Budgeting and Decision Making Exercises iii

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Larry M Walther; Christopher J Skousen

Budgeting and Decision Making Exercises III

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Larry M Walther & Christopher J Skousen

Budgeting and Decision Making

Exercises III

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Budgeting and Decision Making Exercises III

1st edition

All material in this publication is copyrighted, and the exclusive property of

ISBN 978-87-7681-883-8

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Budgeting and Decision Making Exercises III

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Contents

Contents

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Contents

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Problem 1

Problem 1

Carpet Clean manufactures a chemical carpet cleaner he company was formed during the current year

As a result, there was no beginning inventory Management is evaluating performance and inventory management issues, and desires to know both net income and ending inventory under generally accepted accounting principles (absorption costing) as well as variable costing methods Relevant facts are as follows:

Selling price per gallon $ 11.00 Variable manufacturing cost per gallon 2.00 Variable SG&A costs per gallon 2.25

Fixed manufacturing costs $ 2,900,000

Total gallons produced 1,625,000 Total gallons sold 1,500,000

Worksheet 1

Absorption Costing

-Selling, general, & administrative costs

-Variable Costing

-Fixed expenses

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Problem 1

Solution 1

Variable manufacturing costs ($2 X 1,625,000) $ 3,250,000

Cost of goods sold ($6,150,000 X (1,500,000/1,625,000)) 5,676,923

Ending inventory ($6,150,000 X (125,000/1,625,000)) $ 473,077

Selling, general, & administrative costs

Variable (1,500,000 X $2.25) $ 3,375,000

Variable Costing

Variable manufacturing costs ($2 X 1,625,000) 3,250,000

Variable SG&A (1,500,000 X $2.25) 3,375,000

Fixed expenses

Note that the diference in income between the two methods, for this irst year of operation, is also the diference in ending inventory Also discuss why income is positive under absorption costing and negative under variable costing.

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Problem 2

Problem 2

FairWay Golf Carts manufacturers and sells a golf carts he carts usually sell for $8,000 per unit he company normally sells units as quickly as manufactured and does not maintain a inished goods inventory However, during the most recent year, the company produced 21,000 units, but only sold 19,000 A foreign customer has requested to buy the other 2,000 units for delivery on December 31

of the year current year he ofered price is $6,125 per unit for all 2,000 units Below are absorption-costing based calculations of ending inventory and net income, based on the 19,000 units already sold.

Variable manufacturing costs ($5,250 X 21,000) $ 110,250,000

Cost of goods sold ($146,250,000 X (19,000/21,000)) 136,845,238

Ending inventory ($146,250,000 X (2,000/21,000)) $ 14,404,762

Prepare a revised absorption-costing based income statement, assuming acceptance of the 2,000 unit order Also prepare variable-costing income statements (with and without the order) Compare the results and evaluate whether the order should be accepted.

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Problem 2

Worksheet 2

Variable Costing (19,000 units)

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Problem 2

Solution 2

Sales (19,000 X $8,000) + (2,000 X $6,125) $ 164,250,000

Variable manufacturing costs (19,000 X $5,250) 99,750,000

Fixed expenses

Sales (19,000 X $8,000) + (2,000 X $6,125) $ 164,250,000

Variable manufacturing costs (21,000 X $5,250) 110,250,000

Fixed expenses

Under absorption costing, net income decreases by accepting the special order he company’s proit decreases from $2,504,762 to $50,000 Under variable costing, the company goes from a loss of $1,400,000

to a proit of $50,000 Note that the proit is the same under both methods when there is not beginning

or ending inventory.

he essential diference is that ixed manufacturing overhead is all charged to expense under variable costing, but is partially carried as an asset in inventory under absorption costing here is no single right answer as to whether the order should be accepted he key point is to think critically about cost allocations, and how they can inluence the decision-making logic that should be applied.

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