P6-16A

1/
Absorption Costing unit product cost for the first month of operation
a)
Per unit
Direct materials $ 15.00
Direct labor $ 7.00
Variable manufacturing overhead $ 2.00
Fixed manufacturing overhead $ 16.00
Total unit product cost $ 40.00

b) Absorption costing income statement

Beginning inventory -
Number of unit produced 40000
Number of unit sold 35000
Ending inventory 5000
Amount Per unit
Sales $ 2,100,000 $ 60
Cost of goods sold
Variable cost of goods sold $ 40,000 $ 24
Fixed manufacturing overhead $ 60,000 $ 16
Cost of goods sold $ 1,400,000 $ 40
Gross margin $ 700,000 $ 20
Selling and adminsitrative expense
Variable selling and adminsitrative expense $ 70,000 $ 2
Fixed selling and adminsitrative expense $ 560,000
Total selling and adminsitrative expense $ 630,000
Net operating income (loss) $ 70,000
2/

a) Variable costing unit product cost of a product

Per unit
Direct materials $ 15.00
Direct labor $ 7.00
Variable manufacturing overhead $ 2.00
Total unit product cost $ 24.00
b)
Variable costing income statement for the first year
Beginning inventory -
Number of unit produced 40000
Number of unit sold 35000
Ending inventory 5000

Amount Per unit

Sales $ 2,100,000 $ 60
Variable expenses
Variable cost of goods sold $ 840,000 $ 24
Variable selling and adminsitrative expense $ 70,000 $ 2
Total variable expenses $ 910,000 $ 26
Contribution margin $ 1,190,000 $ 34
Fixed expenses
Fixed manufacturing overhead $ 640,000
Fixed selling and adminsitrative expense $ 560,000
Total fixes expenses $ 1,200,000
Net operating income (loss) $ 10,000

3/

The inventory of the first year is of 5,000 units. The cost of inventory under absorption costing
method is calculated by the product unit cost of $40 per unit.
The product unit cost under absorption costing of $40 includes the cost of fixed manufacturing
overhead of $16 per unit.
The cost of inventory of 5,000 units at the rate of $40 comes to $200,000 including the amount
of fixed manufacturing overhead of $80,000.i.e. (5,000x$16)
The net operating income under absorption costing shows more profit than the net operating
income under variable costing due to the fixed manufacturing overhead allocated to
the inventory which has been deferred to the next month which is $80,000.
The difference between the net operating incomes under absorption costing and variable
costing is $80,000 it is equal to the amount of fixed manufacturing overhead is charged to
inventory of the month, which is calculated as follows:

Difference of net operating income = operating income under absorption costing – operating
income under variable costing = -(70000 - 10000) = $80000

6.10
1. Per unit cost of fixed manufacturing overhead
=Fixed manufacturing overhead/No. of units produced
= $300,000/10,000
= $30 per unit

2.
Absorption costing unit product cost of computer desk
Per unit
Direct materials 60
direct labor 30
variable manufacturing overhead 10
fixed manufacturing overhead 30
total unit product cost 130

Absorption Costing Income Statement

Amount Per unit

Sales 1800000 200
Cost of goods sold
Variable cost of goods sold 900000 100
Fixed manufacturing overhead 270000 30
Total cost of goods sold 1170000 130
Gross margin 630000 70
Selling and administrative expenses
Variable selling and administrative expense 180000 20

6.12

Answer:

1a)

Under variable costing, only the variable manufacturing costs are included in product costs

Year 1 Year 2

Direct materials $20 $20

Direct labor 12 12
 Variable manufacturing overhead    4    4

Variable costing unit product cost $36 $36

Note that selling and administrative expenses are not treated as              product costs; that is,
they are not included in the costs that are     inventoried. These expenses are always treated as
period costs.

b)

Year 1 Year 2

Sales 2000000 2500000

Variable expenses:

Variable cost of goods sold @ $36 per unit 1440000 1800000

Variable selling and administrative @ $3 per unit     120,000      150,000

Total variable expenses 1,560,000   1,950,000

Contribution margin     440,000      550,000

Fixed expenses:

Fixed manufacturing overhead 200000 200000

Fixed selling and administrative      80,000       80,000

Total fixed expenses     280,000      280,000

 Net operating income (loss) $  160,000 $   270,000

A)

unit product costs under absorption costing

Year 1 Year 2

Direct materials 20 20

Direct labor 12 12

Variable manufacturing overhead 4 4

Fixed manufacturing overhead *4 **5

Absorption costing unit product cost 40 41

* $200,000 ÷ 50,000 units = $4 per unit.

** $200,000 ÷ 40,000 units = $5 per unit.

b)

The absorption costing income statements appears below

Year 1 Year 2

Sales 2000000 2500000

Cost of goods sold *1,600,000 **2,040,000

 Gross margin 400000 460000

Selling and administrative expenses     200,000     230,000

Net operating income $  200,000 $  230,000

* 40,000 units × $40 per unit = $1,600,000

** (40,000 units × $41 per unit) + (10,000 units × $40 per unit) = $2,040,000

The net operating incomes are reconciled as follows

Year 1 Year 2

Variable costing net operating income (loss) $   160,000 $   270,000

Add: Fixed manufacturing overhead cost

deferred in inventory under absorption costing (10,000 units ×
$4 per unit) 40000

Deduct: Fixed manufacturing overhead cost released from

inventory under absorption costing (10,000 units × $4 per
unit)                      (40,000)

Absorption costing net operating income $    200,000 $   230,000

6.15
1.

Construction Clients Landscaping clients

Increase sales 70000 60000
Market CM ratio *35% *50%
Incremental contribution margin 24500 30000
Less cost of the campaign 8000 8000
Increase Segment margin and net 16500 22000
operating income for the company as
a whole
Sinh landscaping clients produce a bigger increase to net operating income the company should focus on
them.

2)
Now that we have segmented the Dallas region by its markets, the $90,000 in fixed expenses is
partly traceable and partly common. The total fixed expenses that are traceable to the region is
not specifically traceable to its markets. So looking at it as a whole, only $72,000 remains a
traceable fixed cost. The remaining $18,000 would include common costs only to the Dallas
office such as managerial salaries that could not be avoided by eliminating either of the two
market segments.