Absorption costing allocates all production costs, both fixed and variable, to units as product costs so cost of goods sold and inventory on the balance sheet include fixed manufacturing
Trang 1Chapter 14 Measuring and Assigning Costs for Income Statements
LEARNING OBJECTIVES
Chapter 14 addresses the following questions:
Q1 How are absorption costing income statements constructed?
Q2 What factors affect the choice of production volume measures for allocating fixed overhead?
Q3 How are variable costing income statements constructed?
Q4 How are throughput costing income statements constructed?
Q5 What are the uses and limitations of absorption, variable, and throughput costing income statements?
These learning questions (Q1 through Q5) are cross-referenced in the textbook to individual exercises and problems
COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems
Questions Having a Single Correct Answer:
No Symbol This question requires students to recall or apply knowledge as shown in the
textbook
e This question requires students to extend knowledge beyond the applications
shown in the textbook
Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10):
Step 1 skills (Identifying)
Step 2 skills (Exploring)
Step 3 skills (Prioritizing)
Step 4 skills (Envisioning)
Trang 2QUESTIONS
14.1 The three methods are similar because they assign some costs to inventory as product
costs, and expense other costs as period costs The three methods differ in the categories that are used for product and period costs Details of these categorizations follow
Absorption costing allocates all production costs, both fixed and variable, to units as product costs so cost of goods sold and inventory on the balance sheet include fixed manufacturing costs Cost of goods sold is subtracted from revenue to arrive at gross margin, and then other nonmanufacturing expenses are subtracted to arrive at operating income
Variable costing assigns direct costs (direct labor and direct materials) and variable overhead costs to inventory and variable cost of goods sold Variable cost of goods sold and all other non-manufacturing variable costs are subtracted from revenue to arrive at contribution margin All fixed costs, both manufacturing and non-manufacturing, are then subtracted from contribution margin to arrive at operating income
Throughput costing assigns only direct materials costs to inventory and throughput cost
of goods sold Throughput cost of goods sold is subtracted from revenue to arrive at throughput margin All other costs are considered period costs and deducted from
throughput margin to arrive at operating income
Uses of the three methods are different, also Absorption costing income statements meet GAAP and are used by shareholders and other external stakeholders Variable costing income statements generally do not meet GAAP and are only available for internal
reporting Information from these reports is used in decision-making Throughput
accounting income statements provide information for very short-term decisions and are especially helpful when capacity constraints exist
14.2 The allocated fixed manufacturing overhead that is added (if production is greater than
sales) or subtracted (if production is less than sales) from finished goods is the
reconciliation amount between variable versus absorption costing
14.3 The volume variance arises because of differences between actual volumes and budgeted
volumes used to allocate fixed manufacturing overhead Under variable costing all fixed manufacturing overhead is treated as a period expense; there are no allocations of fixed manufacturing overhead to inventory or variable cost of goods sold Hence, there will be
no volume variances
14.4 Under variable costing, all fixed manufacturing overhead is treated as an expense of the
period, regardless of how many units were produced or sold; income will vary only with the number of units sold, the level of production has no effect Under absorption costing, fixed manufacturing overhead is first assigned to product; the amount of fixed overhead that appears on the income statement depends on unit sales Income depends upon both the level of production and the level of sales
Trang 314.5 Eventually all of the units are sold under either method, so eventually all of the fixed
manufacturing cost will be expensed under either method Under variable costing, it is expensed during the period it is incurred, whereas under absorption costing, a portion of fixed manufacturing cost is inventoried and expensed when the inventory is sold rather than during the period it was incurred
14.6 A variable cost increases proportionately with volume Variable costing is a method of
calculating income
14.7 Unless the organization is not-for-profit, none For most on-going, profit-seeking firms,
denominator volume should exceed breakeven volume because the firm plans to be operating at volumes greater than breakeven
14.8 The fixed manufacturing overhead of the current period will be shown in its entirety as an
expense if variable costing is used If absorption costing is used, some of it will be assigned to the units added to inventory, so that the fixed manufacturing overhead
included in cost of goods sold will be less than the total fixed manufacturing overhead that is expensed on the variable costing income statement
14.9 GAAP requires absorption costing to match production-related expenses to revenues
14.10 This can be accomplished through the use of an adjusting journal entry at the end of the
period The objective is to distribute or allocate the fixed manufacturing overhead of the period between inventories on hand (WIP and FG) and cost of goods sold
14.11 A joint cost may be either fixed or variable and a separable cost may be either fixed or
variable Both variable and absorption costing can be applied to joint product situations Under variable costing, the joint costs are first categorized as fixed or variable and then listed on the income statement under the headings of variable or fixed production costs Under absorption costing, the common and separable costs are considered product costs and assigned to inventory
Trang 4EXERCISES
14.12 Famous Desk Company
A and B First list all pertinent information:
Revenue = 220 desks x $300 = $66,000
Variable production costs = 220 desks x $80 = $17,600
Variable selling and administrative costs = 220 desks x $30 = $6,600
Fixed selling and administrative = $6,000
Fixed overhead absorbed into inventory under normal production = $10,000/150 desks =
Trang 514.13 Rock Crusher Corp
A sample spreadsheet showing the calculations for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg)
A Variable costing income statement
VARIABLE COSTING
A100 A300 Variable cost per unit produced $5.00 $2.50
Selling and administrive (60,000) Operating income $20,000
Computation details for variable production cost per unit:
A100: $20,000/4,000 tons = $5 per ton A300: $15,000/6,000 tons = $2.50 per ton
B Absorption costing income statement:
Trang 6Calculation details for cost of goods sold:
Fixed production cost per ton = $100,000/10,000 tons = $10 per ton Variable production cost per ton was calculated in Part A
Cost of goods sold:
C The difference in income resides in inventory There was no beginning inventory, but
there were 3,000 tons (10,000 tons produced – 7,000 tons sold) with $10 of fixed
production cost per ton absorbed into inventory on the balance sheet under absorption
costing The difference in income = $50,000 - $20,000 = $30,000, and the fixed
production cost in inventory is 3,000 x $10 = $30,000
14.14 Plains Irrigation
A The value of inventory is higher when absorption costing is used because some fixed
manufacturing overhead is allocated to inventory to match revenue with expense at the
time of sale If there is fixed manufacturing overhead, the value of inventory under
absorption costing will always be higher than under variable costing
B To identify the costing method that would result in higher income, first calculate the
change in inventory during October under both methods:
October inventory added under absorption costing ($2,598-$1,346) $1,252 October inventory added under variable costing ($1,647-854) 793
Because $459 more cost was assigned to inventory under absorption costing, income
during October would be higher by $459 under absorption than under variable costing
14.15 Asian Iron
A
1 Under variable costing:
Total variable production cost = (NT$2,300 + 3,300 + 2,800) = NT$8,400 Variable cost per unit = NT$8,400/10,500 = NT$0.80 per unit
Units in ending inventory = 10,500 – 9,400 = 1,100 units Ending inventory = NT$0.80 x 1,100 units = NT$880
2 Under absorption costing:
Fixed manufacturing overhead = NT$8,250/10,500 units = NT$0.7857 per unit Total cost per unit = NT$0.80 + NT$0.7857 = NT$1.5857
Ending inventory = NT$1.5857 x 1,100 units = NT$1,744
Trang 73 Under throughput costing:
Total direct materials cost per unit = NT$2,300/10,500 units = NT$0.21905 Ending inventory = NT$0.21905 x 1,100 units = NT$241
(NT$1.5857 x 9,400) (14,906) Gross margin 17,994 Selling and admin
(NT$940 + 14,560) (15,500) Operating income NT$ 2,494
Revenue NT$32,900 Direct materials
(NT$0.21905 x 9,400) (2,059) Throughput margin 30,841 Operating expenses (a) (29,850) Operating income NT$ 991
(a) NT$(3,300 + 2,800 + 940 + 8,250 + 14,560) = NT$29,850
Double-check computations for absorption versus variable costing:
There were no beginning inventories Therefore, the change in inventory is equal to the ending inventory (calculated in Part A)
Difference in operating income - NT$2,494 - NT$1,630 NT$ 864 Double-check computations for absorption versus throughput costing:
Difference in operating income - NT$2,494 - NT$991 NT$1,503
C It is first necessary to calculate the revenue and variable costs per unit:
Revenue per unit = NT$32,900/9,400 = NT$3.50 Variable production cost per unit = NT$0.80 Variable selling cost per unit = NT$940/9,400 = NT$0.10
Trang 8There are several ways to estimate variable costing operating income at 12,110 units One way is to prepare an estimated income statement:
Incremental contribution margin [2,710 x (NT$3.50 – 0.80 – 0.10)] 7,046
14.16 Wild Bird Feeders
A sample spreadsheet showing the calculations for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg)
A and B Absorption and variable costing ending inventory
The problem does not provide the company’s cost flow assumption (LIFO or FIFO) However, the problem states that the prior costs are the same as 2004 planned costs The
2004 actual costs for direct materials, direct labor, and variable manufacturing overhead are the same as the planned costs (i.e., $3,120,000/130,000 units = $24.00 for direct materials, $2,340,000/130,000 units = $18.00 for direct materials, and
$520,000/130,000=$4.00 for variable manufacturing overhead) The problem also states that all over- or underapplied overhead is assigned directly to cost of goods sold
Therefore, the 2004 overhead costs assigned to inventory are the same as the planned costs Thus, the prior year inventory costs are the same as the current year inventory costs, and it does not matter which cost flow assumption the company uses
Trang 9COST OF ENDING INVENTORY
Absorption Variable Absorption Variable Production cost per unit: Costing Costing Costing Costing Direct materials (actual) $24.00 $24.00 $24.00 $24.00 Direct labor (actual) 18.00 18.00 18.00 18.00 Variable manufacturing overhead (allocated=actual) 4.00 4.00 4.00 4.00 Fixed manufacturing overhead (allocated) 5.00 5.00
C Manufacturing and total contribution margin
VARIABLE COSTING
Manufacturing contribution margin 6,625,000 Other variable costs:
Variable administrative 125,000 (1,875,000) Total contribution margin 4,750,000 Fixed costs:
1 Fixed selling and administration = ($980,000 + $850,000) = $1,830,000
2 Fixed manufacturing overhead allocated to COGS:
Fixed overhead at given allocation rate (125,000 x $5) $625,000
3 As noted in the answer to Parts A and B, the cost per unit during 2003 was the same
as the cost per unit assigned to inventory during 2004 Therefore, the cost per unit assigned to cost of goods sold and to inventory is not affected by whether the
company’s inventory levels increased or decreased during 2004 In other words, sales
of units that were produced last year do not need to be considered
4 Calculation of overapplied (underapplied) overhead:
Trang 105 Total fixed costs on income statement = $1,830,000 + $625,000 + $60,000 (because
the underapplied overhead is closed to COGS) = $2,515,000
E Variable costs on variable costing income statement (see the solution to Part C):
$5,750,000 + $1,875,000 = $7,625,000
F Absorption income would be higher than variable income because the company produced more units that it sold, and the units remaining in ending inventories include an allocation
of fixed manufacturing overhead cost under absorption costing Therefore, total
overhead expense on the income statement is less under absorption than under variable costing, where the total fixed cost for the period is expensed
G There are two ways to answer this question The first method is to calculate the amount
of fixed overhead added to inventory under absorption costing The fixed overhead allocation rate is $5 per unit, and 5,000 units were added to inventory Therefore,
absorption costing income should be $25,000 higher than variable costing income
The second method is to prepare the two income statements and compare the results The difference in income is (income statements are available on the sample spreadsheet for this problem):
Revenue (a) $150,000 Raw materials (g) (30,000) Throughput margin 120,000 Operating expenses (h) (101,750) Operating income $ 18,250
Calculation details:
(a) Revenue = 15 motorcycles x $10,000
(b) Variable production costs = 15 motorcycles x ($2,000 + $1,000) = $45,000
(c) Variable selling and administrative costs = 15 motorcycles x $250 = $3,750
Trang 11(d) Absorption cost of goods sold:
Normal capacity = 10 motorcycles per month Estimated fixed overhead per motorcycle = $40,000/10 = $4,000 Total fixed and variable production cost per unit = $4,000 + $2,000 + $1,000
= $7,000 Cost of goods sold = 15 motorcycles x $7,000 = $105,000 (e) Volume variance:
Allocated overhead (18 motorcycles x $4,000) 72,000
Because the volume variance is material relative to actual production costs, it will
be prorated between cost of goods sold and ending inventory The portion allocated to cost of goods sold is:
(f) Total selling and administrative expense = $40,000 + 15 motorcycles x $250 =
$43,750 (g) Total raw materials = 15 motorcycles x $2,000 = $30,000
(h) Total operating expenses:
Direct labor and variable overhead (18 motorcycles x $1,000) $ 18,000
Variable selling and administrative (15 motorcycles x $250) 3,750
D Here is a schedule to reconcile the three income statements Recall that inventory
increased during the month by 3 units (18 motorcycles manufactured – 15 motorcycles sold)
Direct labor and variable overhead costs added to ending variable
Fixed overhead costs allocated to ending absorption costing income (after the volume variance adjustment, this is equal
to actual fixed overhead cost per unit
Trang 12PROBLEMS
14.18 Maine Lobster Company
A Absorption income statements assign all direct production costs and allocate all indirect production costs to inventory At the time of sale, per unit revenue is matched with per unit expense on the income statement Variable income statements categorize costs into fixed and variable, and production related and non-production related costs
B If the company has no shareholders, the company may have no need for GAAP-based income statements The variable income statement would be more useful for internal management use
C If the company wishes to apply for external funds, such as a bank loan, the company may
be required to prepare GAAP-basis financial statements
D It is easy to prepare both types of statements However, for decision-making purposes the variable statements are better
E If Maine Lobster wants other family members to know how the business is doing, GAAP statements would be prepared in a manner that would allow comparison with other businesses
Trang 13Variable costing income statements:
Revenues (jets sold x €1,000,000) €10,000,000 €4,000,000
€10,000,000 Variable costs:
Production (jets sold x €200,000 +
(4,000,000) Selling (jets sold x €100,000) (1,000,000) (400,000) (1,000,000)
5,000,000 Fixed costs:
8,000,000 Operating expenses:
Direct labor (jets produced x €150,000) (1,500,000) (900,000)
(1,200,000) Variable production overhead
(jets produced x €50,000) (500,000) (300,000) (400,000) Variable selling (jets sold x €100,000) (1,000,000) (400,000)
(1,000,000) Fixed production overhead (600,000) (600,000) (600,000) Fixed administrative and selling (100,000) (100,000) (100,000)
Fixed production overhead per unit:
€600,000/units produced 60,000 100,000 75,000