MANAGERIAL ACCT FOR MANAGERS LL\AC
MANAGERIAL ACCT FOR MANAGERS LL\AC
5th Edition
ISBN: 9781265872298
Author: Noreen
Publisher: MCG
Question
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Chapter 4, Problem 4.25P

1.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

To prepare: absorption costing income statement.

1.

Expert Solution
Check Mark

Answer to Problem 4.25P

Income statement is given below.

Explanation of Solution

Year 1 Variable cost of goods sold

  COGS=(UnitsSold×Unitproductcost)=50000units×$2=$100,000

Variable selling and administrative expense:

  Variabelsellingadministrativecosts=Unitssold×Variablecostperunit=50,000unitssold×$1=50,000

    Data Amount $`Amount $
    Sales 800,000
    Variable Expense
    Cost of goods sold100,000
    Variable administrative50,000
    Total variable expense 150,000
    Contribution margin650,000
    Fixed expense :
    Fixed manufacturing expense 480,000
    Fixed administrative expense140,000
    Total fixed expense 620,000
    Net operating income 30,000

Year 2 Variable cost of goods sold

  COGS=(UnitsSold×Unitproductcost)=40000units×$2=$100,000

Variable selling and administrative expense:

  Variabelsellingadministrativecosts=Unitssold×Variablecostperunit=40,000unitssold×$1=40,000

    Data Amount $`Amount $
    Sales 640,000
    Variable Expense
    Cost of goods sold80,000
    Variable administrative40,000
    Total variable expense 120,000
    Contribution margin520,000
    Fixed expense :
    Fixed manufacturing expense 480,000
    Fixed administrative expense140,000
    Total fixed expense 620,000
    Net operating income (10,000)

Year 3 Variable cost of goods sold

  COGS=(UnitsSold×Unitproductcost)=50000units×$2=$100,000

Variable selling and administrative expense:

  Variabelsellingadministrativecosts=Unitssold×Variablecostperunit=50,000unitssold×$1=50,000

    Data Amount $`Amount $
    Sales 800,000
    Variable Expense
    Cost of goods sold100,000
    Variable administrative50,000
    Total variable expense 150,000
    Contribution margin650,000
    Fixed expense :
    Fixed manufacturing expense 480,000
    Fixed administrative expense140,000
    Total fixed expense 620,000
    Net operating income 30,000

2.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

To calculate: Unit product cost by using absorption costing for each year.

2.

Expert Solution
Check Mark

Answer to Problem 4.25P

Unit product cost by using absorption costing for year 1 is $11.60, year 2 is $10 and year 3 is $14

Explanation of Solution

  1. Fixed manufacturing overhead
  2. Year 1

      Fixedmanufacturingoverhead=TotalfixedmanufacturingoverheadNumberofunitsproduced=$480,00050,000units=$9.60

    Unit product cost as follows:

      Particular Per unit costs $
      Variable manufacturing overhead2
      Add: fixed manufacturing overhead9.60
      Unit product cost by using absorption costing 11.60

    Year 2

      Fixedmanufacturingoverhead=TotalfixedmanufacturingoverheadNumberofunitsproduced=$480,00060,000units=$8

    Unit product cost as follows:

      Particular Per unit costs $
      Variable manufacturing overhead2
      Add: fixed manufacturing overhead8
      Unit product cost by using absorption costing 110

    Year 3

      Fixedmanufacturingoverhead=TotalfixedmanufacturingoverheadNumberofunitsproduced=$480,00040,000units=$12

    Unit product cost as follows:

      Particular Per unit costs $
      Variable manufacturing overhead2
      Add: fixed manufacturing overhead12
      Unit product cost by using absorption costing 14
  3. Units in ending inventory:

Year 1

  Units in ending inventory=Unitbeginninginventory+Unitsproducedunitsold=0+50000units50000units=0

  Fixedmanufacturingoverheadinendinginventoryfixedmanufacturingoverheadinbeginninginventory=0×$5$0=$0

Absorption net operating income as:

    ParticularAmount $
    Variable net operating income 30000
    Add: fixed manufacturing overhead deferred in inventory 0
    Absorption costing net operating income 30000

Absorption costing net operating income for year 1 is $30,000

Year 2

  Units in ending inventory=Unitbeginninginventory+Unitsproducedunitsold=0+60000units40000units=20,000units

  Fixedmanufacturingoverheadinendinginventoryfixedmanufacturingoverheadinbeginninginventory=20,000×$8$0=$160,000

Absorption net operating income as:

    ParticularAmount $
    Variable net operating income (10,000)
    Add: fixed manufacturing overhead deferred in inventory 160,000
    Absorption costing net operating income 60,000

Absorption costing net operating income for year 1 is $60,000 Year 3

  Units in ending inventory=Unitbeginninginventory+Unitsproducedunitsold=20000+40000units50000units=10000units

  Fixedmanufacturingoverheadinendinginventoryfixedmanufacturingoverheadinbeginninginventory=(10000×$12)($20000×12)=($40,000)

Absorption net operating income as:

    ParticularAmount $
    Variable net operating income 30,000
    Add: fixed manufacturing overhead deferred in inventory (40,000)
    Absorption costing net operating income (10,000)

Absorption costing net operating income for year 1 is ($10,000) Unit product cost by using absorption costing for year 1 is $11.60, year 2 is $10 and year 3 is $14

3.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

the absorption costing income statement, net operating income was higher in year 2 than it was in Year 1

3.

Expert Solution
Check Mark

Answer to Problem 4.25P

The two main reason of increasing net operating income for the year are given below.

Explanation of Solution

The two main reason of increasing net operating income for the year are as follows:

  • Reduction in the unit product cost sue to high production in year 2
  • Huge amount of fixed manufacturing overhead for the year was deferred in inventory.

4.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

To determine: the reason for loss in year 3

4.

Expert Solution
Check Mark

Answer to Problem 4.25P

Reason for loss in year 2 is that the fixed manufacturing overhead deferred in inventory was charged against the operation in year 3

Explanation of Solution

Reason for loss in year 2 is that in year 2 the fixed manufacturing overhead deferred in inventory was charged against the operation in year 3. The included costs charged are higher than the cost deferred to the upcoming years. As a result the company reported loss for the year even though the units sold is same in year.

5.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

To prepare: Net operating income for year 1,2 and 3

5.

Expert Solution
Check Mark

Answer to Problem 4.25P

Net operating income for year 1 is $30000, year 2 ($10000) and year 3 is $30000

Explanation of Solution

  1. By using lean production company’s production will be attached to sales in each year. Hence no finished goods inventory would have developed in the second year or third
  2. Income statement using absorption costing
    Particular Year 1Year 2Year 3
    Sales 800,000640,000800,000
    Cost of goods sold 580,000580,000
    Cost of goods manufactured464,000
    Add: under applied overhead96,000
    Cost of goods sold 580,000560,000580,000
    Gross margin 220,00080,000220,000
    Less: selling and administrative expense 190,000180,000190,000
    Net operating income 30000(100000)30,000

Under applied overhead:

  undreappliedoverhead=(unitssales×costofgoodsmanufacturedperunit)=40,000units×11.60=$464,000

Net operating income for year 1 is $30000, year 2 ($10000) and year 3 is $30000

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