Week 3 ABSORPTION COSTPROBLEMS 5-17 Nickelson CompanyPROBLEM 5-21 Linden CompanyPROBLEM 5-22 SANDI SCOTTP6-16 AnimPix, Inc.P6-17 Precision Manufacturing IncP6-18 Rocky mountain corporationPROBLEMS 5-17 Nickelson CompanyVariable and Absorption Costing Unit Product Costs and Income StatementsP5-17 Nickleson Company manufactures and sells one product. The following informationpertains to each of the company’s first three years of operation:Variable costs per unit:Manufacturing:Direct materials ……………………………………. $ 25Direct labor …………………………………………… $16Variable manufacturing overhead …………$5Variable selling and administrative………………..$2Fixed costs per year:Fixed manufacturing overhead…………………….. $ 300, 000Fixed selling and administrative expenses……. $ 180, 000During its first year of operations Nickelson produced 60, 000 units and sold 60,000 units.During its second year of operations it produced 75, 000 units and sold 50,000 units.In its third year, Nickelson produced 40, 000 units and sold 65, 000 units. The sellingprice of the company’s product is $ 56 per unit.REQUIRED:1. Compute the company’s break-even-point in units sold.2. Assume the company uses variable costing:a. Compute the unit product cost for year 1, year 2, and year 3.b. Prepare an Income statement for year 1, year, 2, and year 3.3. Assume the company uses absorption costing:a. Compute the unit product cost for year 1, year 2, and year 3.b. Prepare an income statement for year 1, year 2, and year 3.4. Compare the net operating income figures that you computed in requirements 2and 3 to the break-even point that you computed in requirement 1 . Which net operating income figure seem counterintuitive? Why? PROBLEM 5-21 Prepare and Reconcile Variable Costing Statements (LO 5-1, LO 5-2, LO 5-3)P5-21 Linden Company manufactures and sells a single product. Cost data for the product follow:Variable costs per unit:Direct materials……………………………………………. $ 6Direct labor …………………………………………………. 12Variable factory overhead………………………….. 4Variable selling and administrative…………….. 3Total variable costs per unit……………………………………. $ 25Fixed costs per month :Fixed manufacturing overhead …………………….. $ 240, 000Fixed selling and administrative ……………………. $ 180, 000Total fixed cost per month ………………………………………. $ 420, 000The product sells for $40 per unit. Production and sales data for May and June, the first twomonths of operation, are as follows:Units UnitsProduced SoldMay……………………… 30, 000 26, 000June……………………..30, 000 34, 000Income statements prepared by the accounting department, using absorption costing, arepresented below:May JuneSales………………………………………………………. $ 1, 040, 000 $ 1, 360, 000Cost of goods sold…………………………………..780, 000 1, 020, 000Gross margin………………………………………….260, 000 340, 000Selling and administrative expense………. 260, 000 282, 000Net operating income…………………………… $2, 000 $ 58, 000REQUIRED:1. Determine the unit product cost under:a. Absorption costingb. Variable costing2. Prepare contribution formal variable costing income statements for May and June.3. Reconcile the variable costing and absorption costing net operating incomes.4. The company’s Accounting Department has determined the break-even point to be28,000 units per month, computed as follows:Fixed cost per month = $ 420,000 = 28,000 unitsUnit contribution margin $ 15 per unitUpon receiving this figure, the president commented. “There’s something peculiar here. The controller says that the break-even point is 28,000 units per month. Yet we sold only 26, 000 units in May, and the income statement we received showed a $ 2, 000 profit. Which figure do we believe?” Prepare a brief explanation of what happened on the May income statement. PROBLEM 5-22 SANDI SCOTTAbsorption and Variable Costing: Production Constant, Sales Fluctuate (LO 5-1, LO 5-2, LO 5-3)P5-22 Sandi Scott obtained a patent on a small electronic device and organized Scott Products, Inc. toproduce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to healthy profit. For this reason, she was surprised to see a loss for the month on her income statement.This statement was prepared by her accounting service which takes great pride in providing itstimely financial data. The statement follows:Scott Products, Inc.Income StatementSales (40,000 units)…………………………………… $200, 000Variable expensesVariable cost of goods sold………………………………. $ 80,000Variable selling and administrative expenses … 30,000 110, 000Contribution margin………………………………………… 90, 000Fixed expensesFixed manufacturing overhead ………………………. 75, 000Fixed selling and administrative expenses………. 20, 000 95, 000Net operating loss ………………………………………… $ (5,000)Ms. Scott is discouraged over the loss for the month because she had planned to use thestatement to encourage investors to purchase stock in the new company. A friend who is a CPA,insists that the company should be using absorption costing rather than variable costing. Heargues that if absorption costing had been used, the company would have reported a profit forthe month.Selected cost data relating to the product and to the first month of operation follow:Units produced ……………………………………………………………………… 50, 000Units sold ………………………………………………………………………………. 40, 000Variable cost per unit:Direct materials………………………………………………………… $ 1.00Direct labor …………………………………………………………..…. $ 0.80Variable manufacturing overhead …………………………… $ 0.20Variable selling and administrative expenses………….. $0.75REQUIRED:also does realistic computer animation for special effect in movies.1. Complete the following:a. Complete the product cost under absorption cost.b. Redo the company’s income for the month using the absorption costing.c. Reconcile the variable and absorption costing net operating income (loss) figures.2. Was the CPA correct in suggesting that the company really earned a “profit” for the month?Explain?3. During the second month of operations, the company again produced 50,000 units but sold 60,000 units (Assume no change in total fixed costs).a. Prepare a contribution format income statement for the month using variable costing.b. Prepare an income statement for the month using the absorption costing.c. Reconcile the variable costing net operating incomes. PROBLEM 6-16 Second – Stage Allocation and Product Margins (LO 6-4, LO 6-5)P6-16 AnimPix, Inc. is a small company that creates computer-generated animation for films and television. Much of the company’s work consists of short commercials for television, but the company The young founders of the company have become increasingly concerned with the economics of the business-particularly because many competitors have sprung up recently in the local area.To help understand the company’s cost-structure, an activity-based costing system has been designed.Three major activities carried out in the company; animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company bids on the projects. This is an intensive activity that involves individuals from all parts of the company in creating storyboards and prototype stills to be shown to the prospective client. After the client has accepted a project, the animation goes into production and contract administration begins. Technical staff do almost all the work involved in animation production, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measure and rates are listed below:Activity Cost Pool Activity Measure Activity RateAnimation concept………………… Number of proposals $ 6, 000 per proposalAnimation production……………. Minutes of animation $ 7, 700 per minute of animationContract administration………… Number of contracts $ 6, 600 per contractThese activity rates include all of the costs of the company, except for the costs of idle capacity and re-organization-sustaining costs. There are no direct labor or indirect materials costs.Preliminary analysis using these activity rates has indicated that the local commercials segment of the market maybe unprofitable. This segment is higly competitive.Producers of local commercials may ask several companies like Anim Pix to bid which results in an unusually low ratio of accepted contracts to bids.Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Because animation work is billed at standard rates according to the running time of the completed animation, the revenues from these short projects tend to be below average. Data concerning activity in the local commercials market appear below:Local Activity Measure CommercialsNumber of proposals ……………………..20Minutes of animation …………………….12Number of contracts ………………………8The total sales for local commercials amounted to $240,000.REQUIRED:1. Determined the cost of serving the local commercial market.2. Prepare a report showing the margin earned serving the local commercial market.(Remember, this company has no direct materials or direct labor costs.)3. What would you recommend to management concerning the local commercial market? PROBLEM 6-17 Precision Manufacturing , Inc.Comparing Traditional and Activity – Based Product Margins (LO 6-1, LO 6-3)P6-17 Precision Manufacturing Inc. (PMI) makes two type of industrial component parts – theEX300 and the TX500. An absorption costing income statement for the most recentperiod is shown below:Precision Manufacturing Inc.Income StatementSales ……………………………………………………….. $ 1, 700, 000Cost of goods sold……………………………………1, 200, 000Gross margin……………………………………………500, 000Selling and administrative expenses…………550, 000Net operating loss ………………………………….. $( 50, 000)PMI produced and sold 60,000 units of EX300 at a price of $20 per unit and 12, 500 units of TX500 at a price of $40 per unit. The company’s traditional cost system allocated manufacturing overhead to products using a plantwide overhead rate and direct labor dollar as the allocation base. Additional information relating to the company’s two product lines is shown below: EX300 TX500 TotalDirect materials………………… $ 366, 325 $ 162, 550 $ 528, 875Direct labor………………………. $ 120, 000 $ 42, 500 162, 500Manufacturing overhead….. 508, 625Cost of goods sold…………….. $ 1, 200,000The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that $50,000 and $100,000 of the company’s advertising expenses could directly traced to EX300 and TX500, respectively. The remainder of the selling and administrative expenses was organization – sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below: Activity ManufacturingActivity cost Pool (and activity measure) Overhead EX 300 TX 500 TotalMachining (machine-hours)………………… $198, 250 90,000 62,500 152,500Setups (setup hours)…………………………… 150, 000 75 300 375Product-sustaining costs……………………… 100, 000 1 1 2Other ( organization-sustaining costs) 60, 375 NA NA NATotal manufacturing overhead cost…….. $ 508, 625REQUIRED:1. Using Exhibit 6-12 as a guide, compute the product margins for the EX300 and TX500 under the company’s traditional costing system.2. Using Exhibit 6-10 as a guide, compute the product margins for EX300 and TX500 under the activity-based costing system.3. Using Exhibit 6-13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity – based cost assignments differ. PROBLEM 6-18 Comparing Traditional and Activity-Based Product Margin (LO 61, LO 6-3,LO 6-4, LO 6-5).Rocky mountain corporation makes two types of hiking boots – Xactive and the Pathbreaker . Data concerning these two product lines appear below: Xactive PathbreakerSelling price per unit…………………………………………… $ 127. 00 $89. 00Direct materials per unit…………………………………….. 64. 80 51.00Direct labor per unit …………………………………………… 18. 20 13.00Direct labor hours per unit ………………………………… 1. 4 DLHs 1.0 DLHsEstimated annual production and sales……………… 25, 000 units 75,000 unitsThe company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:Estimated total manufacturing overhead……………………….. $2, 200, 000Estimated total direct labor-hours ………………………………….110, 000 DLHsREQUIRED:1. Using Exhibit 6-12 as a guide, compute the product margins for the Xactive and the Path breaker products under the company’s traditional costing system.2. The company I considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (Other cost pool includes organizationsustaining costs and idle capacity costs): Estimated Expected ActivityActivities and Activity Measures Overhead cost Xactive Pathbreaker TotalSupporting direct labor (direct labor-hours) $ 797, 500 35,000 75,000 110, 000Batch setups (setups)…………………… 680, 000 250 150 400Batch setups………………………… 650, 000 1 1 2Other……………………………………………72, 500 NA NA NATotal manufacturing overhead cost………….. $2, 200, 000 Using Exhibit 6-10 as a guide, compute the product margins for the Xactive and the Path-breaker products under the activity-based costing system.3. Using Exhibit 6-13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignment. Explain why the traditional and activity-based cost assignments differ.
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