ACCT112 Management Accounting: WEEK 4 (Textbook Suggested Solution)

10.19 Your manager may be trying to save you from low-value drudgery so that you can do more valued
work. Furthermore, individual, job-level overhead variances may appear to be immaterial. However, they
could add up to a very large adjustment to cost of sales. If your organization has policies and controls
regarding adjustments for overhead variances, it would be best to follow them. Your manager could have
ulterior motives related to a desire to cover up costs or misstate periodic earnings.
10.30

(30 min) Costs traced to jobs

f.

Operating profit = Sales S & A cost Cost of sales

= 17,500 - 2,900 - 8,080
= 6,520

10.46

(40 min) Analysis of overhead using a predetermined rate

a.

$636,000/60,000 = $10.60 per machine hour

b. Opening balance.

$ 54,000

Direct material.

45,000

Direct labour ($8 x 2,000 DLH)..

16,000

Overhead applied ($9 x 3,500 MH).

31,500

Total

$146,500

10-1

c.

$18,000 $9.00 x 2,000 machine hours = $18,000

d.

$76,500 $9.00 x 8,500 machine hours = $76,500

e. Supplies.

$ 6,000

Indirect labour wages.

17,000

Supervisory salaries

36,000

f.

3-2

..

Factory facilities

6,500

Factory equipment costs

8,000

Total..

$73,500

Credit it to cost of sales. The amount is clearly not material (0.1% of cost of sales), so it is
not worth the effort involved in prorating. If it were material, then the proper answer would
be to prorate it between work in process inventory, finished goods inventory, and cost of
sales.

10.58

(45 min) Comparison of absorption and variable costing

Absorption-costing statements of income:

Yr 1
7.00
14.00

Yr 2
7.00
21.00

21.00

28.00

Sales
Less COGS
(2,500 * 21)
(500 * 21)
(2,000 * 28)

150,000

150,000

GP
Less Expenses
Var S&A
Fixed S&A
Operating Income

97,500

10,500
56,000
66,500
83,500

25,000
20,000
52,500

25,000
20,000
38,500

Var Manu costs

Fixed Manu Costs
Absorption cost per
unit

52,500

OR
Year 1
Sales revenue .............................................................................................................. 150,000a
Less: Cost of sales:
Beginning finished-goods inventory ..........................................................
0
Cost of goods manufactured ....................................................................... 63,000b
Cost of goods available for sale .................................................................. 63,000
Ending finished-goods inventory ................................................................ 10,500c
Cost of sales ................................................................................................. 52,500
Gross margin ............................................................................................................... 97,500
Selling and administrative expenses ........................................................................ 45,000
Operating income ........................................................................................................ 52,500
a2,500 units 60 per unit
b21,000 + 42,000 (i.e., both variable and fixed costs)
c500 units (63,000/3,000 units)
d2,500 units 60 per unit
eSame as year 1 ending inventory
f14,000 + 42,000 (i.e., both variable and fixed costs)

Year 2
150,000d
10,500e
56,000f
66,500
0
66,500
83,500
45,000
38,500

10-3

Variable-costing statements of income:

Yr 1
Sales
150,000
Less Var Expenses
Var COGS (2,500 *
7)
17,500
Var S&A
25,000
Contribution Margin
107,500
Less Fixed Costs
Fixed Manu OH
42,000
Fixed S&A
20,000
Operating Income
45,500

Yr 2
150,000

17,500
25,000
107,500
42,000
20,000
45,500

OR

Year 1
Sales revenue .............................................................................................................. 150,000a
Less: Cost of sales:
Beginning finished-goods inventory ..........................................................
0
Cost of goods manufactured ....................................................................... 21,000b
Cost of goods available for sale .................................................................. 21,000
Ending finished-goods inventory ................................................................ 3,500c
Cost of sales ................................................................................................. 17,500
Less: Variable selling and administrative costs .................................................. 25,000
Total variable costs: ................................................................................................... 42,500
Contribution margin ................................................................................................... 107,500
Less: Fixed costs:
Manufacturing ............................................................................................... 42,000
Selling and administrative ........................................................................... 20,000
Total fixed costs ........................................................................................... 62,000
Operating income ....................................................................................................... 45,500
units 60 per unit
variable manufacturing cost only, 21,000
c500 units (21,000/3,000 units)
d2,500 units 60 per unit
eSame as year 1 ending inventory
fThe variable manufacturing cost only, 14,000
a2,500
bThe

10-4

Year 2
150,000d
3,500e
14,000f
17,500
0
17,500
25,000
42,500
107,500
42,000
20,000
62,000
45,500

10.58

(Continued)

Reconciliation of reported income under absorption and variable costing:

Year
1
2

Change in
Inventory
(in units)
500 increase
500 decrease

Actual
FixedOverhead
Rate
14
14*

Difference in
Fixed
Overhead
Expensed
7,000
(7,000)

AbsorptionCosting Income
Minus VariableCosting Income
7,000
(7,000)

*The 500 units which were sold in year 2, but which were manufactured in year 1, include an
absorption-costing product cost of 14 per unit for fixed overhead. Since these 500 units were
manufactured in year 1, it is the year 1 fixed-overhead rate that is relevant to this calculation, not the
year 2 rate.
Explanation: At the end of year 1, under absorption costing, 7,000 of fixed overhead remained
stored in finished-goods inventory as a product cost (year 1 fixed-overhead rate of 14 per unit
500 units = 7,000). However, in year 1, under variable costing, that fixed overhead was expensed as
a period cost.
In year 2, under absorption costing, that same 7,000 of fixed overhead was expensed when
the units were sold. However, under variable costing, that 7,000 of fixed overhead cost had already
been expensed in year 1 as a period cost.
Across both years, total production = total sales = 5,000 units. Change in inventory = 0.
Thus total operating income for both years is the same under both absorption and variable costing.

10-5

10.59

(45 min) Comparison of costing methods

Sales price

35

Units sold

30,000

Units produced

40,000

Direct materials (unit-level cost)

120,000

Direct labour (unit-level cost)

200,000

Factory overhead (unit-level cost)

100,000

Factory overhead (capacity cost)

300,000

Selling and administrative (unit-level cost)

80,000

Selling and administrative (capacity cost)

128,000

a) Absorption cost per unit: Materials (unit-level)

Direct labour (unit-level)

3 = 120,000 / 40,000
5 = 200,000 / 40,000

Factory overhead (unit-level)

2.50 = 100,000 / 40,000

Factory overhead (capacity)

7.50 = 300,000 / 40,000

Total absorption cost

18

b) Variable product cost per unit: Materials (unit-level)

Direct labour (unit-level)
Factory overhead (unit-level)
Total variable product cost
c) Variable costing operating profit: Sales
Variable product cost

3 = 120,000 / 40,000
5 = 200,000 / 40,000
2.50 = 100,000 / 40,000
10.50
1,050,000 = 35 x 30,000
315,000 = 10.50 x 30,000

Variable selling cost

80,000

Contribution margin

655,000

Factory overhead

390,000

Selling & admin.

128,000

Operating income
d) Absorption costing operating profit: Sales

227,000
1,050,000 = 35 x 40,000

Cost of sales

540,000 = 18 x 30,000

Gross margin

510,000

Selling & admin.

208,000

Operating income
Difference from variable costing
e) Absorption cost ending inventory

302,000
75,000
180,000 = 18 x 10,000

f) Variable cost ending inventory

105,000 = 10.50 x 10,000

Difference

75,000

10-6