Solution manual managerial accounting by cabrera 2010 chapter 12 answer

MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual CHAPTER 12 VARIABLE COSTING I Questions The variable costing technique does not consider fixed costs as unimportant or irrelevant, but it maintains that the distinction between behaviors of different costs is crucial for certain decisions The central issue in variable costing is what is the proper timing for release of fixed manufacturing overhead as expense: at the time of incurrence, or at the time the finished units to which the fixed overhead relates are sold Direct costing would be more accurately called variable or marginal costing because in substance it is the inventory costing method which applies only variable production costs to product; fixed factory overhead is not assigned to product Marketing and administrative costs are treated as period costs under both variable costing and absorption costing methods of product costing Under absorption costing, as a company manufactures units of product, the fixed manufacturing overhead costs of the period are added to the units, along with direct materials, direct labor, and variable manufacturing overhead If some of these units are not sold by the end of the period, then they are carried into the next period as inventory The fixed manufacturing overhead cost attached to the units in ending inventory follow the units into the next period as part of their inventory cost When the units carried over as inventory are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period’s cost of goods sold Many accountants and managers believe absorption costing does a better job of matching costs with revenues than variable costing They argue that all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues from the units when they are sold They believe that the fixed costs of depreciation, taxes, insurance, supervisory salaries, and so on, are just as essential to manufacturing products as are the variable costs 12-1 Chapter 12 Variable Costing If fixed manufacturing overhead cost is released from inventory, then inventory levels must have decreased and therefore production must have been less than sales Under absorption costing it is possible to increase net operating income without increasing sales by increasing the level of production If production exceeds sales, units of product are added to inventory These units carry a portion of the current period’s fixed manufacturing overhead costs into the inventory account, thereby reducing the current period’s reported expenses and causing net operating income to rise Generally speaking, variable costing cannot be used externally for financial reporting purposes nor can it be used for tax purposes 10 If production exceeds sales, absorption costing will show higher net operating income than variable costing The reason is that inventories will increase and therefore part of the fixed manufacturing overhead cost of the current period will be deferred in inventory to the next period under absorption costing By contrast, all of the fixed manufacturing overhead cost of the current period will be charged immediately against revenues as a period cost under variable costing II Exercises Exercise (Variable and Absorption Costing Unit Product Costs and Income Statements) Requirement a The unit product cost under absorption costing would be: Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Fixed manufacturing overhead (P160,000 ÷ 20,000 units) Unit product cost P18 27 P35 b The absorption costing income statement: Sales (16,000 units × P50 per unit) 12-2 P800,000 Variable Costing Chapter 12 Less cost of goods sold: Beginning inventory Add cost of goods manufactured (20,000 units × P35 per unit) Goods available for sale Less ending inventory (4,000 units × P35 per unit) Gross margin Less selling and administrative expenses Net operating income P 700,000 700,000 140,000 560,000 240,000 190,000* P 50,000 *(16,000 units × P5 per unit) + P110,000 = P190,000 Requirement a The unit product cost under variable costing would be: Direct materials Direct labor Variable manufacturing overhead Unit product cost P18 P27 b The variable costing income statement: Sales (16,000 units × P50 per unit) Less variable expenses: Variable cost of goods sold: Beginning inventory Add variable manufacturing costs (20,000 units × P27 per unit) Goods available for sale Less ending inventory (4,000 units × P27 per unit) Variable cost of goods sold Variable selling expense (16,000 units × P5 per unit) Contribution margin Less fixed expenses: Fixed manufacturing overhead Fixed selling and administrative Net operating income P800,000 P 540,000 540,000 108,000 432,000 * 80,000 160,000 110,000 512,000 288,000 270,000 P 18,000 * The variable cost of goods sold could be computed more simply as: 16,000 units × P27 per unit = P432,000 12-3 Chapter 12 Variable Costing Exercise (Variable and Absorption Costing Unit Product Costs) Requirement Sales (40,000 units × P33.75 per unit) P1,350,000 Less variable expenses: Variable cost of goods sold (40,000 units × P16 per unit*) P640,000 Variable selling and administrative expenses (40,000 units × P3 per unit) 120,000 760,000 Contribution margin 590,000 Less fixed expenses: Fixed manufacturing overhead 250,000 Fixed selling and administrative expenses 300,000 550,000 Net operating income P 40,000 *Direct materials P10 Direct labor Variable manufacturing overhead Total variable manufacturing cost P16 Requirement The difference in net operating income can be explained by the P50,000 in fixed manufacturing overhead deferred in inventory under the absorption costing method: Variable costing net operating income Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing: 10,000 units × P5 per unit in fixed manufacturing overhead cost Absorption costing net operating income P40,000 50,000 P90,000 Exercise (Variable Costing Unit Product Cost and Income Statement; Break-even) 12-4 Variable Costing Chapter 12 Requirement Under variable costing, only the variable manufacturing costs are included in product costs Direct materials Direct labor Variable manufacturing overhead Unit product cost P 60 30 10 P100 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 and are charged against the current period’s revenue Requirement The variable costing income statement appears below: Sales Less variable expenses: Variable cost of goods sold: Beginning inventory Add variable manufacturing costs (10,000 units × P100 per unit) Goods available for sale Less ending inventory (1,000 units × P100 per unit) Variable cost of goods sold* Variable selling and administrative (9,000 units × P20 per unit) Contribution margin Less fixed expenses: Fixed manufacturing overhead Fixed selling and administrative Net operating loss P1,800,000 P 1,000,000 1,000,000 100,000 900,000 180,000 300,000 450,000 1,080,000 720,000 750,000 P (30,000) * The variable cost of goods sold could be computed more simply as: 9,000 units sold × $100 per unit = $900,000 Requirement The break-even point in units sold can be computed using the contribution 12-5 Chapter 12 Variable Costing margin per unit as follows: Selling price per unit P200 Variable cost per unit 120 P 80 Contribution margin per unit Break-even unit sales = Fixed expenses Unit contribution margin = P750,000 P80 per unit = 9,375 units III Problems Problem Requirement 1: Variable Costing Method Romero Parts, Inc Income Statement - Manufacturing For the Year Ended December 31, 2005 Sales Less: Variable Cost of Sales Inventory, Jan Current Production Total Available for Sale Inventory, Dec 31 Contribution Margin Less Fixed Costs and Expenses Net Income P20,700,000 P1,155,000 7,700,000 P8,855,000 805,000 8,050,000 P12,650,000 6,000,000 P 6,650,000 Requirement 2: Absorption Costing Method Romero Parts, Inc Income Statement - Manufacturing For the Year Ending December 31, 2006 Sales Less Cost of goods sold: Inventory, Jan Current Production P26,100,000 P 1,380,000 16,100,000 12-6 Variable Costing Chapter 12 Total Available for Sale Inventory, Dec 31 Cost of Sales - Standard Favorable Capacity Variance Income from Manufacturing P17,480,000 747,500 P16,732,500 900,000 15,832,500 P10,267,500 Requirement 3: Variable Costing Method Romero Parts, Inc Income Statement - Manufacturing For the Year Ending December 31, 2006 Sales Less Variable Cost of Sales: Inventory, Jan Production Total Available for Sale Inventory, Dec 31 Contribution Margin - Manufacturing Less Fixed Cost Income from Manufacturing P26,100,000 P 805,000 9,800,000 P10,605,000 455,000 10,150,000 P15,950,000 5,400,000 P10,550,000 Reconciliation Net Income, absorption costing Add Fixed Factory Overhead Inventory, 1/1 Total Less Fixed Factory Overhead Inventory, 12/31 Net Income, direct costing P10,267,500 575,000 P10,842,500 292,500 P10,550,000 Problem Requirement Honey Company Income Statement - Direct Costing For the Year Ended December 31, 2005 Sales Less Variable Cost of Sales: Finished Goods Inventory, 1/1 Current Production 12-7 P280,000 P 4,000 120,000 Chapter 12 Variable Costing Total Available for Sale Finished Goods Inventory, 12/31 Variable Cost of Sale - Standard Unfavorable Variance Contribution Margin - Manufacturing Less Variable Marketing Expenses Contribution Margin - Final Less Fixed Costs and Expenses: Fixed Factory Overhead Fixed Marketing and Administrative Expenses Net Income P124,000 12,000 P112,000 5,000 117,000 P163,000 28,000 P135,000 P 54,000 20,000 74,000 P 61,000 Requirement Honey Company Income Statement - Absorption Costing For the Year Ended December 31, 2005 Sales P280,000 Less: Cost of Sales Finished goods inventory, Jan (1,000 x P5.50) Current production costs Variable (30,000 x P4.00) P120,000 Fixed (30,000 x P1.50) 45,000 Less: Finished goods inventory, Dec 31 (3,000 x P5.50) Cost of Sales - at Standard Add (Deduct) Variance Unfavorable variable manufacturing costs variances Underapplied fixed factory overhead (6,000 x P1.50) Cost of Sales - Actual Gross Profit 12-8 P 5,500 165,000 P170,500 16,500 P154,000 5,000 9,000 P168,000 P112,000 Variable Costing Chapter 12 Less: Selling and administrative expenses Variable Fixed Net Income 28,000 20,000 P 48,000 P 64,000 Problem (Variable Costing Income Statement; Reconciliation) Requirement The unit product cost under the variable costing approach would be computed as follows: P 8 Direct materials Direct labor 10 Variable manufacturing overhead Unit product cost P20 With this figure, the variable costing income statements can be prepared: Year Year Sales P1,000,000 P1,500,000 Less variable expenses: Variable cost of goods sold @ P20 per unit 400,000 600,000 Variable selling and administrative @ P3 per unit 60,000 90,000 Total variable expenses 460,000 690,000 Contribution margin 540,000 810,000 Less fixed expenses: Fixed manufacturing overhead 350,000 350,000 Fixed selling and administrative 250,000 250,000 Total fixed expenses 600,000 600,000 Net operating income (loss) P (60,000) P 210,000 Requirement Variable costing net operating income (loss) P (60,000) P 210,000 Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing (5,000 units × P14 per unit) 70,000 Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing (5,000 units × P14 per unit) (70,000) Absorption costing net operating income P 10,000 P 140,000 12-9 Chapter 12 Variable Costing Problem (Prepare and Interpret Statements; Changes in Both Sales and Production; JIT) Requirement Year P1,000,000 Sales Less variable expenses: Variable cost of goods sold @ P4 per unit Variable selling and administrative @ P2 per unit Total variable expenses Contribution margin Less fixed expenses: Fixed manufacturing overhead Fixed selling and administrative Total fixed expenses Net operating income (loss) Year Year P 800,000 P1,000,000 200,000 160,000 200,000 100,000 300,000 700,000 80,000 240,000 560,000 100,000 300,000 700,000 600,000 70,000 670,000 P 30,000 600,000 600,000 70,000 70,000 670,000 670,000 P(110,000) P 30,000 Requirement a Year P 4 Variable manufacturing cost Fixed manufacturing cost: P600,000 ÷ 50,000 units P600,000 ÷ 60,000 units P600,000 ÷ 40,000 units Unit product cost Year P 4 Year P 4 12 10 P16 P14 15 P19 b Variable costing net operating income (loss) Add (Deduct): Fixed manufacturing overhead cost deferred in inventory from Year to Year under absorption costing (20,000 units × P10 per unit) Add: Fixed manufacturing overhead cost deferred in inventory from Year to the future under 12-10 P30,000 P(110,000) 200,000 P 30,000 (200,000) 150,000 Variable Costing Chapter 12 absorption costing (10,000 units × P15 per unit) Absorption costing net operating income (loss) P30,000 P 90,000 P(20,000) Requirement Production went up sharply in Year thereby reducing the unit product cost, as shown in (2a) This reduction in cost, combined with the large amount of fixed manufacturing overhead cost deferred in inventory for the year, more than offset the loss of revenue The net result is that the company’s net operating income rose even though sales were down Requirement The fixed manufacturing overhead cost deferred in inventory from Year was charged against Year operations, as shown in the reconciliation in (2b) This added charge against Year operations was offset somewhat by the fact that part of Year 3’s fixed manufacturing overhead costs was deferred in inventory to future years [again see (2b)] Overall, the added costs charged against Year were greater than the costs deferred to future years, so the company reported less income for the year even though the same number of units was sold as in Year Requirement a Several things would have been different if the company had been using JIT inventory methods First, in each year production would have been geared to sales so that little or no inventory of finished goods would have been built up in either Year or Year Second, unit product costs probably would have been the same in all three years, since these costs would have been established on the basis of expected sales (50,000 units) for each year Third, since only 40,000 units were sold in Year 2, the company would have produced only that number of units and therefore would have had some underapplied overhead cost for the year (See the discussion on underapplied overhead in the following paragraph.) b If JIT had been in use, the net operating income under absorption costing would have been the same as under variable costing in all three years The reason is that with production geared to sales, there would have been no ending inventory on hand, and therefore there would have been no fixed manufacturing overhead costs deferred in inventory to 12-11 Chapter 12 Variable Costing other years Assuming that the company expected to sell 50,000 units in each year and that unit product costs were set on the basis of that level of expected activity, the income statements under absorption costing would have appeared as follows: Sales Less cost of goods sold: Cost of goods manufactured @ P16 per unit Add underapplied overhead Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) Year P1,000,000 800,000 800,000 200,000 170,000 P 30,000 Year Year P 800,000 P1,000,000 640,000 * 120,000 ** 760,000 40,000 150,000 P(110,000) P 800,000 800,000 200,000 170,000 30,000 * 40,000 units × P16 per unit = P640,000 ** 10,000 units not produced × P12 per unit fixed manufacturing overhead cost = P120,000 fixed manufacturing overhead cost not applied to products IV Multiple Choice Questions 10 D B B B B C A B A A 11 12 13 14 15 16 17 18 19 20 B A C D B A C C B C 12-12 ... Finished Goods Inventory, 1/1 Current Production 12- 7 P280,000 P 4,000 120 ,000 Chapter 12 Variable Costing Total Available for Sale Finished Goods Inventory, 12/ 31 Variable Cost of Sale - Standard Unfavorable... computed using the contribution 12- 5 Chapter 12 Variable Costing margin per unit as follows: Selling price per unit P200 Variable cost per unit 120 P 80 Contribution margin... 80,000 160,000 110,000 512, 000 288,000 270,000 P 18,000 * The variable cost of goods sold could be computed more simply as: 16,000 units × P27 per unit = P432,000 12- 3 Chapter 12 Variable Costing