BriefExercises

Identif BE81Determinewhethereachofthefollowingcostswouldbeclassifiedasproductcostsorperiod
ycosts
costsunderavariablecostingsystem:
as

ProductCost
PeriodCost
product
Commissionfeesforsalespersons

costs
or
Glueforwoodenchairsvariable

period
FabricforTshirts

costs
under
LabourcostsforproducingTVs

variabl
Factoryrentexpensefixed

e
costing
Factoryutilitycostsvariable

.
Carmileageforsalespersons

Administrativeexpensesfixed

AdministrativeInternetconnectionfees

Wagesassemblyline

Identify BE82Determinewhethereachofthefollowingcostswouldbeclassifiedasproductcostsor
costsas
periodcostsunderanabsorptioncostingsystem.
product

ProductCost
PeriodCost
costsor
Commissionfeesforsalespersons

period
costs
Glueforwoodenchairsvariable

under
FabricforTshirts

absorption
costing.
LabourcostsforproducingTVs

Factoryrentexpensefixed

Factoryutilitycostsvariable

Carmileageforsalespersons

Administrativeexpensesfixed

AdministrativeInternetconnectionfees

Wagesassemblyline

Identify *BE83Determinewhethereachofthefollowingcostswouldbeclassifiedasproductcostsor
costsas
periodcostsunderathroughputcostingsystem.
product

ProductCost
PeriodCost
costsor
Commissionfeesforsalespersons

period
costs
Glueforwoodenchairsvariable

under
FabricforTshirts

throughpu
tcosting.
LabourcostsforproducingTVs

Factoryrentexpensefixed

Factoryutilitycostsvariable

Carmileageforsalespersons

Administrativeexpensesfixed

AdministrativeInternetconnectionfees

Wagesassemblyline

Calculate BE84LargeOrangeCompanyproducesbasketballs.Itincurredthefollowingcostsduringthe
product
year:
costs
Directmaterials
$28,980
under
Directlabour
51,060
variable
costing.
Fixedmanufacturingoverhead
20,000
Variablemanufacturingoverhead

64,840

Sellingcosts

42,000

Whatisthetotalproductcostforthecompanyundervariablecosting?
Calculate BE85InformationforLargeOrangeCompanyisgiveninBE84.Whatisthetotalproductcostfor
product
thecompanyunderabsorptioncosting?
costs
under
absorption
costing.
Calculate
*BE86InformationforLargeOrangeCompanyisgiveninBE84.Whatisthetotalproduct
productcosts
costforthecompanyunderthroughputcosting?
under
throughput
costing.
Determinethe *BE87BurnsManufacturingincurredthefollowingcostsduringtheyear:directmaterials,$20
manufacturin
perunit;directlabour,$12perunit;variablemanufacturingoverhead,$15perunit;
gcostperunit
variablesellingandadministrativecosts,$8perunit;fixedmanufacturingoverhead,
underthe
$120,000;andfixedsellingandadministrativecosts,$10,000.Burnsproduced12,000
threecosting
unitsandsold10,000units.Determinethemanufacturingcostperunitunder(a)
approaches.
absorptioncosting,(b)variablecosting,and(c)throughputcosting.
Preparea BE88During2012,RafaelCorp.produced50,000unitsandsold40,000for$15perunit.
variable
Variablemanufacturingcostswere$6perunit.Annualfixedmanufacturingoverheadwas
costing
$80,000($2perunit).Variablesellingandadministrativecostswere$2perunitsold,and
income
fixedsellingandadministrativeexpenseswere$20,000.Prepareavariablecostingincome
statement.
statement.

Preparea *BE89InformationforRafaelCorp.isgiveninBE88.SupposetheaccountantforRafaelCorp.
normal
usesnormalcostingandusesthebudgetedvolumeof50,000unitstoallocatethefixed
costing
overheadrateratherthantheactualproductionvolumeof40,000units.Thecompany
income
expensesproductionvolumevariancetocostofgoodssoldintheaccountingperiodin
statement.
whichitoccurs.(a)Calculatethemanufacturingcostperunit.(b)Prepareanormalcosting
incomestatementforthefirstmonthofoperation.(c)Reconcilethedifferenceinnet
incomebetweentheabsorptioncostingandnormalcostingmethods.
Preparean BE810InformationforRafaelCorp.isgiveninBE88.(a)Prepareanabsorptioncostingincome
absorption
statement.(b)Reconcilethedifferencebetweenthenetincomeundervariablecostingand
costing
thenetincomeunderabsorptioncosting.Thatis,showacalculationthatexplainswhat
income
causesthedifferenceinnetincomebetweenthetwoapproaches.
statement
and
reconcile
the
difference
innet
income
underthe
two
approaches
.
Determine BE811CaspianCompanyproduced20,000unitsandsold18,000duringthecurrentyear.Under
netincome
absorptioncosting,netincomewas$25,000.Fixedoverheadwas$190,000.Determine
under
thenetincomeundervariablecosting.
variable
costing.

DoIt!Review
Calculate D812FreshAirProductsmanufacturesandsellsavarietyofcampingproducts.Recentlythe
total
companyopenedanewplanttomanufactureadeluxeportablecookingunit.Costandsales
product
dataforthefirstmonthofoperationsareshownbelow:
costand
Beginninginventory
0units
prepare
an
Unitsproduced
12,000
income
Unitssold
10,000
statement
using
ManufacturingCosts

absorptio
Fixedoverhead
$108,000
ncosting.
Variableoverhead

$3perunit

Directlabour

$12perunit

Directmaterial

$30perunit

Sellingandadministrativecosts
Fixed
Variable

$200,000
$4perunitsold

Theportablecookingunitsellsfor$110.Managementisinterestedintheopeningmonth's
resultsandhasaskedforanincomestatement.

Instructions

Assumingthecompanyusesabsorptioncosting:
(a)Calculatethemanufacturingcostperunit.
(b)Prepareanabsorptioncostingincomestatementforthefirstmonthofoperation.
Calculate D813InformationforFreshAirProductsisgiveninD812.
total
Instructions
product
costand
(a)Assumingthecompanyusesvariablecosting:
prepare
an
1. Calculatethemanufacturingcostperunit.
income

statemen
2. Prepareavariablecostingincomestatementforthefirstmonthofoperation.
tusing

variable
costing.
(b)Reconcilethedifferenceinnetincomebetweentheabsorptioncostingandvariable
costingmethods.

Calculate *D814InformationforFreshAirProductsisgiveninD812.
total
Instructions
product
costand
(a)Assumethecompanyusesnormalcostingandusesthebudgetedvolumeof13,500units
prepare
toallocatethefixedoverheadrateratherthantheactualproductionvolumeof12,000
an
units.Thecompanyexpensesproductionvolumevariancetocostofgoodssoldinthe
income
accountingperiodinwhichitoccurs.Dothefollowing:
statemen
tusing
1. Calculatethemanufacturingcostperunit.
normal

costing.
2. Prepareanormalcostingincomestatementforthefirstmonthofoperation.

(b)Reconcilethedifferenceinnetincomebetweentheabsorptioncostingandnormal
costingmethods.
Calculate *D815InformationforFreshAirProductsisgiveninD812.
total
Instructions
product
costand
(a)Assumingthecompanyusesthroughputcosting:
preparean
income
1. Calculatethemanufacturingcostperunit.
statement

using
2. Prepareathroughputcostingincomestatementforthefirstmonthofoperation.
throughput

costing.
(b)Reconcilethedifferenceinnetincomebetweenthevariablecostingandthroughput
costingmethods.

Exercises
Calculate *E816WuEquipmentCompanymanufacturesanddistributesindustrialaircompressors.The
total
followingdataareavailablefortheyearendedDecember31,2012.Thecompanyhadno
product
beginninginventory.In2012,itproduced1,500unitsbutsoldonly1,200units.Theunit
costand
sellingpricewas$4,500.Costsandexpenseswereasfollows:
preparean
Variablecostsperunit

income
statement
Directmaterials
$800
using
Directlabour
1,500
variable
costing
Variablemanufacturingoverhead
300
and
Variablesellingandadministrativeexpenses
70
throughpu
tcosting.
Annualfixedcostsandexpenses

Manufacturingoverhead
Sellingandadministrativeexpenses

$1,200,000
100,000

Instructions
(a)Calculatethemanufacturingcostofoneunitofproductusingvariablecosting.
(b)Preparea2012incomestatementforWuCompanyusingvariablecosting.
(c)Calculatethemanufacturingcostofoneunitofproductusingthroughputcosting.
(d)Preparea2012incomestatementforWuCompanyusingthroughputcosting.
(e)Reconcilethedifferencebetweenvariablecostingandthroughputcostingnetincome.
Prepare E817AsianWindowsmanufacturesahandpaintedbamboowindowshadeforstandardsize
income
windows.Productionandsalesdatafor2012areasfollows:
statement
Variablemanufacturingcosts
$40pershade
sunder
absorptio
Fixedmanufacturingcosts
$100,000
ncosting
Variablesellingandadministrativeexpenses
$9pershade
and
variable
Fixedsellingandadministrativeexpenses
$250,000
costing.
Sellingprice
$90pershade
Unitsproduced

10,000shades

Unitssold

8,500shades

Instructions
(a)Prepareanincomestatementusingabsorptioncosting.

(b)Prepareanincomestatementusingvariablecosting.

Calculate E818InformationforAsianWindowsisgiveninE817.
total
Instructions
product
costand
(a)Assumethecompanyusesnormalcostingandusesthebudgetedvolumeof8,000units
preparean
toallocatethefixedoverheadrateratherthantheactualproductionvolumeof10,000
income
units.Thecompanyexpensesproductionvolumevariancetocostofgoodssoldinthe
statement
accountingperiodinwhichitoccurs.Dothefollowing:
using
normal
1. Calculatethemanufacturingcostperunit.
costing.

2. Prepareanormalcostingincomestatementfor2012.

(b)Reconcilethedifferenceinnetincomebetweentheabsorptioncostingandnormal
costingmethods.
Calculate E819Bob'sCompanybuildscustomfishingluresforsportinggoodsstores.Initsfirstyearof
the
operations,2012,thecompanyincurredthefollowingcosts:
product
Variablecostperunit

costand
preparean
Directmaterials
$6.50
income
Directlabour
2.75
statement
under
Variablemanufacturingoverhead
5.75
variable
Variablesellingandadministrativeexpenses
3.90
costing.
Fixedcostsforyear
Fixedmanufacturingoverhead
Fixedsellingandadministrativeexpenses

$285,000
240,100

Bob'sCompanysellsthefishingluresfor$25.During2012,thecompanysold80,000lures
andproduced95,000lures.

Instructions
(a)Assumingthecompanyusesvariablecosting,calculateBob'smanufacturingcostper
unitfor2012.
(b)Prepareavariablecostingincomestatementfor2012.
Calculate E820InformationforBob'sCompanyisprovidedinE819.
the
Instructions
product
costand
(a)Assumingthecompanyusesabsorptioncosting,calculateBob'smanufacturingcostper

preparean
income
statement
under
absorptio
ncosting.

unitfor2012.
(b)Prepareanabsorptioncostingincomestatementfor2012.

Calculate *E821InformationforBob'sCompanyisprovidedinE819.
theproduct
Instructions(a)Assumethecompanyusesnormalcostingandusesthebudgetedvolume
costand
of93,860unitstoallocatethefixedoverheadrateratherthantheactual
preparean
productionvolumeof95,000units.Thecompanyexpensesproduction
income
volumevariancetocostofgoodssoldintheaccountingperiodinwhich
statement
itoccurs.Dothefollowing:
under
1. Calculatethemanufacturingcostperunit.
normal

costing.
2. Prepareanormalcostingincomestatementfor2012.

(b)Reconcilethedifferenceinnetincomebetweentheabsorptioncosting
andnormalcostingmethods.
Calculate E822EmpeyManufacturingproducestowelstobesoldassouvenirsatsportingevents
theproduct
throughouttheworld.Assumethatunitsproducedequalledunitssoldin2012.The
costunder
company'svariablecostingincomestatementisasfollows:
absorption
EMPEYMANUFACTURING
costing
IncomeStatement
and
YearEndedDecember31,2012
variable
VariableCosting
costing,
preparean
Sales(260,700units)

$521,400
absorption
Variablecostofgoodssold
$255,486

costing
income
Variablesellingexpenses
31,284

statement,
Variableadministrativeexpenses
36,498
323,268
and
compare
Contributionmargin

198,132
the
Fixedmanufacturingoverhead
96,459

usefulness
ofthe
Fixedsellingexpenses
38,500

variable
Fixedadministrativeexpenses
42,625
177,584
costing
format
Netincome

$20,548
versusthe
Unitsellingprice
$2.00

absorption
costing
Variablecostsperunit

format.

EMPEYMANUFACTURING
IncomeStatement
YearEndedDecember31,2012
VariableCosting
Directmaterial

$0.26

Directlabour

$0.34

Variableoverhead

$0.38

Variablesellingexpenses

$0.12

Variableadministrativeexpenses

$0.14

Instructions(a) Calculatethemanufacturingcostpertowel

undervariablecosting.
(b) Calculatethemanufacturingcostpertowel
underabsorptioncosting.
(c)PrepareanabsorptioncostingincomestatementforEmpeyManufacturing.
(d)Explainwhythereisorisnotadifferenceinthenetincomeamountsinthetwo
incomestatements.
(e)ExplainwhyEmpeyManufacturingCompanymightwanttopreparebothan
absorptioncostingincomestatementandavariablecostingincomestatement.
Determinethe E823OrtizCompanyproduced10,000unitsduringthepastyearbutsoldonly8,500ofthe
ending
units.Thefollowingadditionalinformationisalsoavailable:
inventory
Directmaterialsused
$70,000
undervariable
costing;
Directlabourincurred
30,000
determine
Variablemanufacturingoverhead
25,000
whether
absorptionor
Fixedmanufacturingoverhead
40,000
variable
Fixedsellingandadministrativeexpenses
70,000
costingwould
resultina
Variablesellingandadministrativeexpenses
10,000
highernet
Therewasnoworkinprocessinventoryatthebeginningoftheyear.Ortizdidnothave
income.
anybeginningfinishedgoodsinventoryeither.

Instructions
(a)CalculateOrtizCompany'sfinishedgoodsinventorycostonDecember31under
variablecosting.
(b)Determinewhichcostingmethod,absorptionorvariable,wouldshowahighernet
incomefortheyear.Bywhatamount?
Calculatethe E824HardwoodInc.producesmostlywoodencratesusedforshippingproductsbyocean
manufacturin
freighter.In2012,Hardwoodincurredthefollowingcosts:
gcostunder
Woodused
$54,000
absorption
andvariable
Nails(consideredinsignificantandavariableexpense)
350
costingand
Directlabour
37,000
explainthe
difference.
Utilitiesfortheplant:$2,000eachmonth,plus$0.50foreachkilowatthour

usedeachmonth

Rentexpenseforplantforyear

21,400

AssumeHardwoodusedanaverageof500kilowatthourspermonthoverthepastyear.

Instructions
(a)CalculateHardwood'stotalmanufacturingcostifitusesavariablecostingapproach.
(b)CalculateHardwood'stotalmanufacturingcostifitusesanabsorptioncosting
approach.
(c)Determinethereasonforthedifferencebetweenmanufacturingcostsunderthese
twocostingapproaches.

Calculatethe *E825Duringitssecondyearofoperations,TGSCorporationproduced3,000unitsandsold
manufacturin
2,800unitsat$60each.Thebeginninginventorycomprised100units,andcostswere
gcostunder
unchangedfromthepreviousyear.Costsincurredduringthesecondyearwereas
absorption,
follows:
variable,and
Directmaterialsperunitproduced
$8
throughput
costingand
Directlabourperunitproduced
9
explainthe
Variableoverheadperunitproduced
12
differences.
Variablesellingandadministrativecostsperunitsold
Totalfixedproductionoverhead
Totalfixedsellingandadministrativecosts

Instructions
(a)ReconcileTGS'sincomebasedonabsorptioncostingandvariablecosting.
(b)ReconcileTGS'sincomebasedonvariablecostingandthroughputcosting.

3
18,000
6,000

Problems:SetA
Calculate *P826ABlueMountainProductsmanufacturesandsellsavarietyofcampingproducts.
theproduct
Recently,thecompanyopenedanewplanttomanufacturealightweight,selfstanding
cost;
tent.Costandsalesdataforthefirstmonthofoperations(June2012)areasfollows:
prepare
Manufacturingcosts

income
statements
Fixedoverhead
$200,000
under
Variableoverhead
$4pertent
variable
costing,
Directlabour
$16pertent
absorption
Directmaterial
$40pertent
costing,
and
Beginninginventory
0tents
throughput
Tentsproduced
10,000
costing;
and
Tentssold
9,000
reconcile
Sellingandadministrativecosts

the
differences
Fixed
$400,000
.
Variable
$6pertentsold
Thetentsellsfor$150.Managementisinterestedintheopeningmonth'sresultsandhas
askedforanincomestatement.

Instructions
(a)Assumingthecompanyusesabsorptioncosting:

1. Calculatethemanufacturingcostperunit.

2. PrepareanabsorptioncostingincomestatementforthemonthofJune2012.

(b)Assumingthecompanyusesvariablecosting:
1. Calculatethemanufacturingcostperunit.

2. PrepareavariablecostingincomestatementforthemonthofJune2012.

(c)Reconcilethedifferenceinnetincomebetweentheabsorptioncostingandvariable
costingmethods.
(d)Assumingthecompanyusesthroughputcosting:
1. Calculatethemanufacturingcostperunit.

2. PrepareathroughputcostingincomestatementforthemonthofJune2012.

(e)Reconcilethedifferenceinnetincomebetweenthevariablecostingandthroughput
costingmethods.

Prepare P827AAFNCompanyproducesplasticthatisusedforinjectionmouldingapplicationssuchas
income
gearsforsmallmotors.In2012,thefirstyearofoperations,AFNCompanyproduced
statements
8,000tonnesofplasticandsold6,000tonnes.In2013,theproductionandsalesresults
under
wereexactlyreversed.Ineachyear,thesellingpricepertonnewas$2,500;variable
absorption
manufacturingcostswere15%ofthesalespricefortheunitsproduced;variableselling
costing
expenseswere20%ofthesellingpriceoftheunitssold;fixedmanufacturingcostswere
and
$3.2million;andfixedadministrativeexpenseswere$600,000.
variable
Instructions
costingfor
acompany
(a)Preparecomparativeincomestatementsforeachyearusingvariablecosting.(Usethe
with
formatfromIllustration85.)
beginning
(b)Preparecomparativeincomestatementsforeachyearusingabsorptioncosting.(Use
inventory.
theformatfromIllustration84.)
(c)Reconcilethedifferencesintheincomefromoperationseachyearunderthetwo
costingapproaches.
(d)Commentontheeffectsthattheproductionandsaleslevelshaveonnetincomeunder
thetwocostingapproaches.

Prepare P828ABasicElectricMotorsisadivisionofBasicElectricProductsCorporation.Thedivision
absorption
manufacturesandsellsanelectricswitchusedinawidevarietyofapplications.Duringthe
and
comingyear,itexpectstosell200,000unitsfor$8perunit.EsterMaddenisthedivision
variable
manager.Sheisconsideringproducingeither200,000or250,000unitsduringtheperiod.
costing
Otherinformationisasfollows:
income
DivisionInformationfor2012
statements,
reconcile
Beginninginventory
0
the
Expectedsalesinunits
200,000
differences
between
Sellingpriceperunit
$8
absorption
Variablemanufacturingcostperunit
$3
and
variable
Fixedmanufacturingcost(total)
$500,000
costing
Fixedmanufacturingoverheadcosts

income
perunit
statements
whensales
Basedon200,000units
$2.50 perunit(
)
and
production

levels
change,
and
discussthe
usefulness
of
absorption
costing
versus
variable
costing.

DivisionInformationfor2012
Basedon250,000units
Manufacturingcostperunit

$2.00 perunit(

Basedon200,000units

$5.50 perunit(
fixed)

Basedon250,000units

$5.00 perunit(

Variablesellingandadministrative
expenses
Fixedsellingandadministrative
expenses(total)

$0.50 perunit
$12,000

Instructions
(a)Prepareanabsorptioncostingincomestatement,withonecolumnshowingtheresults
if200,000unitsareproducedandonecolumnshowingtheresultsif250,000unitsare
produced.
(b)Prepareavariablecostingincomestatement,withonecolumnshowingtheresultsif
200,000unitsareproducedandonecolumnshowingtheresultsif250,000unitsare
produced.
(c)Reconcilethedifferenceinthenetincomesunderthetwoapproachesandexplain
whatcausesthisdifference.
(d)Discusstheusefulnessofthevariablecostingincomestatementsversusthe
absorptioncostingincomestatementsfordecisionmakingandforevaluatingthe
manager'sperformance.

Preparean *P829AAltaProductsLtd.hasjustcreatedanewdivisiontomanufactureandsellDVDplayers.
income
Thefacilityishighlyautomatedandthushashighmonthlyfixedcosts,asshowninthe
statement
followingscheduleofbudgetedmonthlycosts.Thisschedulewaspreparedbasedonan
under
expectedmonthlyproductionvolumeof2,000units.
variable
Manufacturingcosts

costing,
absorption
Variablecostsperunit

costing,
Directmaterials
$30
and
throughput
Directlabour
40
costingand
Variableoverhead
10
reconcile
the
Totalfixedoverhead
70,000
differences;
Sellingandadministrativecosts

discussthe
usefulness
Variable
6%ofsales
of

absorption
costing
versus
variable
costing.

Fixed

$50,000

DuringAugust2012,thefollowingactivitywasrecorded:

Unitsproduced

2,000

Unitssold

1,700

Sellingpriceperunit

$175

Instructions
(a)PrepareanincomestatementforthemonthendedAugust31,2012,underabsorption
costing.
(b)PrepareanincomestatementforthemonthendedAugust31,2012,undervariable
costing.
(c)Reconciletheabsorptioncostingandvariablecostingincomefiguresforthemonth.
(d)PrepareanincomestatementforthemonthendedAugust31,2012,under
throughputcosting.
(e)Reconcilethevariablecostingincomeandthroughputcostingincomefiguresforthe
month.
(f)Whataresomeoftheargumentsinfavourofusingvariablecosting?Whataresome
oftheargumentsinfavourofusingabsorptioncosting?
(adaptedfromCGACanada)

Calculate *P830AInformationforAltaProductsLtd.isprovidedinP829A.
theproduct
Instructions
costand
preparean
(a)Assumethecompanyusesnormalcostingandusesthebudgetedvolumeof2,500
income
unitstoallocatethefixedoverheadrateratherthantheactualproductionvolumeof
statement
2,000units.Thecompanyexpensesproductionvolumevariancetocostofgoods
under
soldintheaccountingperiodinwhichitoccurs.Dothefollowing:
normal
costing.
1. Calculatethemanufacturingcostperunit.

2. PrepareanormalcostingincomestatementforthemonthendedAugust31,
2012.
(b)Reconcilethedifferenceinnetincomebetweentheabsorptioncostingandnormal

costingmethods.

Calculate P831AAmanjeetChinmayileftherjobastheproductionmanagerofamediumsizedfirmtwo
product
yearsagotojoinanewfirmthatwasmanufacturingarevolutionarytypeoffitness
cost,
equipment.Amanjeetwasmadethegeneralmanageratthestartofoperations,andthe
prepare
firmseemedtobedoingextremelywell.Thepresidentwasextremelypleasedwiththe
income
company'sfirstyearperformanceand,atthebeginningofthesecondyear,promised
statements
Amanjeeta$20,000bonusifthecompany'snetincomeweretoincreaseby25%inyear
under
2.
variable
Duringyear2,Amanjeetsold25%moreunitsthanshehadinyear1andwasso
costingand
confidentthatshewouldreceiveherbonusthatsheboughtnonrefundableairlinetickets
absorption
toEuropeforherhusbandLeo,herthreesons,andherself.
costing,
Attheendofyear2,Amanjeetreceivedtheincomestatement,anditshowedthatthe
and
company'sincomehaddecreasedfromyear1eventhoughithadsoldconsiderablymore
reconcile

the
difference
whensales
and
production
levels
change.

units.Amanjeetdidnotgetalongverywellwiththeaccountantandfeltthathehad
deliberatelydistortedthefinancialstatementsforyear2.
Amanjeetreceivedthefollowingreports:

Year1

Year2

Production(inunits)

6,000

3,000

Sales(inunits)

4,000

5,000

$500

$500

$300

$300

20

20

Fixedmanufacturing

180,000

210,000

Fixedselling

100,000

140,000

$2,000,000

$2,500,000

1,320,000

1,770,000

Grossmargin

680,000

730,000

Sellingexpenses

180,000

240,000

$500,000

$490,000

Unitsellingprice
Unitcosts
Variablemanufacturing
Variableselling

IncomeStatement(FIFO)
Sales
Costofgoodssold

Netincome

Instructions
(a)Preparevariablecostingincomestatementsforyears1and2.
(b)Foryears1and2,reconcilethedifferencesbetweenthenetincomeasdetermined
bytheincomestatementsyouhavepreparedinpart(a)andtheincomestatements
preparedbytheaccountant.
(c)ExplaintoAmanjeetwhyshelosther$20,000bonus.Whichincomestatementmore
accuratelymeasuresperformance?Why?
(adaptedfromCGACanada)

Calculate *P832AXantraCorp.isamanufacturerofspecialtyinlineskates.Theoperatingresultsfor2012
theproduct
areasfollows:
cost;
Unitsproduced
20,000 pairs
prepare
income
Unitssold
18,000 pairs
statements
Sellingprice
$200 perpair
under
variable

Productioninformation:
costing,
Directmaterials
$1,000,000
absorption
costing,
Directlabour
750,000
and

throughput
costing;
and
reconcile
the
differences
.

Variablemanufacturingoverhead

450,000

Fixedmanufacturingoverhead

800,000

Variablemarketingcosts

180,000

Fixedmarketingcosts

200,000

Therewasnobeginningfinishedgoodsinventory.

Instructions
(a)Prepareanabsorptioncostingincomestatement.
(b)Prepareavariablecostingincomestatement.
(c)Reconcilethenetincomesunderabsorptioncostingandvariablecosting.
(d)Calculatethebreakevenpointinsalesunits(pairsofskates)underthecurrentcost
structure.
(e)Prepareathroughputcostingincomestatement.
(f)Reconcilethenetincomesunderthroughputcostingandvariablecosting.
(adaptedfromCGACanada)
Calculate *P833AInformationforXantraCorp.isprovidedinP832A.
the
Instructions
product
costand
(a)Assumethecompanyusesnormalcostingandusesthebudgetedvolumeof25,000
preparean
pairstoallocatethefixedoverheadrateratherthantheactualproductionvolumeof
income
20,000pairs.Thecompanyexpensesproductionvolumevariancetocostofgoods
statement
soldintheaccountingperiodinwhichitoccurs.Dothefollowing:
under
normal
1. Calculatethemanufacturingcostperunit.
costing.

2. Prepareanormalcostingincomestatementfor2012.

(b)Reconcilethedifferenceinnetincomebetweentheabsorptioncostingandnormal
costingmethods.

Explain
P834ASunCompany,awhollyownedsubsidiaryofGuardian,Inc.,producesandsellsthree
variable
mainproductlines.Atthebeginningof2011,thepresidentofSunCompanypresented
costing
thebudgettotheparentcompanyandacceptedacommitmenttocontribute$15,800to
and
Guardian'sconsolidatedprofitin2012.Thepresidentwasconfidentthattheyear'sprofit
absorption
wouldexceedthebudgettarget,sincethemonthlysalesreportshadshownthatsalesfor
costing
theyearwouldbe10%morethanwhathadbeenpredictedinthebudget.Thepresidentis
and
bothdisturbedandconfusedwhenthecontrollerpresentsanadjustedforecastasat
reconcile
November30,2012,indicatingthatprofitswillbe11%underbudget.Thetwoforecasts

the
difference
swhen
salesand
production
levels
change.

arepresentedbelow:
SUNCOMPANY
ForecastsofOperatingResults

Sales

January1,
2012

November30,
2012

$268,000

$294,800

233,200

56,000

61,600

(6,000)

Actualgrossmargin

56,000

55,600

Sellingexpenses

13,400

14,740

Administrativeexpenses

26,800

26,800

Totaloperatingexpenses

40,200

41,540

$15,800

$14,060

Costofsales
Grossmargin
Overapplied(underapplied)fixedmanufacturing
overhead

Earningsbeforetax

212,000

TherehavebeennosalespricechangesorproductmixshiftssincetheJanuary1,2012,
forecast.Variablecostshaveremainedconstantthroughouttheyear.Theonlycostthat
hasvariedintheincomestatementistheunderappliedmanufacturingoverhead.This
happenedbecausethecompanyworkedonly16,000machinehoursduring2012
(budgetedmachinehourswere20,000)asaresultofashortageofrawmaterialswhenits
mainsupplierwasclosedbyastrike.Fortunately,SunCompany'sfinishedgoods
inventorywaslargeenoughtofillallsalesordersreceived.

Instructions
(a)Analyzeandexplainwhyprofithasdeclinedinspiteofincreasedsalesandcontrol
overcosts.
(b)Whatplan,ifany,couldSunCompanyadoptduringDecembertoimprovethe
reportedprofitatyearend?Explainyouranswer.
(c) ExplainandillustratehowSunCompanycoulduseadifferentinternalcostreporting
procedurethatwouldnotresultintheconfusingeffectoftheprocedureitcurrently
uses.

Prepare P835ATheDanielsTool&DieCorporationhasbeeninexistenceforalittleoverthreeyears.The
income
company'ssaleshavebeenincreasingeachyearasitbuildsareputation.Thecompany
statements
manufacturesdiestoitscustomers'specificationsandthereforeusesajobordercost
under
system.Factoryoverheadisappliedtothejobsbasedondirectlabourhoursthe
variable
absorptioncosting(full)method.Overappliedorunderappliedoverheadistreatedasan
costing
adjustmenttoCostofGoodsSold.Thecompany'sincomestatementsandotherdatafor
and
thelasttwoyearsareasfollows:
absorption
DANIELSTOOL&DIECORPORATION
costing
20112012ComparativeIncomeStatements
and
reconcile

2011
2012
the
Sales
$840,000
$1,015,000
differences
whensales
Costofgoodssold

and
Finishedgoods,January1
25,000
18,000
production
levels
Costofgoodsmanufactured
548,000
657,600
change;
Totalavailable
573,000
675,600
discussthe
usefulness
Finishedgoods,December31
18,000
14,000
of
Costofgoodssoldbeforeoverheadadjustment
555,000
661,600
absorption
costing
Underappliedfactoryoverhead
36,000
14,400
versus
Costofgoodssold
591,000
676,000
variable
costing.
Grossprofit
249,000
339,000
Sellingexpenses

82,000

95,000

Administrativeexpenses

70,000

75,000

152,000

170,000

$97,000

$169,000

Totaloperatingexpenses
Operatingincome

DanielsTool&DieCorporationInventory
Balances

January1,2011

December31,2011

December31,
2012

Rawmaterial

$22,000

$30,000

$10,000

Workinprocess

$40,000

$48,000

$64,000

1,335

1,600

2,100

$25,000

$18,000

$14,000

1,450

1,050

820

Directlabour
hours
Finishedgoods
Directlabour
hours

Danielsusedthesamepredeterminedoverheadrateinapplyingoverheadtoitsproduction
ordersinboth2011and2012.Theratewasbasedonthefollowingestimates:
Fixedfactoryoverhead

$25,000

Variablefactoryoverhead

$155,000

Directlabourhours

25,000

Directlabourcosts

$150,000

In2011and2012,theactualdirectlabourhoursusedwere20,000and23,000,
respectively.Rawmaterialsputintoproductionwere$292,000in2011and$370,000in
2012.Theactualfixedoverheadwas$42,300for2011and$37,400for2012,andthe
planneddirectlabourratewasthedirectlabourachieved.
Forbothyears,alloftheadministrativecostswerefixed.Thevariableportionofthe
sellingexpensesresultsfroma5%commissionthatispaidasapercentageofthesales
revenue.

Instructions
(a)FortheyearendedDecember31,2012,preparearevisedincomestatementfor
DanielsTool&DieCorporationusingthevariablecostingmethod.
(b)ReconcilethedifferenceinoperatingincomebetweenDanielsTool&Die
Corporation's2012absorptioncostingincomestatementandtherevised2012income
statementpreparedundervariablecosting.
(c)Describeboththeadvantagesanddisadvantagesofusingvariablecosting.

Problems:SetB
Calculate *P836BSpongeFunProductsmanufacturesandsellsavarietyofswimmingproducts.Recently,
theproduct
thecompanyopenedanewplanttomanufacturealightweight,inflatableboat.Costand
cost;
salesdatafor2012areshownbelow:
preparean
Manufacturingcosts

income
statement
Fixedoverheadcosts
$150,000
under
Variableoverhead
$5 perboat
variable
costing,
Directlabour
$10 perboat
absorption
Directmaterials
$10 perboat
costing,
and
Beginninginventory
0 boats
throughput
Boatsproduced
50,000
costing;
and
Boatssold
46,000
reconcile
Sellingandadministrativecosts

the
differences
Fixed
$300,000
.
Variable
$8 perboatsold
Theboatsellsfor$60.Managementisinterestedinthefirstyear'sresultsandhasasked
foranincomestatement.

Instructions
(a)Assumingthecompanyusesabsorptioncosting:
1. Calculatetheproductioncostperunit.

2. Prepareanincomestatementfor2012.

(b)Assumingthecompanyusesvariablecosting:
1. Calculatetheproductioncostperunit.

2. Prepareanincomestatementfor2012.

(c)Reconcilethedifferenceinnetincomebetweentheabsorptioncostingandvariable
costingmethods.
(d)Assumingthecompanyusesthroughputcosting:
1. Calculatethemanufacturingcostperunit.

2. Prepareathroughputcostingincomestatementfor2012.

(e)Reconcilethedifferenceinnetincomebetweenthevariablecostingandthroughput
costingmethods.

Calculate *P837BInformationforSpongeFunProductsisprovidedinP836B.
the
Instructions
product
costand
(a)Assumethecompanyusesnormalcostingandusesthebudgetedvolumeof60,000
preparean
unitstoallocatethefixedoverheadrateratherthantheactualproductionvolumeof
income
50,000units.Thecompanyexpensesproductionvolumevariancetocostofgoods
statement
soldintheaccountingperiodinwhichitoccurs.Dothefollowing:
under
normal
1. Calculatethemanufacturingcostperunit.
costing.

2. Prepareanormalcostingincomestatementfor2012.

(b)Reconcilethedifferenceinnetincomebetweentheabsorptioncostingandnormal
costingmethods.
Prepare P838BZakiMetalCompanyproducesthesteelwirethatisusedfortheproductionofpaperclips.
income
In2012,thefirstyearofoperations,Zakiproduced60,000kmofwireandsold50,000
statement
km.In2013,theproductionandsalesresultswereexactlyreversed.Ineachyear,the
sunder
sellingpriceperkilometrewas$120;variablemanufacturingcostswere25%ofthesales
absorptio
priceoftheunitsproduced;variablesellingexpenseswere$9perkilometresold;fixed
ncosting
manufacturingcostswere$1.5million;andfixedadministrativeexpenseswere$300,000.
and
Instructions
variable
costing
(a)Preparecomparativeincomestatementsforeachyearusingvariablecosting.(Usethe
fora
formatfromIllustration85.)
company
(b)Preparecomparativeincomestatementsforeachyearusingabsorptioncosting.(Use
with
theformatfromIllustration84.)
beginning
(c)Reconcilethedifferencesforeachyearinincomefromoperationsunderthetwo
inventory.
costingapproaches.
(d)Commentontheeffectsthattheproductionandsaleslevelshaveonnetincomeunder
thetwocostingapproaches.

Prepare
P839BHarrisonPumpsisadivisionofLiverpoolControlsCorporation.Thedivision
absorption
manufacturesandsellsapumpthatisusedinawidevarietyofapplications.Duringthe
and
comingyear,itexpectstosell60,000unitsfor$20perunit.ImranQureshimanagesthe
variable
division.Heisconsideringproducingeither60,000or100,000unitsduringtheperiod.
costing
Otherinformationisasfollows:
income
DivisionInformationfor2012
statements;
reconcile
Beginninginventory
0
the
Expectedsalesinunits
60,000
differences
between
Sellingpriceperunit
$20
thetwo
Variablemanufacturingcost
$9
income
perunit
statements
whensales
Fixedmanufacturingoverhead $240,000
and
cost(total)
production
Fixedmanufacturingoverhead

levels
costsperunit
change;
discussthe
Basedon60,000units
$4.00
perunit
usefulness
ofthetwo
Basedon100,000units
$2.40
perunit
approaches
tocosting.
Manufacturingcostperunit

Basedon60,000units

$13 per
unit

Basedon100,000units

$11.40 per
unit

Variablesellingand
administrativeexpenses
Fixedsellingand
administrativeexpenses(total)

Instructions

$1 perunit
$30,000

(a)Prepareanabsorptioncostingincomestatement,withonecolumnshowingthe
resultsif60,000unitsareproducedandonecolumnshowingtheresultsif100,000
unitsareproduced.
(b)Prepareavariablecostingincomestatement,withonecolumnshowingtheresultsif
60,000unitsareproducedandonecolumnshowingtheresultsif100,000unitsare
produced.
(c)Reconcilethedifferenceinnetincomesunderthetwoapproachesandexplainwhat
causesthisdifference.
(d)Discusstheusefulnessofthevariablecostingincomestatementsversusthe
absorptioncostingincomestatementsfordecisionmakingandforevaluatingthe
manager'sperformance.

Calculate *P840BAllerdyceCorporationLtd.(ACL)preparesexternalfinancialstatementsusing
theproduct
absorptioncostingandinternalfinancialstatementsusingvariablecosting.Youhavethe
cost,
followinginformationfortheoperationsofACLforthepasttwoyears:
prepare

2011
2012
income
statements
Salesinunits(@$35perunit)
25,000
35,000
under
Productioninunits
30,000
30,000
variable
costing
Variableproductioncostsperunit
$20
$20
and
Fixedproductioncosts
$120,000
$120,000
absorption
costing,
Fixedmarketingcosts
$50,000
$50,000
and
Beginninginventory
0

reconcile
the
Instructions
differences
(a)PrepareabsorptioncostingincomestatementsfortheyearsendedDecember31,
whensales
2011,and2012.Includeacolumnfortotalsforthetwoyears.
and
production
(b)PreparevariablecostingincomestatementsfortheyearsendedDecember31,2011,
levels
and2012.Includeacolumnfortotalsforthetwoyears.
change.
(c)Reconciletheyeartoyeardifferencesinnetincomeundertheabsorptioncosting
andvariablecostingmethods.

Calculate P841BThevicepresidentofAbscorpLtd.isnothappy.Saleshavebeenrisingsteadily,but
theproduct
profitshavebeenfalling.InSeptember2012,Abscorphadrecordsales,butthelowest
cost,
profitsever.TheresultsforthemonthsofJuly,August,andSeptember2012follow:
prepare
ABSCORPLTD.
income
ComparativeMonthlyIncomeStatements
statements
(inthousands)
under
variable

July
August
September
costingand
Sales(@$25perunit)
$1,750
$1,875
$2,000
absorption
costing,and
Lesscostofgoodssold

reconcile
Openinginventory
80
320
400
the
differences
Costsappliedtoproduction

whensales
Variablemanufacturing(@$9perunit)
765
720
540
and
production
Fixedmanufacturingoverhead
595
560
420
levels
Costofgoodsmanufactured
1,360
1,280
960
change.
Goodsavailableforsale

1,440

1,600

1,360

Lessendinginventory

320

400

80

Costofgoodssold

1,120

1,200

1,280

(35)

140

1,085

1,200

1,420

Grossmargin

665

675

580

Lesssellingandadministrativeexpenses

620

650

680

$45

$25

$(100)

Underapplied(overapplied)fixedoverhead
Adjustedcostofgoodssold

Netincome(loss)

Youhavebeenaskedtoexplaintothevicepresidentthattheproblemismoreamatterof
appearancethanrealitybyreinterpretingtheresultsinavariablecostingformat.You
obtainthefollowinginformationthatwillhelpyou:

Production

July

August

September

85,000units

80,000units

60,000units


Sales

July

August

September

70,000

75,000

80,000

Additionalinformationaboutthecompany'soperationsisasfollows:
Therewere5,000unitsoffinishedgoodsintheopeninginventoryonJuly1,2012.

Fixedmanufacturingoverheadcoststotalled$1,680,000perquarterandwere
incurredevenlythroughoutthequarter.Thefixedmanufacturingoverheadcostis
appliedtotheunitsofproductionbasedonabudgetedproductionvolumeof
80,000unitspermonth.
Variablesellingandadministrativeexpensesare$6perunitsold.Theremaining
sellingandadministrativeexpensesonthecomparativemonthlyincomestatements
arefixed.
ThecompanyusesaFIFOcostflowassumption.Workinprocessinventoriesare
smallenoughtobeignored.

Instructions
(a)Calculatethemonthlybreakevenpointundervariablecosting.
(b)
1.

2.

3.

Calculatethenetincomeforeachmonthundervariablecosting.
Reconcilethevariablecostingandabsorptioncostingnetincomesforeach
month.
Explainwhyprofitshavenotbeenmorecloselyrelatedtochangesinthesales
volume.
(adaptedfromCGACanada)

Calculate P842BBoatRefitInc.producesandsellscustompartsforpowerboats.Thecompanyusesa
theproduct
costingsystembasedonactualcosts.Selectedaccountingandproductioninformationfor
cost
fiscal2012isasfollows:
contributio
Netincome(underabsorptioncosting)
$400,000
nmargin
under
Sales
$3,400,000
variable
Fixedfactoryoverhead
$600,000
costingand
thegross
Fixedsellingandadministrativecosts(allcostsarefixed)
$400,000
margin
Netincome(undervariablecosting)
$310,000
under
absorption
Unitsproduced
2,000
costing.
Unitssold
?
BoatRefithadnoworkinprocessinventoryateitherthebeginningortheendoffiscal
2012.Aswell,thecompanydidnothaveanyfinishedgoodsinventoryatthebeginningof
thefiscalyear.

Instructions

(a)Calculatetheunitssoldinfiscal2012.
(b)Calculatethetotalcontributionmarginundervariablecosting.
(c)Calculatethegrossmarginunderabsorptioncosting.
(d)Calculatethecostperunitsoldundervariablecosting.
(e)Calculatethecostperunitsoldunderabsorptioncosting.
(adaptedfromCGACanada)

Preparean P843BWingfootCo.beganoperationsonJuly1,2011.Bytheendofitsfirstfiscalyear,ended
income
June30,2012,Wingfoothadsold10,000wingers.Selecteddataonoperationsfortheyear
statement
endedJune30,2012,follow.(AnybalancesheetfiguresareasatJune30,2012.)
under
Sellingprice
$100
variable
costing;
Wingersproduced
18,000
discussthe
Endingworkinprocess
0
advantage
sof
Totalmanufacturingoverhead
$15,000
variable
Wagerate
$8 perhour
costing
over
Machinehoursused
9,000
absorption
Wagespayable
$20,000
costing.
Directmaterialscosts
$10 perkilogram
Sellingandadministrativeexpenses

$40,000

Additionalinformation:
1.

2.

3.

4.

Eachwingerrequires2kgofdirectmaterials,0.5machinehours,andonedirect
labourhour.
Exceptformachinerydepreciationof$5,000anda$1,000miscellaneousfixed
cost,allmanufacturingoverheadisvariable.
Exceptfor$4,000inadvertisingexpenses,allsellingandadministrativeexpenses
arevariable.
Thetaxrateis40%.

Instructions

Assumethatthecompanyusesvariablecostingandprepareacontributionmethodincome
statementingoodformfortheyearendedJune30,2012.
(adaptedfromCGACanada)

Calculate P844BPortlandOptics,Inc.,specializesinmanufacturinglensesforlargetelescopecamerasused
the
inspaceexploration.Sincethespecificationsforthelensesaredeterminedbythecustomer
product
andvaryconsiderably,thecompanyusesajobordercostingsystem.Itappliesfactory
cost;
overheadtojobsbasedondirectlabourhoursusingtheabsorption(full)costingmethod.
prepare
Portland'spredeterminedoverheadratesfor2011and2012werebasedonthefollowing
income
estimates:
statements

2011
2012
under
variable
Directlabourhours
32,500
44,000
costing
Directlabourcost
$325,000
$462,000
and
absorption
Fixedfactoryoverhead
$130,000
$176,000
costing,
Variablefactoryoverhead
$162,500
$198,000
and
reconcile
MarieMichelleDavid,Portland'scontroller,wouldliketousevariablecostingforinternal
the
reportingsinceshebelievesstatementspreparedusingvariablecostingaremore
difference
appropriateformakingproductdecisions.Inordertoexplainthebenefitsofvariable
swhen
costingtotheothermembersofPortland'smanagementteam,MarieMichelleplansto
salesand
convertthecompany'sincomestatementfromabsorptioncostingtovariablecosting.She
production
hasgatheredthefollowinginformation,alongwithacopyofPortland'scomparative
levels
incomestatementfortheyears2011and2012.
change;
discussthe
usefulness
of
absorption
costing
versus

variable
costing.

PORTLANDOPTICS,INC.
ComparativeIncomeStatement
Years20112012

2011

Netsales

2012

$1,140,000

$1,520,000

16,000

25,000

Costofgoodsmanufactured

720,000

976,000

Totalavailable

736,000

1,001,000

25,000

14,000

711,000

987,000

12,000

7,000

Costofgoodssold

723,000

994,000

Grossprofit

417,000

526,000

Sellingexpenses

150,000

190,000

Administrativeexpenses

160,000

187,000

310,000

377,000

$107,000

$149,000

Costofgoodssold
Finishedgoods,January1

Finishedgoods,December31
Costofgoodssoldbeforeoverheadadjustment
Overheadadjustment

Totaloperatingexpenses
Operatingincome

Portland'sactualmanufacturingdataforthetwoyearsareasfollows:

Directlabourhours

2011

2012
30,000

42,000

2011

2012

Directlabourcost

$300,000

$435,000

Rawmaterialsused

$140,000

$210,000

Fixedfactoryoverhead

$132,000

$175,000

Thecompany'sactualinventorybalanceswereasfollows:

Dec.31,2010

Rawmaterial
Workinprocess
Costs
Directlabourhours
Finishedgoods
Costs
Directlabourhours

Dec.31,2011

Dec.31,2012

$32,000

$36,000

$18,000

$44,000

$34,000

$60,000

1,800

1,400

2,500

$16,000

$25,000

$14,000

700

1,080

550

Forbothyears,alladministrativecostswerefixed.Aportionofthesellingexpenseswas
variableasitresultedfroman8%commissionpaidonnetsales.Portlandreportsanyover
orunderappliedoverheadasanadjustmenttoCostofGoodsSold.

Instructions
(a)FortheyearendedDecember31,2012,preparetherevisedincomestatementfor
PortlandOptics,Inc.,usingthevariablecostingmethod.Besuretoincludethe
contributionmarginontherevisedincomestatement.
(b)Describetwoadvantagesofusingvariablecostingratherthanabsorptioncosting.