Reference no: EM132318524

Question 1 - Variable and absorption costing, explaining operating-income differences

Nascar Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to April and May 2017 are as follows:

	April	May
Units Data:
Beginning Inventory	0	150
Proudtion	500	400
Sales	350	520
Variable Costs:
Manufacturing cost per unit produced	10,000	10,000
Operating (marketing) cost per unit sold	3,000	3,000
Fixed costs:
Manufacturing costs	2,000,000	2,000,000
Operating (marketing) costs	600,000	600,000

The selling price per vehicle is $ 24,000 . The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There are no price, efficiency, or spending variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs.

1. Prepare April and May 2017 income statements for Nascar Motors under (a) variable costing and (b) absorption costing.

2. Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing.

Question 2 - Throughput costing (continuation of Q1)

The variable manufacturing costs per unit of Nascar Motors are as follows:

	April	May
Direct material cost per unit	$6,700	$6,700
Direct manufacturing labor cost per unit	1,500	1,500
Manufacturing overhead cost per unit	1,800	1,800

1. Prepare income statements for Nascar Motors in April and May 2017 under throughput costing.

2. Contrast the results in requirement 1 with those in requirement 1 of Q1.

3. Give one motivation for Nascar Motors to adopt throughput costing.

Question 3 - Variable and absorption costing, explaining operating-income differences

EntertainMe Corporation manufactures and sells 50-inch television sets and uses standard costing. Actual data relating to January, February, and March 2017 are as follows:

	Jan	Feb	March
Unit data:
Beginning Inventory	0	150	150
Proudtion	1,500	1,400	1,520
Sales	1,350	1,400	1,530
Variable Costs:
Manufacturing cost per unit produced	1,000	1,000	1,000
Operating (marketing) cost per unit sold	800	800	800
Fixed costs:
Manufacturing costs	525,000	525,000	525,000
Operating (marketing) costs	130,000	130,000	130,000

The selling price per unit is $3,300. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 1,500 units. There are no price, efficiency, or spending variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs.

1. Prepare income statements for EntertainMe in January, February, and March 2017 under (a) variable costing and (b) absorption costing.

2. Explain the difference in operating income for January, February, and March under variable costing and absorption costing.

Question 4 - Throughput costing (continuation of Q3)

The variable manufacturing costs per unit of EntertainMe Corporation are as follows:

	Jan	Feb	March
Direct material cost per unit	$525	$525	$525
Direct manufacturing labor cost per unit	200	200	200
Manufacturing overhead cost per unit	275	275	275
	$1,000	$1,000	$1,000

1. Prepare income statements for EntertainMe in January, February, and March 2017 under throughput costing.

Question 5 - Variable versus absorption costing

The Tomlinson Company manufactures trendy, high-quality, moderately priced watches. As Tomlinson's senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Tomlinson's 2017 income statement. The following data are for the year ended December 31, 2017:

Beginning inventory, January 1, 2017	90,000 Units
Ending inventory, December 31, 2017	34,000 Units
2017 sales	433,000 Units
Selling price (to distributor)	$24.00 Per Unit
Variable manufacturing cost per unit, including direct materials	$5.40 Per Unit
Variable operating (marketing) cost per unit sold	$1.20 Per unit sold
Fixed manufacturing costs	$1,852,200
Denominator-level machine-hours	6,300
Standard production rate	60 Units per machine-hour
Fixed operating (marketing) costs	$1,130,000

Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to cost of goods sold.

1. Prepare income statements under variable and absorption costing for the year ended December 31, 2017.

2. What is Tomlinson's operating income as percentage of revenues under each costing method?

3. Explain the difference in operating income between the two methods.

4. Which costing method would you recommend to the CFO? Why?

Question 6 - Absorption and variable costing

Miami, Inc., planned and actually manufactured 250,000 units of its single product in 2017, its first year of operation. Variable manufacturing cost was $ 19 per unit produced. Variable operating (nonmanufacturing) cost was $13 per unit sold. Planned and actual fixed manufacturing costs were $ 750,000. Planned and actual fixed operating (nonmanufacturing) cost total $ 420,000 Miami sold 170,000 units of product at $ 41 per unit.

1. Miami's 2017 operating income using absorption costing is

a. $600,000

b. $360,000

c. $780,000

d. $1,020,000

e. None of these

Show supporting calculations.

2. Miami's 2017 operating income using variable costing is

a. $1,100,000

b. $600,000

c. $360,000

d. $780,000

e. None of these

Question 7 - Absorption versus variable costing

Horace Company manufactures a professional-grade vacuum cleaner and began operations in 2017. For 2017, Horace budgeted to produce and sell 25,000 units. The company had no price, spending, or efficiency variances and writes off production-volume variance to cost of goods sold. Actual data for 2017 are given as follows:

Units Produced	21,000
Units Sold	18,500
Sale Price	$432
Variable Costs:
Manufacturing cost per unit produced:
Direct Materials	$33
Direct Labor	23
Manufacturing Overhead	62
Marketing cost per unit sold	46
Fixed costs:
Manufacturing Costs	$1,550,000
Administrative Costs	$906,300
Marketing Costs	$1,479,000

1. Prepare a 2017 income statement for Horace Company using variable costing.

2. Prepare a 2017 income statement for Horace Company using absorption costing.

3. Explain the differences in operating incomes obtained in requirements 1 and 2.

Question 8 - Variable and absorption costing, sales, and operating-income changes

Candyland uses standard costing to produce a particularly popular type of candy. Candyland's president, Jack McCay, was unhappy after reviewing the income statements for the first three years of business. He said, "I was told by our a ccountants-and in fact, I have memorized-that our breakeven volume is 25,000 units. I was happy that we reached that sales goal in each of our first two years. But here's the strange thing: In our first year, we sold 25,000 units and indeed we broke even. Then in our second year we sold the same volume and had a significant, positive operating income. I didn't complain, of course ... but here's the bad part. In our third year, we sold 10% more candy, but our operating income dropped by nearly 90% from what it was in the second year! We didn't change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances ... so what's going on?!"

Absorption Costing
	2016	2017	2018
Sales (units)	25,000	25,000	27,500
Revenue	$2,000,000	$2,000,000	$2,200,000
Cost of goods sold
Beginning inventory	0	0	182,500
Production	1,825,000	2,007,500	1,825,000
Available for sale	1,825,000	2,007,500	2,007,500
Deduct ending inventory		-182,500	0
Adjustment for production-volume variance		-150,000	0
Cost of goods sold	1,825,000	1,675,000	2,007,500
Gross margin	175,000	325,000	192,500
Selling and administrative expenses (all fixed)	175,000	175,000	175,000
Operating income	$0	$150,000	$17,500
Beginning inventory	0	0	2,500
Production (units)	25,000	27,500	25,000
Sales (units)	25,000	25,000	27,500
Ending inventory	0	2,500	0
Variable manufacturing cost per unit	$13	$13	$13
Fixed manufacturing overhead costs	$1,500,000	$1,500,000	$1,500,000
Fixed manuf. Costs allocated per unit produced	$60	$60	$60

1. What denominator level is Candyland using to allocate fixed manufacturing costs to the candy? How is Candyland disposing of any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly.

2. How did Candyland's accountants arrive at the breakeven volume of 25,000 units?

3. Prepare a variable costing-based income statement for each year. Explain the variation in variable costing operating income for each year based on contribution margin per unit and sales volume.

4. Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to Jack McCay the positive operating income in 2017 and the drop in operating income in 2018.

Question 9 - Capacity management, denominator-level capacity concepts

Match each of the following num- bered descriptions with one or more of the denominator-level capacity concepts by putting the appropriate letter(s) by each item:

a. Theoretical capacity

b. Practical capacity

c. Normal capacity utilization

d. Master-budget capacity utilization

1. Measures the denominator level in terms of what a plant can supply.

2. Is based on producing at full efficiency all the time.

3. Represents the expected level of capacity utilization for the next budget period.

4. Measures the denominator level in terms of demand for the output of the plant.

5. Takes into account seasonal, cyclical, and trend factors.

6. Should be used for performance evaluation in the current year.

7. Represents an ideal benchmark.

8. Highlights the cost of capacity acquired but not used.

9. Should be used for long-term pricing purposes.

10. Hides the cost of capacity acquired but not used.

11. If used as the denominator-level concept, would avoid the restatement of unit costs when expected demand levels change.

Question 10 - Denominator-level problem

Thunder Bolt, Inc., is a manufacturer of the very popular G36 motorcycles. The management at Thunder Bolt has recently adopted absorption costing and is debating which denominator- level concept to use. The G36 motorcycles sell for an average price of $ 8,200 Budgeted fixed manufacturing overhead costs for 2017 are estimated at $ 6,480,000 Thunder Bolt, Inc., uses subassembly operators that pro- vide component parts. The following are the denominator-level options that management has been considering:

a. Theoretical capacity-based on three shifts, completion of five motorcycles per shift, and a 360-day year- 3 * 5 * 360 = 5,400

b. Practical capacity-theoretical capacity adjusted for unavoidable interruptions, breakdowns, and so forth-3 * 4 * 320 = 3,840.

c. Normal capacity utilization-estimated at 3,240 units.

d. Master-budget capacity utilization-the strengthening stock market and the growing popularity of motorcycles have prompted the marketing department to issue an estimate for 2017 of 3,600 units.

1. Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level concepts.

2. What are the benefits to Thunder Bolt, Inc., of using either theoretical capacity or practical capacity?

3. Under a cost-based pricing system, what are the negative aspects of a master-budget denominator level? What are the positive aspects?

Question 11 - Variable and absorption costing and breakeven points

Camino, a leading firm in the sports indus- try, produces basketballs for the consumer market. For the year ended December 31, 2017, Camino sold 400,000 basketballs at an average selling price of $ 12 per unit. The following information also relates to 2017 (assume constant unit costs and no variances of any kind):

Inventory, January 1, 2017:	0	Baseketballs
Inventory, December 31, 2017:	20,000	Baseketballs
Fixed manufacturing costs	$380,000
Fixed administrative costs:	$660,000
Direct materials costs:	$3.00	Per basketball
Direct labor costs:	$4.00	Per basketball

1. Calculate the breakeven point (in basketballs sold) in 2017 under: a. Variable costing b. Absorption costing.

2. Suppose direct materials costs were $ 4 per basketball instead. Assuming all other data are the same, calculate the minimum number of basketballs Camino must have sold in 2017 to attain a target operating income of $ 120,000 under: a. Variable costing b. Absorption costing.

Question 12 - Variable costing versus absorption costing

The Garvis Company uses an absorption-costing system based on standard costs. Variable manufacturing cost consists of direct material cost of $ 3 per unit and other variable manufacturing costs of $ 0 per unit. The standard production rate is 10 units per machine- hour. Total budgeted and actual fixed manufacturing overhead costs are $ 420,000. Fixed manufacturing overhead is allocated at $7.00 per machine-hour based on fixed manufacturing costs of $ 840,000 60,000 machine-hours, which is the level Garvis uses as its denominator level.

The selling price is $ 5 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold, is $ 1 per unit. Fixed operating (nonmanufacturing) costs are $120,000 Beginning inventory in 2017 is 30,000 units; ending inventory is 40,000 units. Sales in 2017 are 540,000 units.

The same standard unit costs persisted throughout 2016 and 2017. For simplicity, assume that there are no price, spending, or efficiency variances.

1. Prepare an income statement for 2017 assuming that the production-volume variance is written off at year-end as an adjustment to cost of goods sold.

2. The president has heard about variable costing. She asks you to recast the 2017 statement as it would appear under variable costing.

3. Explain the difference in operating income as calculated in requirements 1 and 2.