Chapter – 8

Variable Costing and the Costs of Quality and Sustainability

Problem - 1
A.

Inventoriable costs under variable costing will constitute variable production costs only. Fixed overheads
are not included.

Variable costing
Direct materials used 150,000
Direct labor 80,000
Variable manufacturing overhead 30,000
Inventoriable costs for the
month 260,000

B.

Inventoriable costs under absorption costing will constitute both fixed and variable production costs.

Absorption costing
Direct materials used 150,000
Direct labor 80,000
Variable manufacturing overhead 30,000
Fixed manufacturing overhead 100,000
Inventoriable costs for the
month 360,000

C.

(1) Variable costing

Under variable costing, fixed manufacturing overheads are expensed immediately. Thus, the amount of
fixed manufacturing overhead costs that would be expensed for the month = $100,000. Fixed selling and
administrative costs are expensed immediately since they are not held in inventory, i.e. they are period
costs. Thus, fixed selling and administrative costs that would be expensed for the month = $60,000.

(2) Absorption costing

Fixed production overhead costs are absorbed in inventory through a predetermined fixed production
overhead rate calculated as FOR = = = $5 per unit produced. They
are expensed in the period when the inventory is sold. Thus, the fixed manufacturing overheads that
would be expensed for the month = 18,000 units * $5 = $90,000. Fixed selling and administrative
overhead costs which are period costs are expensed immediately = $60,000.

D.

Variable Costing Income Statement

Sales 18,000*31.25 562,500
Variable manufacturing costs 18,000*13 234,000
Variable selling and administrative costs 18,000*2.55 45,900
Total variable cost of sales (279,900)
Contribution 282,600

Workings

Selling price per unit 625,000/20,000 31.25

Variable manufacturing costs per unit 260,000/20,000 13
Variable selling and administrative costs per unit 51,000/ 20,000 2.55

Problem – 2

A.

Variable costing
Direct materials used 400,000
Direct labor 200,000
Variable manufacturing overhead 120,000
Variable manufacturing costs for the month 720,000

Variable manufacturing costs per unit 720,000/100,000 2

End-of-period finished goods inventory
= Actual production - sales 100,000-90,000 10,000
Cost of end-of-period finished goods inventory 10,000*2 20,000

B.

Ventura Company
Variable Costing Income Statement
Sales 90,000*15 1,350,000
Less: Variable expenses
Variable manufacturing costs 90,000*7.2 648,000
 Variable selling and administrative costs 90,000*0.45 40,500
Total variable cost of sales (688,500)
Contribution 661,500
Less: Fixed expenses
Fixed manufacturing overhead 250,000
Fixed selling and administrative expenses 300,000
(550,000)
Operating income 111,500

Workings

Selling price per unit $15

Variable manufacturing costs per unit 720,000/100,000 7.2
Variable selling and administrative costs per unit 45,000/ 100,000 0.45

C.

Ventura Company
Variable Costing Income Statement
Sales 90,000*15 1,350,000
Less: Cost of goods sold
Variable manufacturing costs 90,000*7.2 648,000
Fixed manufacturing costs 90,000*2.5 225,000
(873,000)
Gross margin 477,000
Less: Selling and administrative expenses
Fixed selling and administrative expenses 300,000
Variable selling and administrative expenses 90,000*0.45 40,500
(340,500)
Operating income 136,500

Workings

Fixed manufacturing overhead absorption rate

= anticipated fixed production
costs/anticipated production 250,000/100,000 2.5

Problem – 3
A.

Ending finished goods inventory

= Actual production - sales 200,000-170,000 30,000

B.

(1)

Variable costing
Variable manufacturing costs 30,000*18 540,000
Cost of ending finished goods inventory 540,000

(2)

Absorption costing
Variable manufacturing costs 30,000*18 540,000
Fixed manufacturing costs 30,000*4.2 126000
Cost of ending finished goods inventory 666,000

Workings

Fixed manufacturing overhead absorption rate

= anticipated fixed production
costs/anticipated production 840,000/200,000 4.2

C.

Horatio Inc.
Variable Costing Income Statement
Sales 170,000*48 8,160,000
Less: Variable expenses
Variable manufacturing costs 170,000*18 3,060,000
Variable selling and administrative costs 170,000*7 1,190,000
Total variable cost of sales (4,250,000)
Contribution 3,910,000
Less: Fixed expenses
Fixed manufacturing overhead 840,000
Fixed selling and administrative expenses 925,000
(1,765,000)
Operating income 2,145,000
D.

Horatio Inc.
Variable Costing Income Statement
Sales 170,000*48 8,160,000
Less: Cost of goods sold
Variable manufacturing costs 170,000*18 3,060,000
Fixed manufacturing costs 170,000*4.2 714,000
(3,774,000)
Gross margin 4,386,000
Less: Selling and administrative expenses
Fixed selling and administrative expenses 925,000
Variable selling and administrative expenses 170,000*7 1,190,000
(2,115,000)
Operating income 2,271,000

Chapter- 9: Financial Planning and Analysis: The Master Budget

Problem: 1

Butler Manufacturing
Direct Materials Usage Budget
For the Third Quarter of 2019
July August September
Regular
Units of Regular 10,000 6,000 9,000
Pounds of direct materials per unit of Regular 2 2 2
Total pounds of direct materials required for Regular 20,000 12,000 18,000
Deluxe
Units of Deluxe 15,000 10,000 14,000
Pounds of direct materials per unit of Deluxe 5 5 5
Total pounds of direct materials required for Deluxe 75,000 50,000 70,000

Butler Manufacturing
Direct Materials Purchases Budget
For the Third Quarter of 2019
 Regular
July August September
Required ending inventory 3,600 54,00 4,800
Add: Current usage 20,000 12,000 18,000
Total material requirement 23,600 17,400 22,800
Less: Opening stock (6,000) (3,600) (5,400)
Materials to be purchased (Units) 17,600 13,800 17,400
Cost per unit $5 $5 $5
Material purchases budget ($) $88,000 $69,000 $87,000

Deluxe
July August September
Required ending inventory 10,000 14,000 12,000
Add: Current usage 75,000 50,000 70,000
Total material requirement 85,000 64,000 82,000
Less: Opening stock (15,000) (10,000) (14,000)
Materials to be purchased (Units) 70,000 54,000 68,000
Cost per unit $8 $8 $8
Material purchases budget ($) $560,000 $432,000 $544,000

Workings

Required ending inventory Regular Deluxe

July 3,600 10,000
August 5,400 14,000
September 4,800 12,000

Problem – 2

(a)

Cost of goods sold

Opening stock 0
Add: Production
Direct materials 425,000
Direct labor 40,000*1.5*12 720,000
Manufacturing overhead 40,000*1.5*6 360,000
Total production cost 1,505,000
Less: Closing stock -
Cost of goods sold 1,505,000
Workings

Direct materials purchases budget Pounds

Current usage 40,000*2 80,000

Add: Ending inventory of raw materials 15,000

Total material requirement 95,000

Less: Opening stock -10,000
Materials to be purchased (Units) 85,000
Cost per unit $5.00
Material purchases budget ($) $425,000

(b)

Walt Bach Company

Budgeted Income Statement for 2019
Sales 40,000*50 2,000,000
Less: Cost of goods sold (1,505,000)
Gross margin 495,000
Less: Selling and administrative expenses (200,000)
Operating income 295,000
Less: Income taxes (88,500)
Net income 206,500

Problem – 3

Tall Oak, Inc.

Direct Materials Purchases Budget
For the Month of May
May
Required ending inventory 2,400
Add: Current usage 10,500
Total material requirement 12,900
Less: Opening stock (2,100)
Materials to be purchased (Units) 10,800
Cost per unit $4.50
Material purchases budget ($) $48,600
Workings

Tall Oak, Inc.

Direct Materials Usage Budget
For the month of May
May June
Units of Rulers 42,000 48,000
Pounds of resin per Ruler 0.25 0.25
Total pounds of resin required for Rulers 10,500 12,000