Solution manual cost accounting by lauderbach STANDARD COSTING AND VARIABLE COSTING

CHAPTER 13 STANDARD COSTING AND VARIABLE COSTING 13-1 JIT and Costing Methods Throughput costing is most compatible because it penalizes production in excess of sales.. Note to the Instr

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CHAPTER 13

STANDARD COSTING AND VARIABLE COSTING

13-1 JIT and Costing Methods

Throughput costing is most compatible because it penalizes production

in excess of sales Variable costing does not penalize excess production, while absorption costing actually rewards overproduction

Throughput costing expenses everything except material cost as those costs are incurred It expenses material costs when material goes into production Thus, starting to make something gives rise to expense, which encourages managers to produce only when they can sell the product

Absorption costing rewards high production because it capitalizes fixedproduction costs in inventory, thus postponing their appearance in the incomestatement until products are sold

13-2 Use of Costing Methods

The construction company is least likely to use standard costs because

it does not make standard products Such a company could, and probably does,budget costs for major projects, but these are not standards An automaker uses standard costs both for control and because it could not possibly use actual or normal process costing because of product diversity Job order costing would be prohibitively costly A processor of flour could use actual

or normal costing, but would benefit from the control uses of standards.13-3 Product Cost Period Cost

Classifying a cost as either product or period tells little about the cost itself but rather describes how we treat it for reporting purposes Identifying a cost as a product cost results in its being reported as an expense in the period in which the product is sold Identifying a cost as a period cost results in its being reported as an expense in the period in which it is incurred The distinction between period and product costs has

no relevance to decision making except, perhaps, in connection with capital budgeting decisions where the period of expense reporting for tax purposes isrelevant to the determination of future cash flows

13-4 Costing Methods and Zero Inventories

All three methods will give the same results Total expenses will equal total costs incurred, including purchases of materials and components.13-5 Costing Methods and Cash Flows

Throughput costing will probably be the closest because the flow of costs parallels their incurrence Absorption costing will have the least close relationship to cash flow

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13-6 Fundamentals of Absorption and Variable Costing (15 minutes)

1

Standard cost of sales, 18,000 x $30 540,000

Standard gross margin 360,000

Selling and administrative expenses 300,000

2

Standard variable cost of sales, 18,000 x $10 180,000

Standard gross margin, contribution margin 720,000

Variable production costs 200,000 200,000

Fixed production costs 400,000 0

Total available 600,000 200,000

Ending inventory, 2,000 units at $30, $10 60,000 20,000

Cost of sales $540,000 $180,000

Because actual production equalled the level used to set the standard, there

is no volume variance You might ask how much income the company should earnper month if it continues to sell 18,000 units The answer is $20,000, because the company cannot indefinitely make 2,000 units more than it sells.13-7 Fundamentals of Absorption and Variable Costing (15 minutes)

1

2

Standard gross margin, contribution margin 880,000

Variable production costs 200,000 200,000

Fixed production costs 400,000 0

Total available 660,000 220,000

Ending inventory 0 0

Cost of sales $660,000 $220,000

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Because actual production again equalled the level used to set the standard, there is no volume variance

13-8 Basic Standard Costing Absorption and Variable (25 minutes)

Income Statements Variable Costing

Selling and administrative 60,000 60,000

Total fixed costs 360,000 360,000

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approximate sales As inventories stabilize, income will approach $40,000, the variable costing equilibrium amount.

This answer does not rely on the company's using absorption costing or variable costing In the long run, any method will give the same result (You might want to point out that variable costing is not acceptable for tax purposes, so income differences cannot rise from investing tax savings, as can happen with LIFO.)

Note to the Instructor: You can do this exercise without the details of the cost of sales section, as shown below The cost of sales section can be used to show how the costs flow and why incomes turn out the way they do, but

it is not necessary

Income Statements Variable Costing

March April

Sales, at $7 per case $700,000 $700,000

Variable cost of sales at $3 300,000 300,000

Contribution margin 400,000 400,000

Fixed costs:

Production 300,000 300,000

Selling and administrative 60,000 60,000

Total fixed costs 360,000 360,000

Income $ 40,000 $ 40,000

Income Statements Absorption Costing

March April

Sales, at $7 per case $700,000 $700,000

Standard cost of sales at $5 500,000 500,000

absorption costing You may, for example, wish to ask the students if they can explain the differences between the incomes under the two methods The explanation might proceed as follows:

Explanation of the differences in income in the two months

March April

Differences to be explained:

Income under variable costing $ 40,000 $ 40,000

Income under absorption costing 100,000 20,000

Difference to be explained:

Variable costing income smaller $ 60,000

Variable costing income larger $ 20,000

Prior month's fixed costs deferred to

current month by inclusion in the

beginning inventory:

30,000 x $2 0 60,000

Current month's fixed costs deferred to

the next month by inclusion in the

ending inventory:

30,000 x $2 60,000

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Total available for sale 400,000 440,000

Less ending inventory* 40,000 0

Cost of sales 360,000 440,000

Gross margin 180,000 220,000 Selling and administrative expenses 40,000 40,000

Less ending inventory, 2,000 x $10 20,000 0

Cost of sales $180,000 $220,000

3

January February Sales, 18,000 x $30, 22,000 x $30 $540,000 $660,000

Cost of sales, material cost at $6 x production 120,000 120,000

Budgeted fixed manufacturing costs $900,000 $900,000

Divided by capacity measure 225,000 300,000

Equals standard fixed cost per unit $4 $3

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2 (a) (b)

Standard fixed cost per unit $4 $3

Times number of units produced 240,000 240,000

Fixed overhead applied to production $960,000 $720,000

Less budgeted fixed overhead 900,000 900,000

Volume variance (unfavorable) $ 60,000 ($180,000)

Alternatively, the calculations could be made using the differences between actual production and the volume used to set the standard fixed cost Volume Used to Actual Standard Volume Set Standard Production Difference x Fixed Cost = Variance(a) 225,000 240,000 (15,000) x $4 $ 60,000 F(b) 300,000 240,000 60,000 x $3 180,000 U13-11 Relationships (20-25 minutes)

4 (a) $7 per unit $140,000/20,000

(c) 22,000 units $14,000 favorable variance/$7 per unit = 2,000 units more than normal of 20,000

13-12 Effects of Changes in Production Standard Variable Costing (15 minutes)

Production 40,000 units 41,000 unitsSales (40,000 x $10) $400,000 $400,000 Variable cost of goods sold:

Variable production costs

40,000 x $3 $120,000

41,000 x $3 $123,000 Ending inventory

0 x $3 0

1,000 x $3 3,000 Variable cost of goods sold

40,000 x $3 120,000 120,000 Contribution margin 280,000 280,000 Fixed production costs 200,000 200,000Income $ 80,000 $ 80,000

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Note to the Instructor: We asked for income statements for both levels

of production to allow you to highlight how increases in variable cost

occurring because of increases in production are deferred in inventory, therefore having no effect on income Most students should see that income will be the same no matter what production is You might therefore reiteratethat income can be computed as we did as early as Chapter 2

Sales - variable costs - fixed costs = income

(40,000 x $10) - (40,000 x $3) - $200,000 = $80,000

13-13 Effects of Changes in Production Standard Absorption Costing (15-20 minutes)

Production 40,000 units 41,000 unitsSales (40,000 x $10) $400,000 $400,000 Cost of goods sold:

Variable production costs $120,000 $123,000 Applied fixed production costs

40,000 x $5 200,000

41,000 x $5 205,000 Cost of goods available for sale 320,000 328,000 Ending inventory

0 x $8 0

1,000 x $8 8,000 Cost of goods sold (40,000 x $8) 320,000 320,000 Standard gross profit (40,000 x $2) 80,000 80,000 Volume variance, favorable (1,000 x $5) 0 5,000 Income $ 80,000 $ 85,000 Note to the Instructor: We asked for details of the cost of sales section so that you can show how increases in production lead to increases inapplied fixed costs with a corresponding increase in ending inventory and a more favorable (or less unfavorable) volume variance The 1,000 unit

increase in production leads to an increase in the fixed costs in inventory

of $5,000, which is also the increase in income

13-14 "Now Wait a Minute Here." (20 minutes)

This assignment shows the relationships of income to sales and

production

Sales 10,000 Sales 10,000 Sales 10,001 Sales 9,999 Prod 10,000 Prod 10,001 Prod 10,001 Prod 10,001

Sales at $10 $100,000 $100,000 $100,010 $99,990Cost of sales at $7 70,000 70,000 70,007 69,993Standard gross margin 30,000 30,000 30,003 29,997Volume variance 0 6F 6F 6FActual gross margin $ 30,000 $ 30,006 $ 30,009 $30,003 The highest profit is with sales and production at 10,001, but the lowest is with sales and production at 10,000 Sales of 9,999 with

production of 10,001 gives a higher profit than sales of 10,000 with

production of 10,000 Sales of 10,000 with production of 10,001 gives the second best profit In other words, production increases income more than does sales The company increases its profit by $6 for each additional unit

it produces, while selling an additional unit gains $3 ($10 - $7), and

producing and selling another unit gains $9, the $6 for producing and the $3 for selling

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13-15 All Fixed Cost Company (25-30 minutes)

This problem shows the effects on both income and the balance sheet of the two costing methods The reconciling factor between incomes in both years is the $80,000 absorption costing inventory, increase in 20X2, decrease

in 20X3

1 20X2 20X3 Sales, 120,000 x $6 $720,000 $720,000Cost of sales:

($2,840,000 + $100,000) $2,940,0003

Sales $720,000 $720,000Fixed costs 500,000 500,000Profit $220,000 $220,000Balance sheets

Cash = cumulative sales $ 720,000 $1,440,000Plant, net 2,000,000 1,500,000 Total assets $2,720,000 $2,940,000Stockholders' equity ($2,500,000 + $220,000) $2,720,000

($2,720,000 + $220,000) $2,940,00013-16 Basic Absorption Costing (15-20 minutes)

April

Sales, 9,000 x $100 $900,000

Standard gross margin, 9,000 x $35 315,000

Volume variance* 80,000 F

Actual gross margin 395,000

Profit $ 115,000

*

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Actual production 12,000

Normal activity 10,000

Difference 2,000

Standard fixed cost $40

Volume variance, favorable $80,000

An expanded cost of goods sold section appears as follows

Beginning inventory $ 0

Variable production costs, 12,000 x $25 300,000

Fixed production costs, 12,000 x $40 480,000

Total, 12,000 x $65 780,000

Less ending inventory, 3,000 x $65 195,000

Standard cost of sales, 9,000 x $65 $ 585,000

Note that the volume variance is also the difference between applied fixed overhead of $480,000 and budgeted fixed overhead of $400,000

May

Sales, 11,000 x $100 $1,100,000

Volume variance* 40,000 U

Volume variance, unfavorable $40,000

Beginning inventory, 3,000 x $65 $ 195,000

Available for sale, 12,000 x $65 780,000

Note to the Instructor: You might wish to point out that profit dropped

by $50,000, while sales increased 22.1% (from 9,000 to 11,000 units) You might remind students that Chapter 2 showed how income increases more rapidlythan sales when a company has fixed costs A manager looking at these

statements must wonder why the increase in income lagged that of sales when the cost structure remained the same The next exercise in this series allows you to show how variable costing alleviates this problem

13-17 Basic Variable Costing (Continuation of 13-16) (15-20 minutes)

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Total fixed costs 680,000

Loss ($ 5,000)

An expanded cost of goods sold section shows

Less ending inventory 3,000 x $25 75,000

Standard cost of sales 9,000 x $25 $ 225,000

Selling and administrative 280,000

2 Jasper should earn about $145,000 per month, the variable costing income.Absorption costing income does not reflect long-run earning power when

production and sales differ Over the long-run, sales and production would have to approximate one another, bringing total income to the variable

costing equilibrium amount

Note to the Instructor: In connection with the previous exercise, you might wish to show how income is affected under the two costing methods Using variable costing, we see the following

Less inventory effect, (12,000 - 9,000) x $40 120,000

Loss at 9,000 units if production equals sales ($ 5,000)

Income at 11,000 units $ 65,000

Plus inventory effect, (11,000 - 9,000) x $40 80,000

Income if production equals sales $145,000

13-18 Throughput Costing (Continuation of 13-16) (15 minutes)

Cost of sales is now the cost of materials used in production, and all other costs are expensed Material cost is $15 per unit, so direct labor and variable overhead are $10 ($25 - $15)

April Sales, 9,000 x $100 $ 900,000 Cost of sales, 12,000 x $15 180,000

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Margin 720,000 Operating expenses:

Direct labor and variable overhead, 12,000 x $10 $120,000

Fixed manufacturing 400,000

Selling and administrative expenses 280,000 800,000 Loss ($ 80,000)

May Sales, 11,000 x $100 $1,100,000 Standard variable cost of sales, 9,000 x $15 135,000 Margin 965,000Operating expenses:

Direct labor and variable overhead, 9,000 x $10 $ 90,000

Manufacturing 400,000

Selling and administrative 280,000 770,000 Profit $ 195,000 The differences among the three methods are, as always, differences in inventories The table below summarizes the differences Absorption and variable costing treat only one element, fixed production costs, differently.Throughput costing treats all elements differently from the other two methodsexcept that variable costing also expenses fixed production costs as

incurred

Other Variable Fixed

Materials Production Costs Production CostsAbsorption costing X X X

Profit $ 123,000

* Actual production 12,000

Practical capacity 20,000

Difference ( 8,000)

Volume variance, unfavorable ($128,000)

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Total, 12,000 x $41 492,000

May

Sales, 11,000 x $100 $1,100,000

Volume variance* ( 176,000)U

Volume variance, unfavorable ($176,000)

Available for sale, 12,000 x $41 492,000

The differences are in the standard costs, affecting both inventory and cost of goods sold Using practical capacity gives a lower standard cost of sales because the standard cost is lower, but it gives higher (more

unfavorable) volume variances because the basis for setting the standard is higher Income was higher in April, and lower in May, than when the company used normal capacity If production exceeds sales, income will be higher forthe method that has the higher unit cost, and vice versa This relationship works the same as that between variable costing and absorption costing, and for the same reason

13-20 Absorption Costing (15-20 minutes)

Note to the Instructor: This problem and its sequel include variable cost variances, a fixed overhead budget variance, and a volume variance 1

Sales, 90,000 x $400 $36,000,000

Standard cost of sales, 90,000 x $250 22,500,000

Standard gross margin, 90,000 x $150 13,500,000

Volume variance* $600,000 U

Fixed overhead spending variance* 130,000 F

Variable cost variances** 50,000 F 420,000 U

Actual gross margin 13,080,000

Selling and administrative expenses 10,550,000

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Variable overhead variances

We cannot determine how much of the variable cost variance relates to

spending and how much to efficiency

Variable production costs, 96,000 x $100 9,600,000

Fixed production costs, 96,000 x $150 14,400,000

Total, 96,000 x $250 24,000,000

Less ending inventory, 6,000 x $250 1,500,000

Standard cost of sales, 90,000 x $250 $22,500,000

13-21 Variable Costing (15-20 minutes)

Note to the Instructor: You might wish to ignore the fixed overhead budget variance We showed it because it is an economic variance Moreover,students tend to forget that companies using variable costing still plan and control fixed costs

1

Sales, 90,000 x $400 $36,000,000

Standard variable manufacturing margin, 90,000 x $300 27,000,000

Variable cost variances 50,000 F

Variable manufacturing margin 27,050,000

Fixed costs:

Budgeted manufacturing costs $15,000,000

Budget variance 130,000 F

Selling and administrative 10,550,000

Total fixed costs 25,420,000

Profit $ 1,630,000

Variable production costs, 96,000 x $100 9,600,000

The difference in incomes between this and the previous exercise is the

$900,000 fixed costs in the ending inventory (6,000 x $150)

13-22 Interpreting Results (15 minutes)

1 February, 35,000 units; March, 16,000 units

February March Volume variance = $6 x difference between actual $60,000 F $54,000 U production and 25,000 units

Divided by $6 equals difference between actual

production and 25,000 units (under) 10,000 (9,000)

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Normal capacity 25,000 25,000 Production 35,000 16,000

2 The results that the president believes strange occur because absorption costing defers fixed production costs in inventory, so that in periods of high production, profit will be higher than in periods of low production, sales being the same (or even, as here, with higher sales in the low

production period)

It is not the volume variance per se that causes the results, as

students often think Rather, it is the deferral of fixed costs in

inventory

3 Income statements using variable costing

February March Sales $480,000 $680,000

Variable cost of sales 48,000 68,000

February standard cost of sales $192,000

Divided by February sales 24,000

Standard cost of sales $8

Less standard fixed cost of $6 = standard variable cost $2

Fixed costs = $120,000 selling and administrative plus $150,000 fixed

production costs (25,000 x $6)

The variable costing income statements present the picture much better Profits rose by $180,000 ($342,000 - $162,000), accompanying a 10,000 unit sales increase Contribution margin is $18 per unit, $20 - $2

13-23 Income Determination Absorption Costing (20-25 minutes)

Standard cost calculations:

Standard fixed cost per unit:

Fixed production costs $960,000

Production basis 80,000 = $12 per unit

Standard fixed cost per unit:

Fixed production costs $960,000

Production basis 120,000 = $8 per unit

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Standard cost of sales $1,800,000 $1,440,000

Note to the Instructor: You might wish to show that the $80,000

difference between the two incomes is the $4 difference in standard fixed cost multiplied by the 20,000 unit change in inventory

13-24 Income Determination Variable Costing (Continuation of 13-23) (15-20minutes)

Sales $2,700,000 Cost of goods sold:

Variable production costs (110,000 x $8) $880,000

Less ending inventory (20,000 x $8) 160,000

Standard cost of sales 720,000 Standard variable manufacturing margin 1,980,000 Fixed costs:

Production $960,000

Selling and administrative 250,000 1,210,000Income $ 770,000 Note to the Instructor: You might wish to show that the difference between income here and in the previous exercise is the fixed costs in

Add variable costing income 770,000 770,000

Absorption costing income $1,010,000 $930,000

13-25 Relationships (15-20 minutes)

1 (c) $240,000

Sales (80,000 x $10) $800,000

Variable cost of goods sold (80,000 x $4) 320,000

Contribution margin, variable costing ($10 - $4) 480,000

Fixed costs 240,000

Income, variable costing $240,000

(b) 70,000 units

Income under variable costing (part c) $240,000

Income under absorption costing (given) 210,000

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Difference in income, absorption costing lower $ 30,000

Divided by per-unit fixed cost used under

absorption costing ($240,000/80,000) $3

Equals change in inventory 10,000 unitsBecause absorption costing income is lower, the inventory change is negative (inventory declines), so that production must have been 10,000 units lower than sales

2 (a) 50,000 units

Income under variable costing $ 60,000

Add fixed costs 240,000

Equals contribution margin $300,000

Divided by contribution margin per unit $6

Equals sales, in units 50,000

(b) 70,000 units

Income under absorption costing $120,000

Less income under variable costing 60,000

Equals income difference due to inventory change,

absorption costing higher $ 60,000

Divided by per-unit fixed cost, absorption $3

Equals inventory change 20,000 unitsBecause absorption costing income is higher, the inventory change is positive(inventory increases), so that production must have been 20,000 units higher than sales

3 (c) $120,000

Total contribution margin [60,000 x ($10 - $4)] $360,000

Less fixed costs 240,000

Income, variable costing $120,000

(d) $105,000

Income under variable costing $120,000

Inventory change (60,000 - 55,000) 5,000

Times fixed cost per unit $3

Equals the difference between income under

variable and under absorption costing 15,000

Absorption costing income $105,000

(The difference is subtracted because absorption costing income is lower thanvariable costing income when inventory decreases, which is the case here.) Note to the Instructor: Some students have great difficulty with all or parts of this assignment, but those who understand the two costing methods and the relationships among sales, production, and income should be able to complete the problem successfully with little difficulty A critical step is

to recognize that the difference between incomes under the two costing

methods will relate to changes in inventory and, more specifically, to the change in fixed costs in inventory Hence, an important first calculation isthe $3 per-unit fixed cost

We have found that students who attack the assignment methodically have taken one of two approaches One group expresses income under each method informula fashion, to see the relationships Thus,

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Income, variable = (unit sales x unit contribution margin) - fixed costs costing

in the details of income statements reflecting each method

13-26 All-Fixed Company (20 minutes)

Applied fixed costs at $2 22,000 20,000 18,000

Available for sale 22,000 24,000 22,000

Less ending inventory at $2 4,000 4,000 0

Standard cost of sales at $2 18,000 20,000 22,000

Standard gross margin at $3 27,000 30,000 33,000

Volume variance* 2,000 F 0 2,000 U

Profit $29,000 $30,000 $31,000

* $20,000 - applied fixed production costs or ([actual units - 10,000] x

$2)

Note to the Instructor: This exercise highlights the differences

between absorption costing and variable costing In the required format, with simple numbers, it is easy to see several important relationships Applied fixed production costs and the volume variance add up to $20,000, budgeted fixed costs That is, all fixed costs go through the calculation ofincome, with the amounts deferred in inventory (beginning and ending) being the difference between absorption costing and variable costing Thus, the difference in income in the first month will be $4,000 (absorption over variable), zero in the second month because there is no change in

inventories, and $4,000 in the third month (variable over absorption) It isalso worth noting that total expenses on the income statement equal standard cost of sales plus/minus the volume variance, $16,000 ($18,000 - $2,000) in May, $20,000 in June, and $24,000 ($22,000 + $2,000) in July

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unit of product Total standard variable production costs are $22.

2

Sales (40,000 x $40) $1,600,000Standard cost of sales:

Applied variable production costs (45,000 x $22) $ 990,000

Applied fixed production costs (45,000 x $10) 450,000

Available for sale (45,000 x $32) 1,440,000

Ending inventory (5,000 x $32) 160,000

Standard cost of sales (40,000 x $32) 1,280,000Standard gross margin [40,000 x ($40 - $32)] 320,000Volume variance [(45,000 - 50,000) x $10] 50,000UActual gross margin 270,000Selling and administrative expenses 200,000Income $ 70,000

3

Sales (40,000 x $40) $1,600,000Standard variable cost of sales:

Applied variable production costs (45,000 x $22) $990,000

Ending inventory (5,000 x $22) 110,000

Standard variable cost of sales (40,000 x $22) 880,000Standard variable gross margin [40,000 x ($40 - $22)] 720,000 Fixed production costs $500,000

Total fixed costs 700,000Income $ 20,000Alternatively, income is simply [40,000 x ($40 - $22)] - $700,000 = $720,000

Standard fixed cost (requirement 1) $40

An expanded cost of goods sold section follows

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Total available, 19,000 x $65 1,235,000

3 Income statement, variable costing

Selling and administrative 160,000

Standard cost of sales, 14,000 x $25 $350,000

13-29 Absorption Costing and Variable Costing Variances (15-20 minutes)

1 $3 per unit, $900,000/300,000; total standard cost is $9, $3 + $6

Total fixed overhead variances

Total actual variable costs $1,715,000

Total standard variable costs (290,000 x $6) 1,740,000

Variable cost variances 25,000 F

Fixed overhead variances 40,000 U

Total variances $ 15,000 U

3

Sales (270,000 x $20) $5,400,000 Standard cost of sales (270,000 x $9) $2,430,000

Variances 15,000 U

Cost of sales 2,445,000 Gross margin 2,955,000 Selling and administrative expenses 800,000 Income $2,155,000

4

Sales (270,000 x $20) $5,400,000 Standard cost of sales (270,000 x $6) $1,620,000

Variable cost variances 25,000 F 1,595,000

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Gross margin and contribution margin 3,805,000 Fixed costs ($800,000 + $910,000) 1,710,000 Income $2,095,00013-30 Budgeted Income Statements (20 minutes)

1 Absorption costing income statement

Sales, 37,000 x $70 $2,590,000

Selling and administrative expenses:

Volume variance, unfavorable $25,000

Variable production costs, 39,000 x $15 $ 585,000

Sales, 37,000 x $70 $2,590,000

Variable manufacturing margin, 37,000 x $55 2,035,000

Variable selling and

Variable production costs, 39,000 x $15 $585,000

The $50,000 difference in income ($189,000 - $139,000) is explained by the fixed overhead in the ending inventory ($25 x 2,000 pairs)

13-31 Analysis of Results (Continuation of 13-30) (30 minutes)

1 Absorption costing income statement

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Sales, 40,000 x $70 $2,800,000

Selling and administrative expenses:

An expanded cost of sales section appears below

Variable production costs, 41,000 x $15 $ 615,000

Fixed production costs, 41,000 x $25 1,025,000

Sales, 40,000 x $70 $2,800,000

Variable manufacturing margin, 40,000 x $55 2,200,000

Variable selling and

Variable production costs, 41,000 x $15 $615,000

3 The variable costing income statements provide a better basis for

analyzing results Income changes purely as a function of the change in sales The higher income (actual versus budgeted) under absorption costing

is due in part to increased production, where under variable costing it is due solely to increased sales Because goods must be sold to increase profit(at least at some point they must be sold), variable costing provides a better basis for evaluating results

13-32 Analysis of Income Statement Standard Costs (25 minutes)

1 (a) 24,000 units, volume variance/application rate = $8,000/$2 = 4,000 units over normal activity of 20,000 units

(b) $7,000 favorable

Standard use of materials (24,000 x 16) 384,000

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Materials used 370,000

Use below standard 14,000

Material use variance at $0.50 per pound $ 7,000

(c) $10,000 unfavorable, total unfavorable variance of $3,000 + the favorable use variance calculated in part b

(d) $12,000 favorable

Standard hours (24,000 x 2 hours/unit) 48,000

Actual hours 47,000

Hours above standard 1,000

Variance at $12 per hour $12,000

(e) $8,000 unfavorable, total favorable labor variance of $4,000 - the $12,000 favorable efficiency variance from part d

(f) $1,000 favorable, 1,000 hours under standard from part d x $1

standard variable overhead rate per hour

(g) $3,000 unfavorable, total unfavorable variable overhead variance of $2,000 + the favorable efficiency variance from part f

(h) $37,000

Total budgeted fixed overhead

$2 standard rate x 20,000 units $40,000

Fixed overhead spending variance, favorable 3,000

Actual fixed overhead $37,000

2 Variable costing income statement

Sales (20,000 x $50) $1,000,000

Standard variable cost of sales (20,000 x $34) 680,000

Variances:

Materials $3,000U

Labor 4,000F

Variable overhead 2,000U 1,000 U

Standard cost of sales (20,000 x $35.60)* 712,000

Standard gross profit 288,000

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Fixed overhead budget 3,000F

volume** 1,600U 400 F

Actual gross profit 288,400

Income $ 58,400

* $34 + $1.60

** $1.60 x (25,000 - 24,000) = $1,600 unfavorable

Note to the Instructor: You might ask students whether they can

reconcile income here with that in 13-31 The difference in incomes of

$1,600 ($60,000 - $58,400) is the difference in unit fixed costs ($2.00 -

$1.60) multiplied by the increase of 4,000 units

Fixed costs in ending inventory at $2 ($2 x 4,000) $8,000

Fixed costs in ending inventory at $1.60 ($1.60 x 4,000) 6,400

Difference in incomes ($60,000 - $58,400) $1,600

13-34 Reconciling Incomes Absorption Costing (20 minutes)

1

Sales (214.0 x $20) $4,280.0 Standard cost of sales (214.0 x $9) 1,926.0 Standard gross margin 2,354.0 Volume variance* 50.0 U Actual gross margin 2,304.0 Selling and administrative expenses 1,800.0 Income $ 504.0

* (220.0 - 210.0) x $5 = $50 U Alternatively,

Budgeted fixed manufacturing cost (220 x $5) $1,100

Applied fixed manufacturing cost (210 x $5) 1,050

Unfavorable volume variance $ 50

There was no fixed overhead budget variance, nor variable cost variances Budgeted variable costs for 210,000 units are $840,000, which equalled actualvariable costs

thousand less fixed cost than originally planned [(220 - 210) x $5]

The effect of the change in production is greater than that of the change

in sales A reconciliation of the incomes is:

Standard gross margin, actual results (214.0 x $11) $2,354.0 Standard gross margin, budgeted results (211.5 x $11) 2,326.5 Difference (2.5 x $11) $ 27.5 Less difference in fixed overhead deferral 50.0 Difference in incomes $ 22.5

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