Concept explainers
Variable and absorption costing, actual costing. The Iron City Company started business on January 1, 2017. Iron City manufactures a specialty honey beer, which it sells directly to state-owned distributors in Pennsylvania. Honey beer is produced and sold in six-packs, and in 2017, Iron City produced more six-packs than it was able to sell. In addition to variable and fixed manufacturing
Iron City’s CFO is convinced that the firm should use an actual costing system but is debating whether to follow variable or absorption costing. The controller notes that Iron City’s operating income for the year would be $438,000 under variable costing and $461,000 under absorption costing. Moreover the ending finished-goods inventory would be valued at $7.15 under variable costing and $8.30 under absorption costing.
Iron City incurs no variable nonmanufacturing expenses.
- 1. What is Iron City’s total contribution margin for 2017?
- 2. Iron City incurs fixed
manufacturing costs in addition to its fixed marketing and administrative costs. How much did Iron City incur in fixed manufacturing costs in 2017? - 3. How many six-packs did Iron City produce in 2017?
- 4. How much in variable manufacturing overhead did Iron City incur in 2017?
- 5. For 2017, how much in total manufacturing overhead is expensed under variable costing, either through cost of goods sold or as a period expense?
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Chapter 9 Solutions
HORNGRENS COST ACCOUNTING W/ACCESS
- Brees, Inc., a manufacturer of golf carts, has just received an offer from a supplier to provide 2,600 units of a component used in its main product. The component is a track assembly that is currently produced internally. The supplier has offered to sell the track assembly for 66 per unit. Brees is currently using a traditional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours. The estimated traditional full cost of producing the track assembly is as follows: Prior to making a decision, the companys CEO commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following: 3 setups1,160 each (The setups would be avoided, and total spending could be reduced by 1,160 per setup.) One half-time inspector is needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the track assembly operation is 12,300 and could be totally avoided if the part were purchased. Engineering work: 470 hours, 45/hour. (Although the work decreases by 470 hours, the engineer assigned to the track assembly line also spends time on other products, and there would be no reduction in his salary.) 75 fewer material moves at 30 per move. Required: 1. Ignore the special study, and determine whether the track assembly should be produced internally or purchased from the supplier. 2. Now, using the special study data, repeat the analysis. 3. Discuss the qualitative factors that would affect the decision, including strategic implications. 4. After reviewing the special study, the controller made the following remark: This study ignores the additional activity demands that purchasing would cause. For example, although the demand for inspecting the part on the production floor decreases, we may need to inspect the incoming parts in the receiving area. Will we actually save any inspection costs? Is the controller right?arrow_forwardThe Iron City Company started business on January 1, 2017. Iron City manufactures a specialty honey beer, which it sells directly to state-owned distributors in Pennsylvania. Honey beer is produced and sold in six-packs, and in 2017, Iron City produced more six-packs than it was able to sell. In addition to variable and fixed manufacturing overhead, Iron City incurred direct materials costs of $880,000, direct manufacturing labor costs of $400,000, and fixed marketing and administrative costs of $295,000. For the year, Iron City sold a total of 180,000 six-packs for a sales revenue of $2,250,000. Iron City’s CFO is convinced that the firm should use an actual costing system but is debating whether to follow variable or absorption costing. The controller notes that Iron City’s operating income for the year would be $438,000 under variable costing and $461,000 under absorption costing. Moreover, the ending f inished-goods inventory would be valued at $7.15 under variable costing and…arrow_forwardThe Iron City Company started business on January 1, 2017. Iron City manufactures a specialty honey beer, which it sells directly to state-owned distributors in Pennsylvania. Honey beer is produced and sold in six-packs, and in 2017, Iron City produced more six-packs than it was able to sell. In addition to variable and fixed manufacturing overhead, Iron City incurred direct materials costs of $880,000, direct manufacturing labor costs of $400,000, and fixed marketing and administrative costs of $295,000. For the year, Iron City sold a total of 180,000 six-packs for a sales revenue of $2,250,000. Iron City’s CFO is convinced that the firm should use an actual costing system but is debating whether to follow variable or absorption costing. The controller notes that Iron City’s operating income for the year would be $438,000 under variable costing and $461,000 under absorption costing. Moreover, the ending f inished-goods inventory would be valued at $7.15 under variable costing and…arrow_forward
- The Iron City Company started business on January 1, 2017. Iron City manufactures a specialty honey beer, which it sells directly to state-owned distributors in Pennsylvania. Honey beer is produced and sold in six-packs, and in 2017, Iron City produced more six-packs than it was able to sell. In addition to variable and fixed manufacturing overhead, Iron City incurred direct materials costs of $880,000, direct manufacturing labor costs of $400,000, and fixed marketing and administrative costs of $295,000. For the year, Iron City sold a total of 180,000 six-packs for a sales revenue of $2,250,000. Iron City’s CFO is convinced that the firm should use an actual costing system but is debating whether to follow variable or absorption costing. The controller notes that Iron City’s operating income for the year would be $438,000 under variable costing and $461,000 under absorption costing. Moreover, the ending f inished-goods inventory would be valued at $7.15 under variable costing and…arrow_forwardThe Iron City Company started business on January 1, 2017. Iron City manufactures a specialty honey beer, which it sells directly to state-owned distributors in Pennsylvania. Honey beer is produced and sold in six-packs, and in 2017, Iron City produced more six-packs than it was able to sell. In addition to variable and fixed manufacturing overhead, Iron City incurred direct materials costs of $880,000, direct manufacturing labor costs of $400,000, and fixed marketing and administrative costs of $295,000. For the year, Iron City sold a total of 180,000 six-packs for a sales revenue of $2,250,000. Iron City’s CFO is convinced that the firm should use an actual costing system but is debating whether to follow variable or absorption costing. The controller notes that Iron City’s operating income for the year would be $438,000 under variable costing and $461,000 under absorption costing. Moreover, the ending f inished-goods inventory would be valued at $7.15 under variable costing and…arrow_forwardThe Iron City Company started business on January 1, 2017. Iron City manufactures a specialty honey beer, which it sells directly to state-owned distributors in Pennsylvania. Honey beer is produced and sold in six-packs, and in 2017, Iron City produced more six-packs than it was able to sell. In addition to variable and fixed manufacturing overhead, Iron City incurred direct materials costs of $880,000, direct manufacturing labor costs of $400,000, and fixed marketing and administrative costs of $295,000. For the year, Iron City sold a total of 180,000 six-packs for a sales revenue of $2,250,000. Iron City’s CFO is convinced that the firm should use an actual costing system but is debating whether to follow variable or absorption costing. The controller notes that Iron City’s operating income for the year would be $438,000 under variable costing and $461,000 under absorption costing. Moreover, the ending f inished-goods inventory would be valued at $7.15 under variable costing and…arrow_forward
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- Roberta, Inc., manufactures elliptical machines for several well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2017: a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $935,000 b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $650,000 c. Cost of indirect materials, $234,000 d. Costs incurred to set up machines each time a different product needs to be manufactured, $392,000 e. Designing processes, drawing process charts, and making engineering process changes for products, $236,900 f. Machine-related overhead costs such as depreciation, maintenance, and production engineering, $865,000 (These resources relate to the activity of running the machines.) g. Plant management, plant rent, and plant insurance, $498,000 1. Classify each of the preceding costs…arrow_forwardRoberta, Inc., manufactures elliptical machines for several well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2017: a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $935,000 b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $650,000 c. Cost of indirect materials, $234,000 d. Costs incurred to set up machines each time a different product needs to be manufactured, $392,000 e. Designing processes, drawing process charts, and making engineering process changes for products, $236,900 f. Machine-related overhead costs such as depreciation, maintenance, and production engineering, $865,000 (These resources relate to the activity of running the machines.) g. Plant management, plant rent, and plant insurance, $498,000 Q1. How is the cost hierarchy helpful…arrow_forwardRoberta, Inc., manufactures elliptical machines for several well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2017: a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $935,000 b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $650,000 c. Cost of indirect materials, $234,000 d. Costs incurred to set up machines each time a different product needs to be manufactured, $392,000 e. Designing processes, drawing process charts, and making engineering process changes for products, $236,900 f. Machine-related overhead costs such as depreciation, maintenance, and production engineering, $865,000 (These resources relate to the activity of running the machines.) g. Plant management, plant rent, and plant insurance, $498,000 Q1. Consider two types of elliptical…arrow_forward
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