Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.
Production and cost data for the two years are:
Year 1
Year 2
Units produced
25,000
25,000
Units sold
20,000
30,000
Required:
1.
Prepare a variable costing contribution format income statement for each year.
Explanation:
1.
The unit product cost under variable costing is computed as follows:
Direct materials
$
5
Direct labor
11
Variable manufacturing overhead
4
Variable costing unit product cost
$
20
Year 1
Year 2
Variable cost of goods sold (@ $20 per unit)
$
400,000
$
600,000
Variable selling and administrative expenses (@ $3 per unit)
$
60,000
$
90,000
2.
Year 1
Year 2
Units in beginning inventory
0
5,000
+ Units produced
25,000
25,000
− Units sold
20,000
30,000
= Units in ending inventory
5,000
0
Add
(deduct) fixed manufacturing overhead deferred in (released from)
inventory under absorption costing (5,000 units × $14 per unit in Year
1; 5,000 units × $14 per unit in Year 2) = $70,000
Ida
Sidha Karya Company is a family-owned company located in the village of
Gianyar on the island of Bali in Indonesia. The company produces a
handcrafted Balinese musical instrument called a gamelan that is similar
to a xylophone. The gamelans are sold for $840. Selected data for the
company’s operations last year follow:
Units in beginning inventory
0
Units produced
300
Units sold
275
Units in ending inventory
25
Variable costs per unit:
Direct materials
$
100
Direct labor
$
310
Variable manufacturing overhead
$
30
Variable selling and administrative
$
35
Fixed costs:
Fixed manufacturing overhead
$
66,000
Fixed selling and administrative
$
31,000
The absorption costing income statement prepared by the company’s accountant for last year appears below:
Sales
$
231,000
Cost of goods sold
181,500
Gross margin
49,500
Selling and administrative expense
40,625
Net operating income
$
8,875
Required:
1.
Determine
how much of the ending inventory consists of fixed manufacturing
overhead cost deferred in inventory to the next period.
Explanation:
1.
25 units in ending inventory × $220 per unit fixed manufacturing overhead per unit = $5,500
2.
Variable cost of goods sold (275 units sold × $440 per unit) = $121,000
Variable selling and administrative expenses (275 units × $35 per unit) = $9,625
Ida
Sidha Karya Company is a family-owned company located in the village of
Gianyar on the island of Bali in Indonesia. The company produces a
handcrafted Balinese musical instrument called a gamelan that is similar
to a xylophone. The gamelans are sold for $940. Selected data for the
company’s operations last year follow:
Units in beginning inventory
0
Units produced
13,000
Units sold
9,000
Units in ending inventory
4,000
Variable costs per unit:
Direct materials
$ 220
Direct labor
$ 500
Variable manufacturing overhead
$ 59
Variable selling and administrative
$ 24
Fixed costs:
Fixed manufacturing overhead
$ 790,000
Fixed selling and administrative
$ 580,000
Required:
1.
Assume that the company uses absorption costing. Compute the unit product cost for one gamelan.
Explanation:
1.
Under absorption costing, all manufacturing costs (variable and fixed) are included in product costs.
Under variable costing, only the variable manufacturing costs are included in product costs.
Direct materials
$
220
Direct labor
500
Variable manufacturing overhead
59
Variable costing unit product cost
$
779
Note
that selling and administrative expenses are not treated as product
costs under either absorption or variable costing. These expenses are
always treated as period costs and are charged against the current
period’s revenue.
Gallatin
Carpet Cleaning is a small, family-owned business operating out of
Bozeman, Montana. For its services, the company has always charged a
flat fee per hundred square feet of carpet cleaned. The current fee is
$22.70 per hundred square feet. However, there is some question about
whether the company is actually making any money on jobs for some
customers—particularly those located on remote ranches that require
considerable travel time. The owner’s daughter, home for the summer from
college, has suggested investigating this question using activity-based
costing. After some discussion, a simple system consisting of four
activity cost pools seemed to be adequate. The activity cost pools and
their activity measures appear below:
Activity Cost Pool
Activity Measure
Activity for the Year
Cleaning carpets
Square feet cleaned (00s)
11,500
hundred square feet
Travel to jobs
Miles driven
435,000
miles
Job support
Number of jobs
1,600
jobs
Other (costs of idle capacity and
organization-sustaining costs)
None
Not applicable
The total cost of operating the company for the year is $353,000, which includes the following costs:
Wages
$
138,000
Cleaning supplies
29,000
Cleaning equipment depreciation
15,000
Vehicle expenses
28,000
Office expenses
67,000
President’s compensation
76,000
Total cost
$
353,000
Resource consumption is distributed across the activities as follows:
Distribution of Resource Consumption Across Activities
Cleaning Carpets
Travel to Jobs
Job Support
Other
Total
Wages
79
%
10
%
0
%
11
%
100
%
Cleaning supplies
100
%
0
%
0
%
0
%
100
%
Cleaning equipment depreciation
73
%
0
%
0
%
27
%
100
%
Vehicle expenses
0
%
77
%
0
%
23
%
100
%
Office expenses
0
%
0
%
63
%
37
%
100
%
President’s compensation
0
%
0
%
31
%
69
%
100
%
Job support consists of receiving calls from potential customers at the home office, scheduling
jobs, billing, resolving issues, and so on.
Required:
1.
Prepare the first-stage allocation of costs to the activity cost pools.
Explanation:
1.
The first-stage allocation of costs to activity cost pools appears below:
Wages:
Cleaning Carpets = 79% × $138,000 = $109,020
Travel to Jobs = 10% × $138,000 = $13,800
Job Support = 0% × $138,000 = $0
Other = 11% × $138,000= $15,180
Cleaning supplies:
Cleaning Carpets = 100% × $29,000 = $29,000
Travel to Jobs = 0% × $29,000 = $0
Job Support = 0% × $29,000 = $0
Other = 0% × $29,000 = $0
Cleaning equipment depreciation:
Cleaning Carpets = 73% × $15,000 = $10,950
Travel to Jobs = 0% × $15,000 = $0
Job Support= 0% × $15,000 = $0
Other = 27% × $15,000 = $4,050
Vehicle expenses:
Cleaning Carpets = 0% × $28,000 = $0
Travel to Jobs = 77% × $28,000 = $21,560
Job Support = 0% × $28,000 = $0
Other = 23% × $28,000 = $6,440
Office expenses:
Cleaning Carpets = 0% × $67,000 = $0
Travel to Jobs = 0% × $67,000 = $0
Job Support = 63% × $67,000 = $42,210
Other = 37% × $67,000 = $24,790
President's compensation:
Cleaning Carpets = 0% × $76,000 = $0
Travel to Jobs = 0% × $76,000 = $0
Job Support = 31% × $76,000 = $23,560
Other = 69% × $76,000 = $52,440
2.
The activity rates are computed as follows:
Activity Cost Pool
(a)
Total Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Cleaning carpets
$
148,970
11,500
hundred square feet
$
12.95
per hundred square feet
Travel to jobs
$
35,360
435,000
miles
$
.08
per mile
Job support
$
65,770
1,600
jobs
$
41.11
per job
3.
The cost for the Flying N Ranch job is computed as follows:
