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Variable and Absoprtion Costing

1. Lee Company, which has only one product, has provided the following data concerning
its most recent month of operations:

Selling price ............................ P95

Units in beginning inventory ............. 100


Units produced ........................... 6,200
Units sold ............................... 5,900
Units in ending inventory ................ 400

Variable costs per unit:


Direct materials ....................... P42
Direct labor ........................... 28
Variable manufacturing overhead ........ 1
Variable selling and administrative .... 5

Fixed costs:
Fixed manufacturing overhead ........... P62,000
Fixed selling and administrative ....... 35,400

The company produces the same number of units every month, although the sales in units vary
from month to month. The company's variable costs per unit and total fixed costs have been
constant from month to month.

Required:
a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and the
variable costing method.
d. Prepare an income statement for the month using the absorption costing method.
e. Reconcile the variable costing and absorption costing net incomes for the month.

2. Pabbatti Company, which has only one product, has provided the following data
concerning its most recent month of operations:

Selling price ............................ P112

Units in beginning inventory ............. 500


Units produced ........................... 2,800
Units sold ............................... 2,900
Units in ending inventory ................ 400

Variable costs per unit:


Direct materials ....................... P37
Direct labor ........................... 19
Variable manufacturing overhead ........ 7
Variable selling and administrative .... 5

Fixed costs:
Fixed manufacturing overhead ........... P109,200
Fixed selling and administrative ....... 5,800

The company produces the same number of units every month, although the sales in units vary
from month to month. The company's variable costs per unit and total fixed costs have been
constant from month to month.
Required:

a. What is the unit product cost for the month under variable costing?
b. Prepare an income statement for the month using the contribution format and the
variable costing method.
c. Without preparing an income statement, determine the absorption costing net income
for the month.
(Hint: Use the reconciliation method.)

Profit Planning
1. Tilson Company has projected sales and production in units for the second quarter of
the coming year as follows:

April May June


Sales ............ 55,000 45,000 65,000
Production ....... 65,000 55,000 55,000

Cash-related production costs are budgeted at $7 per unit produced. Of these production
costs, 40% are paid in the month in which they are incurred and the balance in the following
month. Selling and administrative expenses will amount to $110,000 per month. The accounts
payable balance on March 31 totals $193,000, which will be paid in April.
All units are sold on account for $16 each. Cash collections from sales are budgeted at 60%
in the month of sale, 30% in the month following the month of sale, and the remaining 10% in
the second month following the month of sale. Accounts receivable on April 1 totaled $520,000
($100,000 from February's sales and the remainder from March).

Required:

a. Prepare a schedule for each month showing budgeted cash disbursements for the Tilson
Company.
b. Prepare a schedule for each month showing budgeted cash receipts for Tilson Company.

At March 31 Streuling Enterprises, a merchandising firm, had an inventory of 38,000 units, and
it had accounts receivable totaling $85,000. Sales, in units, have been budgeted as follows for
the next four months:

April ............... 60,000


May ................. 75,000
June ................ 90,000
July ................ 81,000

Streuling's board of directors has established a policy to commence in April that the inventory
at the end of each month should contain 40% of the units required for the following month's
budgeted sales.
The selling price is $2 per unit. One-third of sales are paid for by customers in the month of
the sale, the balance is collected in the following month.

Required:

a. Prepare a merchandise purchases budget showing how many units should be


purchased for each of the months April, May, and June.

b. Prepare a schedule of expected cash collections for each of the months April, May, and
June.
TabComp Inc. is a retail distributor for MZB-33 computer hardware and related software. TabComp
prepares annual sales forecasts of which the first six months of the coming year are presented
below.

Hardware Hardware Total


Units Dollars Software Sales

January ....... 130 $390,000 $160,000 $550,000


February ...... 120 360,000 140,000 500,000
March ......... 110 330,000 150,000 480,000
April ......... 90 270,000 130,000 400,000
May ........... 100 300,000 125,000 425,000
June .......... 125 375,000 225,000 600,000

Cash sales account for 25% of TabComp's total sales, 30% of the total sales are paid by bank
credit card, and the remaining 45% are on open account (TabComp's own charge accounts).
The cash and bank credit card sale payments are received in the month of the sale. Bank credit
card sales are subject to a four percent discount which is deducted immediately. The cash
receipts for sales on open account are 70% in the month following the sale, 28% in the second
month following the sale, and the remaining are uncollectible.
TabComp's month-end inventory requirements for computer hardware units are 30% of the
next month's sales. The units must be ordered two months in advance due to long lead times
quoted by the manufacturer.

Cost Volume Profit


The following is Arkadia Corporation's contribution format income statement for last month:

Sales ....................... P1,200,000


Less variable expenses ...... 800,000
Contribution margin ......... 400,000
Less fixed expenses ......... 300,000
Net income ........................ P 100,000

The company has no beginning or ending inventories and produced and sold 20,000 units during the month.

Required:

a. What is the company's contribution margin ratio?

b. What is the company's break-even in units?

c. If sales increase by 100 units, by how much should net income increase?

d. How many units would the company have to sell to attain target profits of P125,000?

e. What is the company's margin of safety in dollars?

f. What is the company's degree of operating leverage?

The following monthly data are available for the Challenger Company and its only product, Product SW:

Total Per Unit


Sales (400 units)..... P110,000 P275
Variable expenses..... 44,000 110
Contribution margin... P 66,000 P165
Fixed expenses........ 52,800
Net income............ P 13,200

Required:

a. Without resorting to calculations, what is the total contribution margin at the break-even point?

b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SW.
This change would reduce variable costs by P15. The company’s marketing manager predicts that this
would reduce the overall quality of the product and thus would result in a decline in sales to a level of
350 units per month. Should this change be made?

c. Assume that Challenger Company is currently selling 400 units of Product SW per month.
Management wants to increase sales and feels this can be done by cutting the selling price by P25
per unit and increasing the advertising budget by P20,000 per month. Management believes that these
actions will increase unit sales by 50%. Should these changes be made?

d. Assume that Challenger Company is currently selling 400 units of Product SW. Management wants
to automate a portion of the production process for Product SW. The new equipment would
reduce direct labor costs by P20 per unit but would result in a monthly rental cost for the new robotic
equipment of P10,000. Management believes that the new equipment will increase the reliability of
Product SW thus resulting in an increase in monthly sales of 12%. Should these changes be made?

Tanner Company's most recent contribution format income statement is presented below:

Sales .................... P75,000


Less variable expenses ... 45,000
Contribution margin ...... 30,000
Less fixed expenses ...... 36,000
Net loss ................. P(6,000)

The company sells its only product for P15 per unit. There were no beginning or ending inventories.

Required:

a. Compute the company's break-even point in units sold.

b. Compute the total variable expenses at the break-even point.

c. How many units would have to be sold to earn a target profit of P9,000?

d. The sales manager is convinced that a P6,000 increase in the advertising budget would increase total
sales by P25,000. Would you advise the increased advertising outlay?
Flexible Budgets

The Moore Company produces and sells a single


product. A standard cost card for the product
follows:

Standard Cost Card--per unit of product:

Direct materials, 4 yards at $4.00 ........


$16.00
Direct labor, 1.5 hours at $10.00 .........
15.00
Variable overhead, 1.5 hours at $3.00 .....
4.50
Fixed overhead, 1.5 hours at $7.00 ........
10.50
Standard cost per unit ....................
$46.00

The company manufactured and sold 18,000 units of


product during the year. A total of 70,200 yards of
material was purchased during the year at cost of
$4.20 per yard. All of this material was used to
manufacture the 18,000 units. The company records
showed no beginning or ending inventories for the
year.

The company worked 29,250 direct labor-hours during


the year at a cost of $9.75 per hour. Overhead cost
is applied to products on the basis of direct labor-
hours. The denominator activity level (direct labor-
hours) was 22,500 hours. Budgeted fixed overhead
costs as shown on the flexible budget were $157,500,
while actual fixed overhead costs were $156,000.
Actual variable overhead costs were $90,000.

Required:

a. Compute the direct materials price and quantity


variances for the year.
b. Compute the direct labor rate and efficiency
variances for the year.
c. Compute the variable overhead spending and
efficiency variances for the year.
d. Compute the fixed overhead budget and volume
variances for the year.
Flick Company uses a standard cost system in which
manufacturing overhead is applied to units of product
on the basis of direct labor-hours. The company's
total budgeted variable and fixed manufacturing
overhead costs at the denominator level of activity
are $20,000 for variable overhead and $30,000 for
fixed overhead. The predetermined overhead rate,
including both fixed and variable components, is
$2.50 per direct labor-hour. The standards call for
two direct labor-hours per unit of output produced.
Last year, the company produced 11,500 units of
product and worked 22,000 direct labor-hours. Actual
costs were $22,500 for variable overhead and $31,000
for fixed overhead.

Required:

a. What is the denominator level of activity?


b. What were the standard hours allowed for the
output last year?
c. What was the variable overhead spending variance?
d. What was the variable overhead efficiency
variance?
e. What was the fixed overhead budget variance?
f. What was the fixed overhead volume variance?

You have just been hired as the controller of the Eastern Division of Global Manufacturing.
Performance records for last year are incomplete, with only the following data available:

Variable overhead rate .......... $3.00 per direct labor-hour


Budgeted fixed overhead ......... $84,800
Total actual overhead cost ...... $262,500
Fixed overhead budget variance .. $7,200 unfavorable
Variable overhead
efficiency variance ........... $15,000 unfavorable
Actual direct labor-hours worked 55,000 direct labor-hours
Denominator activity level ...... 53,000 direct labor-hours
Standard hours per unit ......... 2 direct labor-hours

Required:

Prepare a complete analysis of manufacturing overhead for the past


year. Indicate actual, standard, and denominator activity levels;
variable overhead spending and efficiency variances; and fixed
overhead budget and volume variances.
Standard Costing

(Appendix) Albert Manufacturing Company manufactures a single product. The


standard cost of one unit of this product is:

Direct materials: 6 feet at P1.50 ........... P 9.00


Direct labor: 1 hour at P6.75 ............... 6.75
Variable overhead: 1 hour at P4.50 .......... 4.50
Total standard variable cost per unit ....... P20.25

During the month of October, 6,000 units were produced. Selected cost data
relating to the month's production follow:

Material purchased: 60,000 feet at P1.43 .... P85,800


Material used in production: 38,000 feet ... -
Direct labor: ?__ hours at P ?__ per hr .. P41,925
Variable overhead cost incurred ............. P30,713
Variable overhead efficiency variance ....... P 2,250

There was no beginning inventory of raw materials. The variable overhead rate is
based on direct labor-hours.

Required:

a. For direct materials, compute the price and quantity variances for the
month, and prepare journal entries to record activity for the month.
b. For direct labor, compute the rate and efficiency variances for the
month, and prepare a journal entry to record labor activity for the month.
c. For variable overhead, compute the spending variance for the month, and
prove the efficiency variance given above.

(Appendix) Vernon Mills, Inc. is a large producer of men's and women's


clothing. The company uses standard costs for all of its products. The standard
costs and actual costs per unit of product for a recent period are given below for
one of the company's product lines:

Standard Actual
Cost Cost
Standard: 4.0 yards at P5.40 per yard ...... P21.60
Actual: 4.4 yards at P5.05 per yard ......... P22.22
Direct labor:
Standard: 1.6 hours at P6.75 per hour ....... P10.80
Actual: 1.4 hours at P7.30 per hour ......... P10.22
Variable overhead:
Standard: 1.6 hours at P2.70 per hour ....... P 4.32
Actual: 1.4 hours at P3.25 per hour ......... P 4.55
Total cost per unit ....................... P36.72 P36.99
During this period, the company produced 4,800 units of this product. A
comparison of standard and actual costs for the period on a total cost basis is
given below:

Actual costs: 4,800 units at P36.99 ...... P177,552


Standard costs: 4,800 units at P36.72 .... 176,256
Difference in cost--unfavorable .......... P 1,296

There was no inventory of materials on hand at the beginning of the period.


During the period, 21,120 yards of materials were purchased, all of which were
used in production.

Required:

a. For direct materials, compute the price and quantity variances for the
period and prepare journal entries to record all activity relating to direct
materials for the period.
b. For direct labor, compute the rate and efficiency variances and prepare a
journal entry to record the incurrence of direct labor cost for the period.
c. For variable overhead, compute the spending and efficiency variances.

ABC

Fife & Jones PLC, a consulting firm, uses an activity-based costing in


which there are three activity cost pools. The company has provided the
following data concerning its costs and its activity based costing system:

Costs:
Wages and salaries ... P540,000
Travel expenses ...... P100,000
Other expenses ....... P140,000
Total .............. P780,000

Distribution of resource consumption:

Activity Cost Pools


Working On Business
Engagements Development Other Total
Wages and salaries 50% 20% 30% 100%
Travel expenses ... 60% 30% 10% 100%
Other expenses .... 35% 25% 40% 100%

Required:

a. How much cost, in total, would be allocated to the Working On


Engagements activity cost pool?
b. How much cost, in total, would be allocated to the Business
Development activity cost pool?
c. How much cost, in total, would be allocated to the Other activity cost
pool?
Huish Awnings makes custom awnings for homes and businesses. The
company uses an activity-based costing system for its overhead costs.
The company has provided the following data concerning its annual
overhead costs and its activity cost pools:

Overhead costs:
Production overhead .. P150,000
Office expense ....... P100,000
Total .............. P250,000

Distribution of resource consumption:

Activity Cost Pools


Making Job
Awnings Support Other Total
Production overhead .. 45% 40% 15% 100%
Office expense ....... 8% 65% 27% 100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-
sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Annual Activity


Making awnings ...... 5,000 yards
Job support ......... 200 jobs
Other ............... Not applicable

Required:

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by
filling in the table below:

Making Job
Awnings Support Other Total
Production overhead ..
Office expense .......
Total ..............

b. Compute the activity rates (i.e., cost per unit of activity) for the Making
Awnings and Job Support activity cost pools by filling in the table below:

Making Job
Awnings Support
Production overhead ..
Office expense .......
Total ..............

c. Prepare an action analysis report in good form of a job that involves making 80
yards of awnings and has direct materials and direct labor cost of P3,000. The
sales revenue from this job is P4,000.

For purposes of this action analysis report, direct materials and direct
labor should be classified as a Green cost; production overhead as a Red cost; and
office expense as a Yellow cost.
Relevant Costing

Foster Company makes 20,000 units per year of a part it uses in


the products it manufactures. The unit product cost of this part
is computed as follows:

Direct materials ................. $24.70


Direct labor ..................... 16.30
Variable manufacturing overhead .. 2.30
Fixed manufacturing overhead ..... 13.40
Unit product cost .............. $56.70

An outside supplier has offered to sell the company all of


these parts it needs for $51.80 a unit. If the company accepts
this offer, the facilities now being used to make the part could
be used to make more units of a product that is in high demand.
The additional contribution margin on this other product would be
$44,000 per year.
If the part were purchased from the outside supplier, all of
the direct labor cost of the part would be avoided. However,
$5.10 of the fixed manufacturing overhead cost being applied to
the part would continue even if the part were purchased from
the outside supplier. This fixed manufacturing overhead cost
would be applied to the company's remaining products.

Required:

a. How much of the unit product cost of $56.70 is relevant in


the decision of whether to make or buy the part?
b. What is the net total dollar advantage (disadvantage) of
purchasing the part rather than making it?
c. What is the maximum amount the company should be willing to
pay an outside supplier per unit for the part if the supplier
commits to supplying all 20,000 units required each year?

Benjamin Signal Company produces products R, J, and C from a


joint production process. Each product may be sold at the split-
off point or be processed further. Joint production costs of
$92,000 per year are allocated to the products based on the
relative number of units produced. Data for Benjamin's operations
for the current year are as follows:

Units Allocated Joint Sales Value


Product Produced Production Cost at Split-off
R 8,000 $32,000 $76,000
J 10,000 40,000 71,000
C 5,000 20,000 48,000

Product R can be processed beyond the split-off point for an


additional cost of $26,000 and can then be sold for $105,000.
Product J can be processed beyond the split-off point for an
additional cost of $38,000 and can then be sold for $117,000.
Product C can be processed beyond the split-off point for an
additional cost of $12,000 and can then be sold for $57,000.

Required:
Which products should be processed beyond the split-off point?

Answer:
R J C o
Sales value after further
processing..................... $105,000 $117,000 $57,000
Sales value at split-off......... 76,000 71,000 48,000
Added sales value from processing 29,000 46,000 9,000
Added processing costs........... 26,000 38,000 12,000
Net gain (loss) from further
processing..................... $ 3,000 $ 8,000 $(3,000)

Products R and J should be processed beyond the split-off point.


Product C should be sold at split-off. Joint production costs are
not relevant to the decision to sell at split-off or to process
further.

Bowen Company produces products P, Q, and R from a joint


production process. Each product may be sold at the split-off
point or be processed further. Joint production costs of $81,000
per year are allocated to the products based on the relative
number of units produced. Data for Bowen's operations for the
current year are as follows:

Allocated Joint Sales Value


Product Units Produced Production Cost at Split-off
P 4,000 $28,000 $38,000
Q 7,000 49,000 47,000
R 2,000 14,000 16,000

Product P can be processed beyond the split-off point for an


additional cost of $10,000 and can then be sold for $50,000.
Product Q can be processed beyond the split-off point for an
additional cost of $35,000 and can then be sold for $65,000.
Product R can be processed beyond the split-off point for an
additional cost of $6,000 and can then be sold for $25,000.

Required:
Which products should be processed beyond the split-off point?

(Ignore income taxes and the time value of money in this


problem.) Madison optometry is considering the purchase of a new
lens grinder to replace a machine that was purchased several
years ago. Selected information on the two machines is given
below:

Old New
Machine Machine
Original cost when new ............ $80,000 $85,000
Accumulated depreciation to date .. 32,000 ---
Current salvage value ............. 26,000 ---
Annual operating cost ............. 4,000 3,000
Remaining useful life ............. 4 years 4 years
Required:

Compute the total advantage or disadvantage of using the new


machine instead of the old machine over the next four years.

Juett Company produces a single product. The cost of producing


and selling a single unit of this product at the company's normal
activity level of 70,000 units per month is as follows:

Direct materials ........................ $29.60


Direct labor ............................ 5.80
Variable manufacturing overhead ......... 2.50
Fixed manufacturing overhead ............ 17.20
Variable selling & administrative expense 1.80
Fixed selling & administrative expense .. 6.70

The normal selling price of the product is $72.90 per unit.


An order has been received from an overseas customer for 2,000
units to be delivered this month at a special discounted price.
This order would have no effect on the company's normal sales and
would not change the total amount of the company's fixed costs.
The variable selling and administrative expense would be $1.10
less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.

Required:

a. Suppose there is ample idle capacity to produce the units


required by the overseas customer and the special discounted
price on the special order is $66.10 per unit. By how much
would this special order increase (decrease) the company's
net operating income for the month?
b. Suppose the company is already operating at capacity when the
special order is received from the overseas customer. What
would be the opportunity cost of each unit delivered to the
overseas customer?
c. Suppose there is not enough idle capacity to produce all of
the units for the overseas customer and accepting the
special order would require cutting back on production of
1,300 units for regular customers. What would be the minimum
acceptable price per unit for the special order?