Problem No.

1
The K Corporation makes major household appliances such as refrigerators, stoves,
and dishwashers. Sales are heavily dependent on the number of housing starts and the
level of disposable income. Next year, the number of housing starts in the Central
region is expected to be the same as this year's; however, about two-thirds of these
starts will be for rental apartments as compared to an historical average of one-third.
The remaining housing starts will be for single-family homes and upscale
condominiums.
K generally makes two models of each product: Economy (fully functional, but with few
special features) and Prestige (with the most popular special features). BoSan
assumes a product mix of 40% Economy and 60% Prestige.
Required:
1. Explain how a cost-volume-profit (CVP) analysis may be used by management.

- Cost-volume-profit (CVP) analysis helps managers understand the

relationships among cost, volume, and profit. As it focuses on the following
factors; selling price, number of unit (sales volume), variable per unit, total fixed
cost, and product mix it enables them to make important decisions such as what
products and services to offer, what prices to charge, what marketing strategy to
use and what cost structure to maintain.

2. One of the assumptions that underlies CVP analysis is a constant sales mix over
the relevant range of activity. What are three other assumptions of CVP
analysis?

- The selling price per unit is constant.

- The cost behavior is linear over a relevant range.
- The number of units manufactured and sold is the same

3. Describe how the percentage change in rental units could create a problem with
BoSan's CVP analysis.

- With the change to less single-family homes and upscale condominiums

to more rental apartments this may result for demand on the economy models to
increase relative to the demand for Prestige models. This shift in the customer’s
buying behavior could create a problem since the Cost Value Profit model
assumes a constant sales mix. The change in the mix could invalidate previous
Cost Value Profit studies.
Problem No. 2
Low esteem Corporation reported sales revenues of $1,850,000 for the period just
ended. Cost of goods sold, selling expenses, and administrative expenses totaled
$1,200,000, $280,000, and $170,000, respectively. A detailed analysis of the latter
three amounts revealed respective fixed cost components of $780,000, $60,000, and
$130,000.
Required:
1. Determine the amounts that High Point would report on a traditional income
statement for (1) gross margin, (2) contribution margin, and (3) net income.
(1) Gross margin:

Sales revenue $1,850,000.00

Less: Cost of goods sold $1,200,000.00
Gross margin $ 650,000.00

(2) Contribution margin:

Contribution margin $0 (not disclosed on traditional IS)

(3) Net income:

Gross margin $650,000.00

Less: Selling expenses $280,000.00
Administrative expenses $170,000.00
Net income $200,000.00

2. Determine the amounts that High Point would report on a contribution income
statement for (1) gross margin, (2) contribution margin, and (3) net income.
(1) Gross margin:

Gross margin $0 (not disclosed on contribution IS)

(2) Contribution margin:

Total Fixed Variable
Expenses Expenses Expenses
Cost of goods sold $1,200,000 $780,000 $420,000
Selling expenses $280,000 $60,000 $220,000
Administrative expenses $170,000 $130,000 $40,000
Total $1,650,000 $970,000 $680,000
 Sales revenue $1,850,000.00
Less: Variable expenses $680,000.00
Contribution margin $1,170,000.00

(3) Net income:

Contribution margin $1,170,000.00

Less: Fixed expenses $970,000.00
Net income $200,000.00

3. Which of the two income statements (traditional or contribution) is more useful for
studying a company's cost-volume-profit relationships.

- Contribution income statement would be more useful as it already

categorizes its costs into fixed and variable cost.
Problem No. 3
Absorption and variable costing are two different methods of measuring income and
costing inventory.
Required:
1. Product costs are defined as costs associated with the manufacturing process.
How does the operational definition of product cost differ between absorption
costing and variable costing?

- The operational definition of product cost differ between the two in a way
that the former costing defined fixed manufacturing overhead costs as product
cost while the latter costing view it as a period cost.

2. An absorption-costing income statement will report gross profit or gross margin

whereas a variable-costing income statement will report contribution margin.
What is the difference between these terms?

- Gross profit or gross margin is the difference between sales and cost of
goods sold. While, on the other hand, contribution margin is the difference
between sales and variable expenses only, as it ignores fixed costs/expenses
upon calculating the contribution margin.

3. Check Inc., has greatly modified its manufacturing process to reduce non-value-
added activities and has also adopted the just-in-time philosophy. As a result,
the average finished-goods inventory has dropped from six weeks' supply to
eight business days' supply. In view of these changes, will the difference in
operating income between variable costing and absorption costing be greater or
less than in the past? Explain.

- In view of those changes the difference in operating income between the

two costing will be reduced. As the inventories of work-in-process and finished
goods were previously smaller, changes in inventories will be less significant
which will result to a reduced difference in income.
Problem No. 4
B Company manufactures sleeping bags that sell for $30 each. The variable standard
costs of production are $19.50. Budgeted fixed manufacturing overhead is $100,000,
and budgeted production is 10,000 sleeping bags. The company actually manufactured
12,500 bags, of which 11,000 were sold. There were no variances during the year
except for the fixed-overhead volume variance. Variable selling and administrative
costs are $0.50 per sleeping bag sold; fixed selling and administrative costs are $5,000.
Required:
1. Calculate the standard product cost per sleeping bag under absorption costing
and variable costing.

Variable cost per unit:

Variable cost per unit (given) $19.50

Fixed cost per unit:

Fixed cost $100,000.00
Divide: No. of units 10,000 $10.00
Absorption cost per unit $29.50

2. Compute the fixed-overhead volume variance.

Budgeted fixed overhead $100,000.00

Actual fixed overhead:
No. of units sold 12,500
Multiply: Fixed cost per unit $10.00 $125,000.00
Fixed overhead variance ($25,000.00)

3. Prepare income statements for the year by using absorption costing and variable
costing.

- See next page for answers.

Absorption Costing Income Statement:
B Company
Absorption-Costing Income Statement
For the Year-Ended December 31, 20XX

Sales revenue (11,000 units x $30) $330,000

Less: Cost of goods sold (11,000 units x $29.50) $324,500
Gross margin (standard) $5,500
Fixed overhead variance $25,000
Gross margin (actual) $30,500
Less: Operating expenses [(11,000 units x $0.50) + 5,000] $10,500
Net income $20,000

Variable Costing Income Statement:

B Company
Variable-Costing Income Statement
For the Year-Ended December 31, 20XX

Sales revenue (11,000 units x $30) $330,000

Less: Variable cost of goods sold
(11,000 units x $19.50) $214,500
Variable operating expenses
(11,000 units x $0.50) $5,500 $220,000
Contribution margin $110,000
Less: Fixed costs ($100,000 + $5,000) $105,000
Net income $5,000
Problem No. 5
J Corporation, which uses throughput costing, began operations at the start of the
current year. Planned and actual production equaled 20,000 units, and sales totaled
17,500 units at $95 per unit. Cost data for the year were as follows:
Direct materials (per unit) $ 18
Conversion cost:
Direct labor 160,000
Variable manufacturing overhead 280,000
Fixed manufacturing overhead 340,000
Selling and administrative costs (total) 430,000
The company classifies direct materials as a throughput cost.
Required:
1. Compute the company's total cost for the year.

Direct materials (20,000 units x $18) $360,000.00

Direct labor $160,000.00
Variable manufacturing overhead $280,000.00
Fixed manufacturing overhead $340,000.00
Selling and administrative costs $430,000.00
Total cost $1,570,000.00

2. How much of this cost would be held in year-end inventory under (1) absorption
costing, (2) variable costing, and (3) throughput costing?
Absorption Variable Throughput
costing costing costing
Direct materials $360,000 $360,000 $360,000
Direct labor $160,000 $160,000
Variable manufacturing overhead $280,000 $280,000
Fixed manufacturing overhead $340,000
Total product cost (TPC) $1,140,000 $800,000 $360,000

Cost per unit (TPC/ 20,000 units) $57 $40 $18

Multiply: No. of units still in inventory* 2,500 2,500 2,500
Year-end inventory cost $142,500 $100,000 $45,000
 (1) Absorption costing = $142,500
(2) Variable costing = $100,000
(3) Throughput costing = $45,000

3. How much of the company's total cost for the year would appear on the period's
income statement under (1) absorption costing, (2) variable costing, and (3)
throughput costing?

Absorption Variable Throughput

costing costing costing
Total costs for the year (as computed in
letter A) $1,570,000 $1,570,000 $1,570,000
Year-end inventory cost (as computed in
letter B) $142,500 $100,000 $45,000
Total costs appearing in the income
statement $1,427,500 $1,470,000 $1,525,000

(1) Absorption costing = $1,427,500

(2) Variable costing = $1,470,000
(3) Throughput costing = $1,525,000

4. Compute the year's throughput-costing net income.

Sales revenue (17,500 units x $95) $1,662,500.00

Less: Throughput costing (as computed in letter C) $1,525,000.00
Throughput income $137,500.00