Direct costing is a procedure by which only prime costs plus variable factory overhead are assigned to a product or inventory; all fixed costs are considered period costs.. Under direct
Trang 1CHAPTER 20
DISCUSSION QUESTIONS
20-1
Q20-1 Direct costs are direct materials, direct labor,
and other costs directly assignable to a product.
Direct costing is a procedure by which only
prime costs plus variable factory overhead
are assigned to a product or inventory; all
fixed costs are considered period costs.
Q20-2 Product costs are associated with the
manu-facture of a product and include direct
materi-als, direct labor, and factory overhead These
costs are charged against revenue as cost of
goods sold, or shown on the balance sheet as
inventories of work in process and finished
goods Period costs are associated with the
passage of time and are included as expenses
in the income statement Under direct costing,
fixed factory overhead is treated as a period
cost rather than as a product cost.
Q20-3 Under direct costing, only variable
manufactur-ing costs are included in inventory Under
absorption costing (the current, generally
accepted method of costing inventory for
exter-nal reporting), all manufacturing costs, both
variable and fixed, are included in inventory.
Q20-4 It is argued that fixed manufacturing costs are
the expenses of maintaining productive
capacity Such expenses are more closely
associated with the passage of time than with
production activity and should, therefore, be
charged to period expense rather than to the
product.
Q20-5 The direct costing method is useful for
inter-nal reporting because it focuses attention on
the fixed-variable cost relationship and the
contribution margin concept It facilitates
man-agerial decision making, product pricing, and
cost control It allows certain calculations to
be readily made, such as break-even points
and contribution margins of products, sales
territories, operating divisions, etc The focus
on the contribution margin (sales revenue
less variable costs) enables management to
emphasize profitability in making short-run
business decisions Fixed costs are not easily
controllable in the short run and hence may
not be particularly relevant for short-run
busi-ness decisions.
Q20-6 Arguments for the use of direct costing
include the following:
(a) For profit-planning and decision-making purposes, management requires cost- volume-profit relationship data that are more readily available from direct cost statements than from absorption cost statements.
(b) Since fixed factory overhead is absorbed
as a period cost, fluctuations in tion and differences between the number
produc-of units produced and the number sold do not affect the per unit product cost (c) Direct costing reports are more easily understood by management because the statements follow management’s deci- sion-making processes more closely than
do absorption cost statements.
(d) Reporting the total fixed cost for the period in the income statement directs management’s attention to the relation- ship of such cost to profits.
(e) The elimination of allocated joint fixed cost permits a more objective appraisal of income contributions according to prod- ucts, sales areas, kinds of customers, etc Cost-volume relationships are highlighted (f) The similarity of the underlying concepts
of direct costing and flexible budgets itates the adoption and use of these methods for reporting and cost control (g) Direct costing provides a means of costing inventory that is similar to management’s concept of inventory cost as the current out-of-pocket expenditures necessary to produce or replace the inventory.
facil-(h) Clerical costs are lower under direct ing because the method is simpler and does not require involved allocations of fixed costs or special analyses of absorp- tion data.
cost-(i) The computation of product costs is pler and more reliable under direct costing because a basis for allocating the fixed costs, which involves estimates and per- sonal judgment, is eliminated.
Trang 2sim-Q20-7 Arguments against the use of direct costing
include the following:
(a) Separation of costs into fixed and variable
might be difficult, especially when such
costs are semivariable in nature.
Moreover, all costs—including fixed
costs—are variable at some level of
pro-duction and in the long run.
(b) Long-range pricing of products and other
long-range policy decisions require a
knowledge of complete manufacturing
cost, which would require additional
sep-arate computations to allocate fixed
over-head.
(c) The pricing of inventories by the direct
costing method is not acceptable for
income tax computation purposes.
(d) Direct costing has not been recognized
as conforming with generally accepted
accounting principles applied in the
preparation of financial statements for
stockholders and the general public.
(e) Profits determined by direct costing are not
“true and proper” because of the exclusion
of fixed production costs that are part of
total production costs and inventory.
Production would not be possible without
plant facilities, equipment, etc To disregard
these fixed costs violates the general
prin-ciple of matching costs with revenue.
(f) The elimination of fixed costs from
inven-tory results in a lower figure and
conse-quent reduction of reported working
capital for financial analysis purposes.
Q20-8 Assuming that the quantity of ending
inven-tory is larger than the quantity of beginning
inventory and the lifo method is used,
operat-ing income usoperat-ing direct costoperat-ing would be
smaller than operating income using
absorp-tion costing Direct costing excludes fixed
fac-tory overhead from inventories because such
costs are considered to be period costs which
are expensed when incurred In contrast,
absorption costing includes fixed factory
over-head in inventories because such costs are
considered to be product costs, which are
expensed only when the products are sold.
When the quantity of inventory increases
dur-ing a period, direct costdur-ing produces a lower
dollar increase in inventory than absorption
costing, because fixed costs are expensed
rather than charged to inventory Since a
smaller amount of current period cost is
charged against income under the absorption costing method when inventories increase, absorption costing income would be larger than direct costing income.
Q20-9 The break-even point is the point at which costs and revenue are in equilibrium, showing neither profit nor loss for the business Q20-10 The contribution margin is the result of sub-
tracting variable cost from the sales figure The contribution margin indicates the amount avail- able for the recovery of fixed cost and for profit Q20-11.(a) R(BE) = F
per-(3) Total cost line.
(4) Variable cost area.
(5) Fixed cost area.
(6) Break-even point.
(7) Loss area.
(8) Profit area.
(9) Sales line.
Q20-13 An analysis of the expected behavior of a
firm’s expenses and revenue for the purpose
of constructing a break-even chart is usually restricted to the output levels at which the firm
is likely to operate Assumptions about the level of fixed cost, the rate of variable cost, and sales prices are based on the operating conditions and managerial policies that will be
in effect over the expected output levels These expected output levels represent the firm’s relevant range, and the cost-volume- profit relationships shown in a break-even chart are applicable only to output levels within this range The behavior of fixed cost, variable cost, and sales prices at levels of out- put below or above the relevant range are likely to result in an entirely different set of cost-volume-profit relationships because of
Trang 3changed operating conditions or managerial
policies The fact that the cost and revenue
lines on a break-even chart are typically
extended past the upper and lower limits of
the relevant range should not, therefore, be
interpreted to mean that they are valid for
these levels of output.
A break-oven chart showing
cost-volume-profit relationships for all levels of output could
be developed The shapes of the cost and
rev-enue lines in such a chart could not, however,
be expected to approximate straight-line
(lin-ear) patterns By restricting the underlying cost
and revenue behavior assumptions in
break-even analyses to a relatively narrow output
range (the range over which the firm is likely to
operate), it is usually possible to assume linear
behavior patterns without any significant
distor-tions in cost-volume-profit reladistor-tionships,
thereby simplifying the analysis.
If the range over which a firm is likely to
operate is quite wide, curvilinear functions
may be employed; or it may be desirable to
develop a number of break-even charts, each
having its own relevant range, for which the
underlying cost and revenue behavior
assumptions are valid.
Q20-14 Weaknesses inherent in the preparation and
use of break-even analysis are:
(a) When more than one product is
pro-duced, the contribution margin of each
product will probably differ Accordingly, a
break-even analysis for the whole
opera-tion will not indicate the contribuopera-tion of
each product to fixed cost and the volume
required for each product.
(b) Some costs are almost impossible to
classify conclusively as being either fixed
or variable.
(c) General economic conditions and other
external factors may affect the data used
in the analysis.
(d) In the final analysis, fixed cost is related to
production and sales and, therefore, may
decrease somewhat due to decreased
production and sales—and vice versa.
(e) Quite often costs increase sharply at
cer-tain points in production and sales levels
and then level out until a certain greater
stage of production and/or sales is
reached, at which time the phenomenon
is repeated as production and/or sales
are again increased.
(f) Performance must be constantly pared to the break-even analysis in order
com-to determine whether the conditions that existed at the time of the calculations have held true, and whether any changes have been considered.
Q20-15 (a) With sales price per unit and total fixed
cost remaining constant, the break-even point moves up rapidly as unit variable cost is increased; at the same time, the break-even point moves down as unit variable cost is decreased.
(b) A decrease in fixed cost lowers the even point An increase in fixed cost moves the break-even point higher Q20-16 The margin of safety is a selected sales figure
break-less break-even sales The margin of safety is
a cushion against sales decreases The greater the margin, the greater the cushion against suffering a loss.
Q20-17 Cost-volume-profit relationship is the
relation-ship of profit to sales volume This relationrelation-ship
is important to management because agement tries at all times to keep volume, cost, price, and product mix in a ratio that will achieve a desired level of profit.
man-Q20-18 The Theory of Constraints is a specialized
version of direct costing for use in short-run optimization decisions A distinction between TOC and direct costing is that TOC focuses
on only the purely variable costs and does not consider direct labor to be purely variable Q20-19 Most companies that classify costs into fixed
and variable categories treat direct labor as variable, so in direct costing, direct labor is assigned to products as a variable or incre- mental cost of production In the Theory of Constraints, direct labor is stipulated to be not purely variable and therefore is not treated as
an incremental cost of output.
The difference between the contribution margin measure in direct costing and the throughput measure in TOC is that direct labor is one of the costs deducted from sales
to calculate contribution margin, but direct labor is not a cost to be deducted from sales
in calculating throughput.
There are many differences in emphasis between direct costing and the Theory of Constraints For example, while direct cost- ing is widely used as an accounting approach for internal reporting of income and product cost, TOC deals heavily with the
Trang 4improvement of constraints or bottlenecks in a
production system.
Q20-20 Throughput is the rate at which a system
gen-erates money through sales It is calculated
as sales minus the purely variable costs, and
often the only purely variable cost is the cost
of materials.
Q20-21 Elevating a constraint means improving the
constraint—improving the conditions at a
bot-tleneck in the system Its significance is
great-est if the constraint is the tightgreat-est one in the
system; there, any improvement will increase the total throughput of the entire system.
An improvement in product quality can help elevate a constraint because it can reduce the workload on a bottleneck resource For exam- ple, removing defective units before rather than after they reach the bottleneck means there will be fewer units passing through the bottleneck This has approximately the same effect on the bottleneck as increasing its capacity.
Trang 5EXERCISES E20-1
Operating income for 20A using direct costing:
Sales (90,000 × $12) $1,080,000
Variable cost of goods sold (90,000 × $4) 360,000
Gross contribution margin $ 720,000
Variable marketing and administrative expenses
(1) Variable cost per unit:
$7,000,000 total variable cost
60% manufacturing cost portion
$4,200,000 total variable manufacturing cost
$4,200,000 total variable manufacturing cost
Fixed cost per unit:
$11,200,000 total fixed cost
50% manufacturing cost portion
$5,600,000 total fixed factory overhead
$5,600,000 total fixed factory overhead
Cost of goods sold at standard under
(2) Units actually produced during the year 140,000
Units sold during the year 100,000
Unit increase in inventory 40,000
Standard variable manufacturing cost per unit × 30
Ending inventory at standard direct cost $1,200,000
Trang 6E20-2 (Concluded)
(3) Normal production volume 160,000
Units actually produced during the year 140,000
Excess of budget over actual production 20,000
Fixed factory overhead per unit × $35
Factory overhead volume variance $ 700,000
(4) Sales (100,000 units × $180) $18,000,000
Standard variable cost of goods sold (100,000 units × $30
unit variable cost) 3,000,000 Gross contribution margin $15,000,000
Variable selling expense ($7,000,000 variable cost × 40%) 2,800,000
Contribution margin $12,200,000
Less fixed costs 11,200,000
Operating income under direct costing $1,000,000
(3) Computations explaining the difference in operating income:
Absorption costing operating income $ 91,000
Direct costing operating income 96,000
Difference $ (5,000)
Units produced during the period 8,000
Units sold during the period 9,000
Unit decrease in finished goods inventory (1,000)
Fixed factory overhead charged to each unit of product
under absorption costing × $5 Difference $ (5,000)
Trang 7Variable factory overhead 50
Variable marketing expense 30
Total variable cost per unit $ 3.00
Sales price per unit $ 5.00
Variable cost per unit 3.00
Contribution margin per unit $ 2.00
Fixed factory overhead $15,000
Fixed marketing expense 5,000
Fixed administrative expense 6,000
Total fixed expense $26,000
(1) $26,000 total fixed cost
$2 contribution margin = 13,000 units of sales to break even
(2) 13,000 units × $5 per unit = $65,000 sales to break even
(3) $26,000 fixed cost + $10,000 profit
$2 contribution margin = 18,000 units (4) 18,000 units × $5 per unit = $90,000 sales
$ ,
$
$
$ ,
Trang 8($800,000 × 30%) 240,000
($1,200,000 × 25%) 300,000 540,000 Contribution margin $560,000 $ 900,000 $1,460,000
Trang 9Sales price per unit $110 $35 Variable cost per unit 50 20 Contribution margin per unit $ 60 $15
or alternatively:
or alternatively:
6,000 packages × 1 table per package = 6,000 tables to break even
6,000 packages × 4 chairs per package = 24,000 chairs to break even
6,000 tables × $110 per table = $ 660,000
24,000 chairs × $ 35 per chair = 840,000
Total sales to break even $1,500,000
E20-11
Product L Product M Sales price per unit $20 $15
Variable cost per unit 12 10
Unit contribution margin $ 8 $ 5
Expected sales mix × 2 × 3
Contribution margin per
Trang 10E20-11 (Concluded)
$31 contribution margin = 12,000 packages to break even
Break-even sales $1,020,000
(2) $372,000 fixed cost + $93,000 profit
$31 contribution margin = 15,000 packages to achieve profit
Sales to achieve profit $1,275,000
E20-12
(1) Variable manufacturing cost $210,000
Fixed manufacturing cost 80,000 Variable marketing expense 105,000 Fixed marketing and administrative expenses 60,000 Total costs to produce and sell 70,000 units $455,000
$455,000 total cost = $6.50 sales price per unit to break even
Trang 12(1) throughput/unit = sales – materials cost = $45 – ($14 + $1) = $30
(2) Maximum throughput per month is $144,000 Total throughput for a period is the
$30/unit (from requirement 1) multiplied by the number of units shipped; units are limited by the lowest-capacity operation, which is Surface Prep’s 4,800 units per month: 4,800 units/month × $30/unit = $144,000/month.
(3) Surface Prep is the tightest constraint, with a 4,800-unit capacity.
E20-15
(1) No, they should not acquire the equipment Gloss Coat is not the tightest
con-straint, so increasing its capacity will not help.
(2) Zero Maximum monthly throughput will not increase.
(3) Yes, an additional Surface Prep (SP) crew should be hired The increase in
over-all throughput more than justifies the cost.
(4) Maximum throughput will increase by about $15,000 per month (500 units/month
× $30/unit) SP is the tightest constraint, so increasing its capacity will increase throughput of the entire system until SP’s improvement causes another con- straint to become the tightest Gloss Coat, the second-tightest constraint, presently has capacity 500 units higher than SP’s.
E20-16
(1) Yes, an inspection should be created just prior to Surface Prep (SP) For each
1,000 shipped, 50 defectives enter SP—26, 14, and 10 arising in the three ing operations, respectively SP is the tightest constraint, so removing defec- tives prior to SP will increase total system throughput At $30 throughput per unit, the 50 added units (per thousand shipped) do justify the added inspection (2) Removing all defectives just prior to SP will increase the number of good units
preced-entering SP by 50/1,000 or about 5% With SP presently handling 4,800 units per month, a 5% increase in units shipped is 05 × 4,800 = 240 Additional through- put will be 240 units/month × $30/unit = $7,200 per month Because the inspec- tion will cost $1,800 per month, the monthly advantage of the added inspection operation will be $7,200 minus $1,800, or $5,400 per month.
Trang 13PROBLEMS P20-1
TAYLOR TOOL CORPORATION Product-Line Income Statement (Contribution Margin Approach)
Sales $3,000,000 $1,500,000 $1,000,000 $500,000 Less variable cost of goods sold 1,400,000 700,000 500,000 200,000 Gross contribution margin $1,600,000 $ 800,000 $ 500,000 $300,000 Less variable marketing expenses
(packing and shipping) 250,000 100,000 100,000 50,000 Contribution margin $1,350,000 $ 700,000 $ 400,000 $250,000 Less traceable fixed expenses:
Manufacturing $ 250,000 $ 100,000 $ 100,000 $ 50,000 Marketing (advertising) 450,000 200,000 200,000 50,000 Total traceable fixed expense $ 700,000 $ 300,000 $ 300,000 $100,000 Product contribution $ 650,000 $ 400,000 $ 100,000 $150,000 Less common fixed expenses:
1 $1,950,000 absorption cost of goods sold – $1,400,000 variable costs – $250,000 traceable fixed cost
2 $800,000 total marketing costs – $250,000 variable expense – $450,000 advertising expense
Trang 14Income Statement For Year Ended 12-31-20–
Sales (52,000 × $25) $1,300,000 Cost of goods sold:
Standard full cost (52,000 × $15) $780,000
Net unfavorable variable cost variances 2,000
Unfavorable volume variance* 5,000 787,000 Gross profit $ 513,000 Less commercial expenses:
Variable expenses (52,000 × $1) $ 52,000
Fixed expenses 180,000 232,000 Operating income under absorption costing $ 281,000
*Units budgeted for production during the year 50,000 Units actually produced during the year 49,000
1,000 Fixed factory overhead charged to each unit $ × 5 Unfavorable volume variance $ 5,000
Income Statement For Year Ended 12-31-20–
Sales (52,000 × $25) $1,300,000 Cost of goods sold:
Standard variable cost (52,000 × $10) $520,000
Net unfavorable variable cost variances 2,000 522,000 Gross contribution margin $ 778,000 Variable commercial expenses (52,000 × $1) 52,000 Contribution margin $ 726,000 Less fixed costs:
Factory overhead
(50,000 units budgeted × $5) $250,000 Commercial expenses 180,000 430,000 Operating income under direct costing $ 296,000 (3) Operating income under absorption costing $ 281,000
Operating income under direct costing 296,000 Difference $ (15,000) Units produced during the year 49,000 Units sold during the year 52,000 Unit decrease in finished goods inventory (3,000) Fixed factory overhead charged to each unit under
absorption costing $ × 5 Difference $ (15,000)
Trang 15Income Statement For Year Ended 12-31-20–
Sales (48,000 × $16) $768,000 Cost of goods sold:
Standard full cost (48,000 × $9) $432,000
Net unfavorable variable cost variances 1,000
Favorable volume variance* (3,000) 430,000 Gross profit $338,000 Less commercial expenses:
Variable expenses (48,000 × $1) $48,000
Fixed expenses 99,000 147,000 Operating income under absorption costing $191,000
*Units budgeted for production during the year 50,000 Units actually produced during the year 51,000
(1,000) Fixed factory overhead charged to each unit × $3 Favorable volume variance $ (3,000)
Income Statement For Year Ended 12-31-20–
Sales (48,000 × $16) $768,000 Cost of goods sold:
Standard variable cost (48,000 × $6) $288,000
Net unfavorable variable cost variances 1,000 289,000 Gross contribution margin $479,000 Variable commercial expenses (48,000 × $1) 48,000 Contribution margin $431,000 Less fixed costs:
Factory overhead
(50,000 units budgeted × $3) $150,000 Commercial expenses 99,000 249,000 Operating income under direct costing $182,000 (3) Operating income under absorption costing $191,000
Operating income under direct costing 182,000 Difference $ 9,000 Units produced during the year 51,000 Units sold during the year 48,000 Unit increase in finished goods inventory 3,000 Fixed factory overhead charged to each unit under
absorption costing × $3 Difference $ 9,000