9 1 CHAPTER 9 INVENTORY COSTING AND CAPACITY ANALYSIS 9 16 In comparing the absorption and variable cost methods, each of the following statements is true except a SG&A fixed expenses are not included[.]
CHAPTER INVENTORY COSTING AND CAPACITY ANALYSIS 9-16 In comparing the absorption and variable cost methods, each of the following statements is true except: a SG&A fixed expenses are not included in inventory in either method b Only the absorption method may be used for external financial reporting c Variable costing charges fixed overhead costs to the period they are incurred d When inventory increases over the period, variable net income will exceed absorption net income 9-17 Queen Sales, Inc has just completed its first year of operations The company has not had any sales to date Queen has incurred the following costs associated with its production as of December 31, Year 1: Direct materials $45,000 Production labor 35,000 Bookkeeper salary 28,000 Factory utilities 18,500 Office rent 12,000 Factory supervisor salary 9,600 Machine maintenance contract 7,500 Under absorption costing, what is the inventory amount shown on the balance sheet at December 31, Year 1? a $155,600 b $115,600 c $98,500 d $80,000 9-18 King Tooling has produced and sold the following number of units of their only product during their first two years in business: Produced Sold Year ended December 31, Year 50,000 40,000 Year ended December 31, Year 50,000 55,000 Production costs per unit have not changed over the two-year period Under variable costing, what is the amount of cost of sales relative to the cost of sales shown on the GAAP income statement of the company? 9-1 9-19 Year Year a Higher Higher b Higher Lower c Lower Higher d Lower Lower The following information relates to Drexler Inc.’s Year financials: Direct labor $420,000 Direct materials 210,000 Variable overhead 205,000 Fixed overhead 355,000 Variable SG&A expenses 150,000 Fixed SG&A expenses 195,000 Year period costs for Drexler, under both the absorption and variable cost methods, will be Absorption Cost Method Variable Cost Method a $345,000 $700,000 b $345,000 $905,000 c $550,000 $700,000 d $550,000 $905,000 9-20 Which of the following statements is not true regarding the use of variable and absorption costing for performance measurement? a The net income reported under the absorption method is less reliable for use in performance evaluations because the cost of the product includes fixed costs, which means the level of inventory affects net income b The net income reported under the contribution income statement is more reliable for use in performance evaluations because the product cost does not include fixed costs c Variable costing isolates contribution margins to aid in decision making d The Internal Revenue Service allows either absorption or variable costing as long as the method is not changed from year to year, while U.S GAAP only allows absorption costing 9-21 Variable and absorption costing, explaining operating-income differences Nascar Motors assembles and sells motor vehicles and uses standard costing Actual data relating to April and May 2017 are as follows: 9-2 The selling price per vehicle is $24,000 The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units There are no price, efficiency, or spending variances Any production-volume variance is written off to cost of goods sold in the month in which it occurs Required: Prepare April and May 2017 income statements for Nascar Motors under (a) variable costing and (b) absorption costing Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing 9-23 Variable and absorption costing, explaining operating-income differences EntertainMe Corporation manufactures and sells 50-inch television sets and uses standard costing Actual data relating to January, February, and March 2017 are as follows: January February March Unit data: Beginning inventory 150 150 Production 1,500 1,400 1,520 Sales 1,350 1,400 1,530 Variable costs: Manufacturing cost per unit produced Operating (marketing) cost per unit sold $ 1,000 $ 1,000 $ 1,00 $ 800 $ 800 $ 800 Fixed costs: Manufacturing costs $525,00 $525,000 $525,0 00 Operating (marketing) costs $130,00 $130,000 $130,0 00 9-3 The selling price per unit is $3,300 The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 1,500 units There are no price, efficiency, or spending variances Any -production-volume variance is written off to cost of goods sold in the month in which it occurs Prepare income statements for EntertainMe in January, February, and March 2017 under (a) variable costing and (b) absorption costing Explain the difference in operating income for January, February, and March under variable costing and absorption costing 9-25 Variable versus absorption costing The Tomlinson Company manufactures trendy, highquality, moderately priced watches As Tomlinson’s senior financial analyst, you are asked to recommend a method of inventory costing The CFO will use your recommendation to prepare Tomlinson’s 2017 income statement The following data are for the year ended December 31, 2017: Beginning inventory, January 1, 2017 90,000 units Ending inventory, December 31, 2017 34,000 units 2017 sales 433,000 units Selling price (to distributor) $24.00 per unit Variable manufacturing cost per unit, including direct materials $5.40 per unit Variable operating (marketing) cost per unit sold $1.20 per unit sold Fixed manufacturing costs $1,852,200 Denominator-level machine-hours 6,300 Standard production rate 60 units per machine-hour Fixed operating (marketing) costs $1,130,000 Required: Assume standard costs per unit are the same for units in beginning inventory and units produced during the year Also, assume no price, spending, or efficiency variances Any production-volume variance is written off to cost of goods sold Prepare income statements under variable and absorption costing for the year ended December 31, 2017 What is Tomlinson’s operating income as percentage of revenues under each costing method? Explain the difference in operating income between the two methods Which costing method would you recommend to the CFO? Why? 9-4