Exam 9: Income Effects of Denominator Level on Inventory Valuation

Johnson and Sons Company was concerned that increased sales did not result in increased profits for 2016. Both variable unit and total fixed manufacturing costs for 2015 and 2016 remained constant at $20 and $2,000,000, respectively. In 2015 the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no beginning inventory in 2011. In 2016 the company made 70,000 units and sold 90,000 units at a price of $50. Selling and administrative expenses were all fixed at $100,000 each year. Required: a. Prepare income statements for each year using absorption costing in the gross margin format. b. Prepare income statements for each year using variable costing in the contribution margin format. c. Explain why the income was different each year using the two methods. Show computations.

Finch-Hutton Machine Works Ltd. uses standard costing based on a practical capacity of 1,050 tractor bearings per month. The actual production for the month of January was 980. The standard variable cost per unit is $11 and budgeted monthly fixed manufacturing overhead is $78,750. Actual costs for January were $11,760 and $78,400 for variable and fixed respectively. There was no work-in-process inventory at the beginning or end of January. The finished goods inventory had no balance at the beginning of January; January sales were 900 units at $135 per unit. Non-manufacturing costs totalled $38,000. Variances are pro-rated to inventory and cost of goods sold based on the balances in the accounts before proration. Required: 1. Prepare an income statement in gross margin format using absorption costing. 2. Determine the balance of the January ending finished goods inventory. 3. Determine the variances in as much detail as possible then prepare the journal entries to clear the variance accounts.

The new plant manager has lots of ideas for change. His bonus is tied directly to plant profit, and last month he had the accounting department change from absorption costing to variable costing, as he heard at a meeting that contribution margin was usually higher than gross margin. This month, he wants to change to throughput costing, in hopes that throughput contribution will be greater than contribution margin. The relevant data are: Sales $150,000; opening inventory $2,500; variable cost of goods manufactured $24,000; ending inventory using variable costing $8,000; variable marketing cost $15,200; and, there are no variable cost variances. The above numbers are the same for throughput costing except as follows: direct materials in goods manufactured $13,200; and, ending inventory $4,400. Required: a. Calculate the contribution margin and throughput margin. b. Does this appear to be a sensible strategy by the plant manager?

Answer the following question(s) using the information below. Ms. Andrea Chadwick, the company president, has heard that there are multiple break-even points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for current year is as follows: -What are break-even sales in units using variable costing?

Answer the following question(s) using the information below. Reusser Company produces wood statues. Management has provided the following information: -What is the cost per statue if throughput costing is used?

The following information pertains to XYZ Corporation: What is the difference between absorption costing operating income and variable costing operating income?

The following data are available for Ruggles Company for the year ended September 30, 2016. Required: a. Determine operating income using the variable costing approach. b. Determine operating income using the absorption costing approach. c. Explain why the income was different each year using the two methods. Show computations.

Answer the following question(s) using the information below. Heinrich Corporation budgeted fixed manufacturing costs of $6,000 during 2012. Other information for 2012 includes: The budgeted denominator level is 1,000 units. Units produced total 750 units. Units sold total 600 units. Beginning inventory was zero. The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. -The production-volume variance is

Use the information below to answer the following question(s). Honda Heaven produces and sells an auto part for $20.00 per unit. Direct materials are $8 per unit, while direct manufacturing labour averages $1.50 per unit. Variable manufacturing overhead is $0.50 per unit and fixed manufacturing overhead is $250,000 per year. Administrative expenses, all fixed, run $90,000 per year, with sales commissions of $2 per part. Production is 100,000 parts per year. And this year, 75,000 boxes were sold. -What is Honda Heaven's inventoriable cost per box using absorption costing?

Answer the following question(s) using the information below. Gabe's Auto produces and sells an auto part for $30.00 per unit. In 2012, 100,000 parts were produced and 75,000 units were sold. Other information for the year includes: -What is the inventoriable cost per unit using variable costing?

Ace Products sells its products for $22 each. Unit manufacturing costs are: direct materials, $4.00; direct manufacturing labour, $6.00; and variable manufacturing overhead, $3.00. Total fixed manufacturing overhead costs are $60,000 and marketing expenses are $2.00 per unit plus $20,000 per year. The current production level is 25,000 units although only 20,000 units are anticipated to be sold. Required: a. Prepare an income statement using absorption costing in the gross margin format. b. Prepare an income statement using variable costing in the contribution margin format.

Use the information below to answer the following question(s). Beauty Supply Company manufactures shampoo. The supervisor has provided the following information and stated that standard costing is used for manufacturing, marketing, and administrative costs. There were no beginning or ending inventories of materials or work-in-process. -What would Beauty Supply Company's operating income (loss) be for January and February, respectively, using the absorption costing approach?

Answer the following question(s) using the information below. Peggy's Pillows produces and sells a decorative pillow for $75.00 per unit. In the first month of operation, 2,000 units were produced and 1,750 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes: -What is cost of goods sold using variable costing?

Ewing Company planned to be in operation for three years. During the first year, it had no sales but incurred $120,000 in variable manufacturing expenses and $40,000 in fixed manufacturing expenses. In the next year, it sold half of the finished goods inventory from the previous year for $100,000 but it had no manufacturing costs. In the third year, it sold the remainder of the inventory for $120,000, had no manufacturing expenses and went out of business. Marketing and administrative expenses were fixed and totalled $20,000 each year. Required: a. Prepare an income statement for each year using absorption costing in the gross margin format. b. Prepare an income statement for each year using variable costing contribution margin format.

Which of the following is TRUE concerning operating income calculated under variable costing as compared to absorption costing?

Sierra Tool Manufacturing Ltd. manufactures hammers at their Hamilton facility. For next month the vice-president of production plans on producing 2,700 hammers per day. The company can produce as many as 4,000 hammers per day, but are more likely to produce 3,500 per day. The demand for wrenches for the next three years is expected to average 3,100 wrenches per day. Fixed manufacturing costs per month total $282,400. The company works 22 days a month due to local zoning restrictions. Fixed manufacturing overhead is charged on a per wrench basis. Required: a. What is the theoretical fixed manufacturing overhead rate per wrench? b. What is the practical fixed manufacturing overhead rate per wrench? c. What is the normal fixed manufacturing overhead rate per wrench? d. What is the master-budget fixed manufacturing overhead rate per wrench?

Normandeau Corporation manufactures and sells laptop computers and uses standard costing. For the month of September there was no beginning inventory, there were 1,500 units produced and 1,250 units sold. The manufacturing variable cost per unit is $770 and the operating cost per unit was $625. The fixed manufacturing cost is $450,000 and the fixed operating cost is $75,000. The selling price per unit is $1,850. Required: Prepare the income statement for Normandeau Corporation for September under variable costing.

Answer the following question(s) using the information below. The following information pertains to the Bean Company: -What is the variable costing break-even point in units?

One possible means of determining the difference between absorption and variable costing based operating incomes is

For the current year, Nichols Inc., had sales of 75,000 units and production of 100,000 units. Other information for the year included: Required: a. Compute the ending finished goods inventory under both absorption and variable costing. b. Compute the cost of goods sold under both absorption and variable costing.