inventory (AC) = 10,000 × $7.20 = $72,000
Ending Inventory (VC) = 10,000 × $4.80 = $48,000
Difference $24,000
(B)
1. Absorption Costing

Sales (90,000×$12) $1,080,000

Cost of goods sold
Beg Inventory 0
Production (100,000×$7.20) 720,000
End Inventory (10,000×$7.20) (72,000) (648,000)
Gross Margin 432,000
Selling and Admin expenses:
Fixed 128,000
Variable (90,000×$0.80) 72,000 200,000
Net Income 232,000

2. Variable Costing

Sales (90,000×$12) 1,080,000

Variable Costs 0
Beg Inv 0
Production (100,000×$4.80) 480,000
End Inventory (10,000×$4.80) (48,000) (432,000)
MM 648,000
V. S&A (90,000×0.80) (72,000)
CM 576,000
Fixed Costs:
Manufacturing 240,000
S&A 128,000 368,000
Net Income 208,000
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(C) NI (AC) – NI (VC) = $232,000 - $ 208,000 = $24,000

10,000 (Increase in inventory) × $2.40 (FC rate) = $24,000

AC (NI) – VC (NI) = F.M0H (End Inv) – F.MOH (Beg Inv)

232,000 - 208,000 = 10,000 × $2.40 – 0

$24,000 = $24,000

Problem No 2: (Calco Company)

(A) F.MOH Rate = $100,000 ÷ 100,000 = $ 1.00 per unit

AC cost assigned = 60,000 × $1.00 = $60,000 assigned to products
(B) SP = $800,000÷100,000 = $8.00 V. Mfg Rate = $300,000 ÷100,000 = $3
V.S &A = $20,000÷100,000 = $0.20

1. Absorption Costing

Sales (30,000×$8) $240,000

Cost of goods sold:
V. Mfg (30,000 × $3) 90,000
F. Mfg (30,000 ×$ 1) 30,000 (120,000)
Gross Margin 120,000
Selling and Admin expenses(6 months)
Fixed (80,000÷2) 40,000
Variable (30,000×$0.20) 6,000 46,000
Net Income $74,000

2. Variable Costing

Sales (30,000×$8) $240,000

Variable Costs:
V.MOH (30,000 × 3) 90,000
V. S &A (30,000 × 0.20) 6,000 (96,000)
CM 144,000
FC
MOH (100,000÷2) 50,000
S & A (38,000÷2)) 40,000 90,000
Net Income $54,000
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(C) AC (NI) – VC (NI) = F. Mfg (End inv ) – F. Mfg (Beg Inv)

74,000 - 54,000 = (30,000 × $ 1) – (10,000×1)
20,000 = 20,000
For 6 months, overhead was applied by $10,000
Actual Production 60,000
Budgeted Production 50,000

Problem No 3: (Children Manufacturing)

Beginning Inventory 15,000 units Ending inventory 25,000

Production 170,000 Maximum capacity 200,000
Sales 160,000 Normal Capacity 180,000

F.MOH Rate = $315,000 ÷ 180,000 = $ 1.75 per unit

1. Absorption Costing

Sales (160,000×$22) $3,520,000

CGS: 0
V. Mfg (160,000 × 10) 1,600,000
F.MOH (160,000 × 1.75) 280,000 (1,880,000)
Gross Margin 1,640,000
Under applied FOH (180,000-170,000)× $1.75 (17,500)
Adjusted GM 1,622,500
Selling and Admin expenses(6 months)
Fixed 260,000
Variable (160,000×$4) 640,000 900,000
Net Income 722,500

2. Variable Costing

Sales (160,000×$22) $3,520,000

VC:
V. Mfg (160,000 × 10) 1,600,000
V. S &A (160,000 × 4) 640,000 (2,240,000)
Contribution Margin 1,280,000
FC:
Fixed Mfg 315,000
S&A 260,000 575,000
Net Income 705,000

AC (NI) – VC (NI) = F.MIH (End Inv ) – F.MOH (Beg Inv)

722,500 - 705,000 = (25,000 × $ 1.75) – (15,000×1.75)
17,500 = 17,500
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Problem No 4 (Mavis Company)

Units 30,000 (beg) + 550,000 (P) – 540,000 (S) = 40,000 (End)

SP = $ 5 V. Mfg = $3
Fixed Manufacturing OH = 420,000÷60,000 = $7 per machine hour
(10 units per machine hour) $ 7 ÷ 10 = $0.70 per machine hour
(1) Absorption costing

Sales in units 540,000

Sales in dollars @ $ 5 per unit $2,700,000
Cost of goods sold
Beg Inventory 30,000×$3.7 111,000
V. Mfg cost 550,000 × $3 1,650,000
F. Mfg cost 550,000 × $0.7 385,000
Less Ending 40,000× $3.7 (148,000)
CGS 1,998,000
Plus Adjustment (600,000 – 550,000) × $0.7 U 35,000
Adjusted CGS 2,033,000
Gross Margin 667,000
Operating Expenses:
Fixed Marketing & Admin cost 120,000
Variable Marketing &Admin cost 540,000× $1 540,000
Total Operating expenses 660,000
Net Income $7,000

2. Variable costing

Sales in units 540,000

Sales in dollars @ $ 5 per unit $2,700,000
Less Variable expenses
Variable Mfg cost 540,000×$3 (1,620,000)
Variable Mkt cost 540,000×$1 (540,000)
Contribution margin 540,000
Less Fixed Expenses:
Fixed manufacturing 420,000
Fixed marketing 120,000
Total Fixed expenses 540,000
Operating Income $0

NI (AC) – NI (VC) = Fixed Mfg (ending inventory) – Fixed Mfg (beginning inventory)
7,000 – 0 = 40,000× 0.7 – 30,000 × 0.7 $7,000 = $7,000
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Problem No 5: (Rehe Company)

(a) Variable Costing Year 1 Year 2

Sales in units 1,000 1,200
Sales in dollars @ $ 3 per unit $3,000 $3,600
Less Variable expenses
Beg Inventory 0, 400×0.5 0 200
Production - Variable Mfg cost 1,400×0.5 , 1,000 × 0.5 700 500
Less ending inventory - 400×0.5, 200×0.5 (200) (100)
500 600
Manufacturing Margin $2,500 $3,000
Less Variable marketing cost 1,000×$1 , 1,200×$1 (1,000) (1,200)
Contribution Margin 1,500 1,800
Less Fixed Expenses:
Fixed manufacturing 700 700
Fixed marketing 400 400
Total Fixed expenses 1,100 1,100
Operating Income $400 $700

(b) Absorption costing Year 1 Year 2

Sales in units 1,000 1,200
Sales in dollars @ $ 3 per unit $3,000 $3,600
Cost of goods sold
Beg Inventory 0 , 400×1 0 400
Mfg cost 1,400×$1 , 1,000 × $1.2 (0.5+0.7) 1,400 1,200
Less ending inventory - 400×1, 200×1.2 (400) (240)
1,000 1,360
Gross Margin $2,000 $2,240
Less Selling and Administrative expense:
Variable 1,000×1, 1,200×1 1,000 1,200
Fixed 400 400
1,400 1,600
Operating Income $600 $640

Reconciliation

NI (AC) – NI (VC) = Fixed Mfg (ending inventory) – Fixed Mfg (beginning inventory)
Year 1 600 - 400 = 400×0.5 - 0×0.5
Year 2 640 - 700 = 200×0.7 – 400 ×0.5
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Problem No 6: (Orion Company)

1. Absorption Costing 19x7 19x8 19x9

Sales (in units) 50,000 35,000 65,000
Sales in $ ×$12 600,000 420,000 780,000
CGS ×$9 (450,000) (315,000) (585,000)
Gross Margin 150,000 105,000 195,000
Selling and Administrative expenses:
Variable ×$1 50,000 35,000 65,000
Fixed 25,000 25,000 25,000
75,000 60,000 90,000
Net Income 75,000 45,000 105,000

2. Variable Costing 19x7 19x8 19x9

Sales (in units) 50,000 35,000 65,000
Sales in $ ×$12 600,000 420,000 780,000
Variable Cost: (450,000) (315,000) (585,000)
Variable manufacturing ×$6 300,000 210,000 390,000
Variable selling and administrative ×$1 50,000 35,000 65,000
350,000 245,000 455,000
Contribution margin 250,000 175,000 325,000
Fixed Cost:
Manufacturing 150,000 150,000 150,000
Selling and administrative 25,000 25,000 25,000
175,000 175,000 175,000
Net Income $75,000 0 $150,000

1. No Change in Inventory
19x7 – no change in FG inventory Production = Sales
In Variable Costing F.MOH $150,000 is expensed
In Absorption Costing F.MOH (50,000×$3) is expensed

2. Increase in Inventory
19x8 – Increase in FG inventory 15,000 units Production > Sales
In Variable Costing F.MOH $150,000 is expensed
In Absorption Costing F.MOH (35,000×$3) is expensed
Net Income (AC) > Net Income (VC) by $45,000 (150,000 – 105,000)

3. Decrease in Inventory
19x9 – Decrease in FG inventory 15,000 units Production < Sales
In Variable Costing F.MOH $150,000 is expensed
In Absorption Costing F.MOH (65,000×$3) is expensed (50,000+15,000 inv)
Net Income (AC) < Net Income (VC) by $45,000 (195,000 – 150,000)
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Problem No 7: (Mass Company)

Year 2000 1000(beg) + 25,000(P) – 25,000 (S) = 1,000 (End)
Year 2001 1000(beg) + 29,000(P) – 25,000 (S) = 5,000 (End)
Fixed MOH rate = 120,000÷30,000 = $4

(a) Variable Costing 2001

Sales in units 25,000
Sales in dollars @ $ 40 per unit $1,000,000
Less Variable expenses
Beg Inventory 100×24 2,400
Production 29,000×24 696,000
Less ending inventory – 5000×24 (120,000)
MM 400,000
Less Variable marketing cost 25,000×$1.20 (30,000)
Contribution Margin 370,000
Less Fixed Expenses:
Fixed manufacturing OH 120,000
Fixed marketing 190,000
Total Fixed expenses 310,000
Operating Income $60,000

(b) Absorption Costing 2001

Sales in units 25,000
$1,000,0
Sales in dollars @ $ 40 per unit 00
Less Cost of goods sold
Beg Inventory 0, 1000×(24+4) 28,000
Variable Mfg cost 29000×24 696,000
Fixed Mfg cost 29000×4 116,000
Less ending inventory - 5000×28 (140,000)
CGS 700,000
Gross Margin $300,000
Adjustment (30,000 – 29,000) × $4 4,000
Adjusted GM $296,000
Less Selling and Administrative expenses
V. Marketing 25000×1.2 30,000
F. Marketing 190,000
Total 220,000
Operating Income $76,000

76,000 – 60,000 = (5000×4) – (1000×4) 16,000 = 16,000

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Problem No 8: (Stassen Company)

SP = $99 V. Mfg cost = $20 V. Mkt = $19

F. Mfg cost per month = $12,800 F. Mfg cost per unit = 12,800 ÷800 = $16
F. Mkt cost per month = $10,400

(a) Variable Costing Jan Feb

Sales in units 400 750
Sales in dollars @ $ 99 per unit $39,600 $74,250
Less Variable expenses
Beg Inventory 0, 200×20 0 4,000
Variable Mfg cost 600×20 , 650 × 20 12,000 13,000
Less ending inventory - 200×20, 100×20 (4,000) (2,000)
Manufacturing Margin 31,600 59,250
Less Variable marketing cost 400×$19 , 750×$19 (7,600) (14,250)
Contribution Margin $24,000 $45,000
Less Fixed Expenses:
Fixed manufacturing 12,800 12,800
Fixed marketing 10,400 10,400
Total Fixed expenses 23,200 23,200
Operating Income $800 $21,800
(b) Absorption Costing Jan Feb
Sales in units 400 750
Sales in dollars @ $ 99 per unit $39,600 $74,250
Less Cost of goods sold
Beg Inventory 0, 200×36 0 7,200
Variable Mfg cost 600×20 , 650 × 20 12,000 13,000
Fixed Mfg cost 600×16 , 650 × 16 9,600 10,400
Less ending inventory - 200× (20+16), 100×(20+16) (7,200) (3,600)
CGS 14,400 27,000
Gross Margin 25,200 47,250
Adjustment (800-600) × 16 U, (800-650) × 16 3,200 2,400
Adjusted GM 22,000 44,850
Less Selling and Administrative expenses
V. Marketing 400×19, 750×19 7,600 14,250
F. Marketing 10,400 10,400
Total 18,000 24,650
Operating Income $4,000 $20,200
Jan 4,000 – 800 = 200×16 - 0× 16 3,200 = 3,200
Feb 20,200 – 21,800 = (100×16) – (200× 16) -1,600 = -1,600