Mgrl Corner 4e_SM AISE_08

1.The only difference between absorption costing and variable costing is the way in which fixed

overhead costs are assigned. Under variable costing, fixed overhead is a period cost; under absorption costing, it is a product cost.2.Absorption-costing income is greater because some of the period's fixed overhead is placed in

inventory and not recognized as part of Cost of Goods Sold on the absorption-costing income statement.3. A segment is any subunit of sufficient importance to warrant production of performance reports.4.Contribution margin is the amount available to cover fixed expenses and provide for profit.

Segment margin is the amount available to cover common fixed expenses and provide for profit. Contribution margin is the difference between revenues and variable expenses. Segment margin is contribution margin less direct fixed expenses.5.Ordering costs are the costs of placing and receiving an order. Examples include clerical costs,

documents, insurance, and unloading. Carrying costs are the costs of carrying inventory.

Examples include insurance, taxes, handling costs, and the opportunity cost of capital tied up in inventory.6.Stockout costs are the costs of insufficient inventory (e.g., lost sales and interrupted production).7.No, the purchase price is not part of the fundamental EOQ formula. However, the potential for

quantity discounts may be considered by management in deciding whether or not to order the EOQ amount. For example, the company may order more than the EOQ amount if the quantity discount is larger than the additional carrying cost.8.Reasons for carrying inventory include the following:

(a) to balance setup and carrying costs (b) to satisfy customer demand

(c) to avoid shutting down manufacturing facilities (d) to take advantage of discounts

(e) to hedge against future price increases

9.If carrying costs increase, that implies that fewer orders are placed. However, the company

still needs the annual demand for the part. So fewer orders imply a larger number of parts ordered. This increases carrying costs.

8

DISCUSSION QUESTIONS

ABSORPTION AND VARIABLE COSTING,

AND INVENTORY MANAGEMENT

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

10.The economic order quantity is the amount that should be ordered to minimize the

sum of ordering and carrying costs.

11.Safety stock is the difference between maximum demand and average demand, multiplied

by the lead time. By reordering whenever the inventory level hits the safety stock point, a

company is ensured of always having sufficient inventory on hand to meet demand.

12.JIT minimizes carrying costs by driving inventories to insignificant levels. Ordering costs

are minimized by entering into long-term contracts with suppliers (or driving setup times

to zero).

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

MULTIPLE-CHOICE EXERCISES

8-1.b

8-2.e

8-3.d

8-4.e

8-5.d

8-6.c

8-7.d

8-8.c

8-9.a

8-10.c

8-11.b

8-12.c

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

CORNERSTONE EXERCISES

CE 8-13

1.Units ending inventory=Units beginning inventory + Units produced –

Units sold

=300 + 15,000 – 12,700

=2,600units

2.Direct materials$20

Direct labor60

Variable overhead12

Fixed overhead30

Unit product cost$122

3.Value of ending inventory = 2,600 units × $122 = $317,200

CE 8-14

1.Units ending inventory=Units beginning inventory + Units produced –

Units sold

=300 + 15,000 – 12,700

=2,600units

2.Direct materials$20

Direct labor60

Variable overhead12

Unit product cost$92

3.Value of ending inventory = 2,600 units × $92 = $239,200

CE 8-15

1.Direct materials$9

Direct labor6

Variable overhead4

Fixed overhead5

Unit product cost$24

Total cost of goods sold = $24 × 9,300 units = $223,200

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

CE 8-15 (Continued)2.

Sales ($47 × 9,300)……………………………………………………..…$437,100Less: Cost of goods sold……………………………………………….223,200Gross margin…………………………………………………………..$213,900Less: Selling and administrative expense………………………….138,000Operating income…………………………………………………………

$75,900

CE 8-16

1.Direct materials $9Direct labor

6Variable overhead 4Unit product cost

$19

Total cost of goods sold = $19 × 9,300 units = $176,7002.

Sales ($47 × 9,300)………………………….…………………$437,100Less: Variable costs………………………………………….176,700Contribution margin…………………………………………$260,400

Less fixed expense:

Fixed overhead………………………………………………$50,000Fixed selling and administrative expenses……………138,000188,000Operating income………………………………………………

$72,400

Osterman Company

Income Statement Under Variable Costing

For the Most Recent Year

Osterman Company

Income Statement Under Absorption Costing

For the Most Recent Year

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

EXERCISES

E 8-22

1.Unit direct materials cost = $79,950/39,000 units = $

2.05

Unit direct labor cost = $101,400/39,000 units = $2.60

Unit variable overhead cost = $15,600/39,000 units = $0.40

Unit fixed overhead cost = $50,700/39,000 units = $1.30

2.Unit direct materials cost$2.05

Unit direct labor cost 2.60

Unit variable overhead cost0.40

Unit fixed overhead cost 1.30 Absorption cost per unit$6.35

3.Ending inventory in units = 39,000 – 38,900 = 100 units

4.Absorption-costing ending inventory = $6.35 × 100 units = $635

E 8-23

1.Unit direct materials cost ($118,500/50,000 units)$

2.37

Unit direct labor cost ($93,000/50,000 units) 1.86

Unit variable overhead cost ($65,000/50,000 units) 1.30 Variable-costing cost per unit $5.53

2.Variable-costing ending inventory = $5.53 × (50,000 – 48,900) = $6,083

E 8-24

1.Unit direct materials cost ($612,500/70,000 units)$8.75

Unit direct labor cost ($105,000/70,000 units) 1.50

Unit variable overhead cost ($79,100/70,000 units) 1.13

Unit fixed overhead cost ($269,500/70,000 units) 3.85 Absorption cost per unit$15.23

2.Unit direct materials cost ($612,500/70,000 units)$8.75

Unit direct labor cost ($105,000/70,000 units) 1.50

Unit variable overhead cost ($79,100/70,000 units) 1.13 Variable cost per unit$11.38

3.Absorption-costing ending inventory = $15.23 × 2,400 units* = $36,552

*(70,000 – 67,600 units)

4.Variable-costing ending inventory = $11.38 × 2,400 units = $27,312

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

E 8-25

1.Unit direct materials cost$9.30

Unit direct labor cost 2.75

Unit variable overhead cost 1.65

Unit fixed overhead cost 2.50

Absorption cost per unit$16.20

2.Unit direct materials cost$9.30

Unit direct labor cost 2.75

Unit variable overhead cost 1.65

Variable cost per unit$13.70

3.Absorption-costing income:

Sales ($26 × 56,900)………………………………...$1,479,400

Less: Cost of goods sold ($16.20 × 56,900)…....921,780

Gross margin……………………………………..$557,620 Less:

Variable selling expense ($2 × 56,900)……….$113,800

Fixed selling expense……………………………65,500

Fixed administrative expense………………….244,000423,300 Operating income……………………………………$134,320

4.Variable-costing income:

Sales ($26 × 56,900)………………………………..$1,479,400 Less variable expenses:

Cost of goods sold ($13.70 × 56,900)…………$779,530

Selling expense ($2 × 56,900)……..………….113,800893,330 Contribution margin……………………………….$586,070 Less fixed expenses:

Fixed overhead ($2.50 × 60,000)………...…....$150,000

Selling and administrative expenses………..309,500459,500 Operating income…………………………………..$126,570

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

E 8-26

1.Unit direct materials cost$8.00

Unit direct labor cost 4.00

Unit variable overhead cost 1.50

Unit fixed overhead cost 4.15

Absorption cost per unit$17.65

2.Unit direct materials cost$8.00

Unit direct labor cost 4.00

Unit variable overhead cost 1.50

Variable cost per unit$13.50

3.Ending inventory=Beginning inventory + Units produced – Units sold

=5,000 + 20,000 – 23,700

=1,300 units

4.Absorption-costing ending inventory = $17.65 × 1,300 units = $22,945

5.Variable-costing ending inventory = $13.50 × 1,300 units = $17,550

E 8-27

1.Absorption-costing income:

Sales ($27 × 23,700)……………………………………………$639,900

Less: Cost of goods sold ($17.65 × 23,700)………………418,305

Gross margin……………………………………...…………$221,595 Less:

Variable selling expenses ($3 × 23,700)….……….….$71,100

Selling and administrative expenses……………………24,30095,400 Operating income…………………………………………….$126,195

2.Variable-costing income:

Sales ($27 × 23,700)………………………………….………$639,900 Less variable expenses:

Cost of goods sold ($13.50 × 23,700)……………………$319,950

Selling expenses ($3 × 23,700)……………….…….......71,100391,050 Contribution margin……………………………………………$248,850 Less fixed expenses:

Fixed overhead ($4.15 × 20,000)……….………..….…$83,000

Selling and administrative expenses…………………24,300107,300 Operating income……………………………………...………$141,550

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

E 8-28

1.Number of units in ending inventory= Units produced – Units sold

= 16,000 units – 15,200 units

= 800 units

Fixed overhead in ending inventory= Absorption-costing inventory –

Variable-costing inventory

= $5,000 – $3,400

= $1,600

Fixed overhead cost per unit = $1,600/800 units = $2.00

Total fixed overhead = $2.00 × 16,000 units = $32,000

2.Fixed overhead rate= Total fixed overhead/Units normal production

= $23,000/20,000 units

= $1.15

Unit absorption cost= Prime cost + Variable overhead cost + Fixed

overhead cost

$8.00

= $6.00 + Variable overhead cost + $1.15

Variable overhead cost per units= $8.00 – $6.00 – $1.15

= $0.85

3.Absorption-costing income 45,000

$

Variable-costing income 42,500

$

Difference 2,500

The difference between absorption-costing income and variable-costing

income is fixed overhead multiplied by the difference between units

produced and units sold. Beginning inventory was zero, so ending inventory consists of the units that went into ending inventory during the year.

Fixed overhead going into =Fixed overhead rate × Units

ending inventory into inventory

$2,500=$2.50 × Units into inventory

Units into inventory=$2,500/$2.50 = 1,000 units

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

E 8-30 (Continuedd)2.

Small Consumer Business Computers Computers Total

Sales

$40,960,000

$134,000,000$174,960,000Less variable expenses:

Variable cost of goods sold (38,592,000)(123,200,000)(161,792,000)Variable selling expense (2,240,000)(5,200,000)(7,440,000)Contribution margin $128,000$5,600,000

$5,728,000

Less direct fixed expenses:Direct fixed overhead (120,000)(350,000)(470,000)Segment margin $8,000$5,250,000

$

5,258,000Less common fixed expenses:Common fixed overhead

(1,700,000)Common selling and administrative (2,960,000)Operating income

$

598,000

E 8-31

1.Orders per year = 9,000 units/600 units per order = 15 orders

2.Total ordering cost = $5 × 15 orders = $75

3.Average amount in inventory = (600 + 0)/2 = 300 units Total carrying cost = $1 × 300 units = $300

4.Total inventory-related cost

=Total ordering cost + Total carrying cost =$75 + $300 = $375

5.No, Zellen’s order size of 600 units is not the economic order quantity.

We can tell this because the ordering costs of $75 do not equal the carrying costs of $300. Zellen could get closer to the EOQ amount by ordering more frequently (increasing order cost) in smaller amounts per order (decreasing carrying costs).

Paulson Computers Inc.Segmented Income Statement

For the Coming Year

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

E 8-33 (Continued)

or

Reorder point with safety stock=Maximum daily usage × Lead time

=85 motors × 4 days

=340 motors

E 8-34

1.Reorder point without safety stock=Average daily rate × Lead time

=20 units × 6 days

120 units

=

2.Safety stock = (Maximum daily usage – Average daily usage) × Lead time

= (65 units – 20 units) × 6 days

= 270 units

3.Reorder point with safety stock=Reorder point without safety stock +

Safety stock

=120 units + 270 units

=390 units

or

Reorder point with safety stock=Maximum daily usage × Lead time

=65 units × 6 days

=390 units

4. There are many more weddings during the summer than in most other

seasons of the year. This could explain why sometimes the maximum

number of boas used (65) is so much higher than the daily average of 20.

Armed with this knowledge, the manager could carry more safety stock

during the summer months, and less during the other months of the year.

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

PROBLEMS P 8-35

1.Absorption costing:

Direct materials$1.68

Direct labor0.42

Variable overhead0.37

Fixed overhead 1.76

Unit cost$4.23

Cost of ending inventory = $4.23 × 1,250 units = $5,288 2.Variable costing:

Direct materials$1.68

Direct labor0.42

Variable overhead0.37

Unit cost$2.47

Cost of ending inventory = $2.47 × 1,250 units = $3,088 3.Selling price$6.95

Less:

Variable cost of goods sold(2.47)

Commission ($6.95 × 8%)(0.56)

Contribution margin per unit$3.92

CHAPTER 8 Absorption and Variable Costing, and Inventory Management P 8-35 (Continued)

4.Sales ($6.95 × 29,500)………………………...……$205,025

Less variable expenses:

Variable cost of goods sold……………………$72,865

Commissions……………………………………16,40289,267 Contribution margin………………………………$115,758

Less fixed expenses:

Fixed overhead…………………………………$28,160

Fixed administrative……………………………37,89066,050 Operating income…………………………………$49,708

Variable costing should be used, since the fixed costs will not increase

as production and sales increase.

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

P 8-36

1.Direct materials$3.35

Direct labor 1.78

Variable overhead 1.60

Fixed overhead ($180,000/300,000 units)0.60

Total$7.33

Per-unit inventory cost on the balance sheet is $7.33.

Units in ending inventory=11,300 units + 300,000 units – 306,500 units

=4,800 units

Total ending inventory = $7.33 × 4,800 units = $35,184

2.Absorption-costing income:

Sales (306,500 units × $9)…….………….…………………………………$2,758,500 Less: Cost of goods sold (306,500 units × $7.33)……………………2,246,645 Gross margin……………………………………………...………………$511,855 Less: Selling and administrative expenses……………………….……371,850 Operating income…………………………………….…………………$140,005

3.Direct materials$3.35

Direct labor 1.78

Variable overhead 1.60

Total$6.73

Per-unit inventory cost under variable costing equals $6.73.

This differs from the per-unit inventory cost in Requirement 1 because the

balance sheet is for external use and reflects absorption costing. Variable

costing does not include per-unit fixed overhead.

4.Variable-costing income:

Sales (306,500 units × $9)…………………………………………………$2,758,500 Less variable expenses:

Variable cost of goods sold (306,500 units × $6.73)………………(2,062,745)

Variable selling and administrative (306,500 units ×$0.90)………(275,850) Contribution margin………………………………………………...………$419,905 Less fixed expenses:

Fixed overhead…………………………………………….……………(180,000)

Fixed selling and administrative……………………………………..(96,000) Operating income$143,905

CHAPTER 8 Absorption and Variable Costing, and Inventory Management P 8-36 (Continued)

5.Absorption-costing income:

Sales (296,700 units × $9)…………………………………………………$2,670,300

Less: Cost of goods sold (296,700 units × $7.33)……………………2,174,811 Gross margin………………………………………………….…………$495,489 Less: Selling and administrative expenses……………………………363,030 Operating income………………………………………………………$132,459 Variable-costing income:

Sales (296,700 units × $9)…………………………………………………$2,670,300

Less variable expenses:

Variable cost of goods sold (296,700 units ×$6.73)………………(1,996,791)

Variable selling and administrative (296,700 units ×$0.90)……(267,030) Contribution margin………………………………….……………………$406,479

Less fixed expenses:

Fixed overhead…………………………………………………………(180,000)

Fixed selling and administrative…………………………………...…(96,000) Operating income…………………………………..………………………$130,479

P 8-37

1.Unit cost = $222,275/52,300 units = $4.25

Absorption-costing ending inventory = 2,700 units × $4.25 = $11,475

2.Variable-costing ending inventory:

$4.25 per unit – $0.50 per unit = $3.75 per unit

Ending inventory = 2,700 units × $3.75 = $10,125

Sales………………………………………………...………………………$455,010

Less: Variable cost of goods sold ($3.75 × 52,300 units)………….196,125 Contribution margin…………………………...………………………$258,885 Less fixed expenses:

Fixed overhead…………………………………………...……………(27,500)

Fixed selling and administrative……………………………………(145,000) Operating income………………………………………………..…………$86,385

CHAPTER 8 Absorption and Variable Costing, and Inventory Management

P 8-37 (Continued)3.

Total Sales

$116,000$90,000$661,010Less variable expenses:Cost of goods sold (75,000)

(37,500)

(308,625)Commissions -(9,000)

(9,000)Return penalties (4,640)

-(4,640)Packing expense -(5,000)(5,000)Contribution margin $36,360$38,500$333,745Less fixed expenses:Shipping

(8,500)-(8,500)Additional clerk (28,000)-(28,000)Segment margin

$(140)

$38,500

$297,245Less common expenses:Overhead

(27,500)Selling and administrative (145,000)Operating income

$124,745

4.Only two segments are profitable, the drugstores & supermarkets and the beauty shops. The discount stores are unprofitable. Sugarsmooth might consider raising the price to the discount stores. Alternatively, perhaps costs could be lowered. If neither of these is a possibility, then the discount stores should be dropped.

P 8-381.

Coffee Blenders Makers Total

Sales

$1,920,000$2,175,000$4,095,000Less: Variable cost of goods sold 1,600,0002,025,0003,625,000Contribution margin

$320,000

$150,000$470,000Less: Direct fixed expenses 92,400145,000237,400Segment margin

$227,600

$5,000

$232,600

Less: Common fixed expenses 89,600Operating income

$143,000

Sugarsmooth Inc.

Variable-Costing Income Statement

For the Coming Year Drugstores & Supermarkets Discount Stores Beauty Shops

$455,010(196,125)

Bismarck Company

Segmented Income Statement

--$258,885

---$258,885