MANAGEMENT ACCOUNTING
CONCEPTS AND TECHNIQUES
By Dennis Caplan, University
at Albany (State University of New York)
CHAPTER 15: Alternative
Inventory Valuation Methods
Exercises
and Problems:
15-1: Which of the following items account for the difference in income between Variable Costing and Absorption Costing when inventory levels are changing? (Check all that apply.)
(A) Fixed manufacturing costs
(B) Fixed non-manufacturing costs
(C) Variable manufacturing costs
(D) Variable non-manufacturing costs
15-2: At a production level of 100 units, the per unit cost under Absorption Costing is $8, which consists of $2 of direct materials, $2 of direct labor, $2 of variable manufacturing overhead, and $2 of fixed manufacturing overhead. Calculate the Absorption Costing per unit cost assuming the production level is increased to 200 units?
15-3: Hank’s Hot Dog Factory manufactures hot dogs. The factory’s cost structure is as follows: fixed manufacturing costs per month are $8,000. Variable manufacturing costs are $0.40 per hot dog. Fixed non-manufacturing costs are $7,000 per month. Variable non-manufacturing costs consist of a $0.20 sales commission for every hot dog sold. The sales price per hot dog is $2.20.
Required: If the company begins the month with zero inventory, makes 10,000 hot dogs, and sells 7,000 hot dogs, what is the total cost of inventory on the Balance Sheet at the end of the month under Variable Costing? What is income (loss) for the month under Variable Costing?
15-4: The Esquimau Pie Company makes and sells the
famous Esquimau Pie ice cream bar. The company’s cost
structure is as follows: fixed manufacturing overhead is $5,000 monthly. Variable
manufacturing costs are $1.40 for each Esquimau Pie.
Fixed non-manufacturing costs are $3,000 monthly. There are no variable
non-manufacturing costs. The company begins the month with no inventory, makes
2,000 Esquimau Pies, and sells 1,000 Esquimau Pies for $10 per pie.
Required:
A) What is the cost of ending inventory under Absorption
Costing?
B) What is the cost of ending inventory under Variable
Costing?
C) What is income under Absorption Costing?
D) What is income under Variable Costing?
15-5: The Impatients-To-Go Silk Flower Company began operations on January 1, 2004. Which of the following circumstances ensures that the company’s net income will be the same under Absorption Costing as under Variable Costing for 2005, its second year of operations?
(I) The company has no inventory on January 1, 2005, and no inventory on December 31, 2005.
(II) The company incurred no fixed manufacturing overhead in 2005, and has no inventory on December 31, 2005.
(III) The company incurred no fixed manufacturing overhead in 2004, and has no inventory on December 31, 2005.
(A) I only
(B) I and II are each sufficient
(C) I and III are each sufficient
(D) I, II and III are each sufficient
15-6: The Foster Company has variable and fixed manufacturing costs, and also
some variable and fixed non-manufacturing costs. For the year 2005, the company
has zero beginning inventory, and positive ending inventory. Which statement is true?
(A) Income
in 2005 is the same under both Absorption Costing and Variable Costing
(B) Income
in 2005 is higher under Absorption Costing than under Variable Costing
(C) Income
in 2005 is lower under Absorption Costing than under Variable Costing
(D) Unable
to determine, from the information given, whether income is higher or lower
under Absorption Costing than under Variable Costing.
15-7: O’Brien and Hwang started 2006 with zero inventory,
produced 100 units of product, and sold 90 units. They incurred the following costs:
variable manufacturing costs of $10 per unit; fixed manufacturing costs of
$2,000; variable non-manufacturing costs of a $2 sales commission per unit
sold; and fixed non-manufacturing costs of $700.
A) What will the 2006 year-end
balance sheet show for ending inventory if the company uses Variable Costing?
B) Calculate net income for
2006 under Variable Costing. The sales price is $50 per unit.
15-8: John Smith owned a flour mill. He started 1803 with no inventory, produced 50 tons of flour, and ended the year with five tons of flour. Sales were $22,500. He had no variable manufacturing overhead. His only direct cost was grain, for which he paid $8,000. Non-manufacturing variable costs were $5,000, non-manufacturing fixed costs were $4,000, and manufacturing fixed costs were $6,000.
A) What was Smith’s contribution margin for 1803?
(A) $9,500
(B) $10,300
(C) $10,800
(D) The answer depends on whether Smith uses Absorption Costing or Variable Costing
B) What was operating income for 1803 under Variable Costing?
(A) Loss of $500
(B) Income of $800
(C) Income of $900
(D) Income of $300
15-9: The following information pertains to Booz Audio, a manufacturer of high-end
speakers for home audio systems. Each “Unit” is actually two speakers (i.e., a
pair of speakers). The sales price per unit is $1,500 in both years. Beginning
inventory in 2004 was zero.
|
2004 Units manufactured Units sold Direct manufacturing costs(materials
and labor) Variable manufacturing overhead Fixed manufacturing
overhead Variable non-manufacturing
overhead Fixed non-manufacturing
overhead |
5,000 4,500 $2,000,000 500,000 1,000,000 50,000 100,000 |
|
2005 Units manufactured Units sold Direct manufacturing costs
(materials and labor) Variable manufacturing
overhead Fixed manufacturing
overhead Variable non-manufacturing
overhead Fixed non-manufacturing
overhead |
4,000 4,100 $1,600,000 400,000 1,000,000 40,000 100,000 |
Required:
A) Prepare a contribution
margin income statement for 2005, using variable costing, assuming the company
uses FIFO.
B) Prepare a gross margin
income statement for 2005, using absorption costing, assuming the company uses
FIFO.
C) Compute cost-of-goods-sold
for 2005, using absorption costing, assuming the company uses LIFO.
15-10: The Arcata Bicycle Company began operations on January
1, 2000 with no inventory. The company makes one product, a touring bike.
Following is information for production and sales for Arcata’s first two years
of operations.
|
|
For the year 2000 |
For the year 2001 |
|
Units produced Units sold Selling price per unit Direct materials per unit Direct labor per unit Sales commission per unit |
100 85 $2,000 $100 $60 $20 |
100 80 $2,000 $90 $60 $20 |
In each year, total variable manufacturing overhead was $50,000; total fixed manufacturing overhead was $60,000; and total fixed non-manufacturing overhead was $20,000. There were no variable non-manufacturing costs other than sales commissions.
Required:
15-11: Onen Corporation makes just one product: a hydraulic pump that sells for $1,000 per unit. In May, Onen started with zero units in beginning inventory, manufactured 400 pumps, and sold 350 pumps. The variable manufacturing cost is $600 per unit, which consists of $300 in direct materials, $200 in direct manufacturing labor, and $100 in variable manufacturing overhead. The fixed manufacturing overhead costs are $50,000. The only variable non-manufacturing cost is a warehousing fee incurred each time a unit is manufactured, and this fee is $60 per unit. Fixed non-manufacturing costs are $70,000.
Required:
A) What will appear on the balance sheet at the end of May for the cost of ending inventory under Variable Costing?
B) Prepare an income statement for May using Variable Costing. Use a contribution margin format for the income statement.
C) What will appear on the balance sheet at the end of May for the cost of ending inventory under Absorption Costing?
D) Prepare an income statement for May using Absorption Costing. Use a Gross Margin format for the income statement.
E) Calculate operating income for May under Throughput Costing.
15-12: Claypool Corporation can make three models of barbecue grills.
Following is information about production cost and sales demand for one year,
which is the company’s planning horizon.
|
|
Portable |
Standard |
Deluxe |
|
Sales price Maximum sales demand Beginning inventory Inputs: Direct materials Direct labor Metal-working time Fixed manufacturing overhead |
$400 per unit 1,000 units zero $85 per unit 10 hours per unit 2 hours per unit $3,000 in total |
$200 per unit 500 units zero $40 per unit 4 hours per unit 1 hour per unit $1,000 in total |
$800 per unit 400 units zero $280 per unit 15 hours per unit 3 hours per unit $5,000 in total |
The capacity of the factory is determined by the
metal-working machine. This machine can run 2,000 hours annually. The table
shows how much time each unit requires on this machine. The company anticipates
that at the end of this year, this machine will have to be replaced.
The factory has a single production line, and must
retool the line when switching from one model of grill to another. The
out-of-pocket cost to retool is $5,000 each time production is switched.
Production downtime for retooling is determined by the downtime on the
metal-working machine, which is 100 hours. There is no need to run more than
one production-run of any one product annually (meaning that even if all three
models are produced, total downtime on the metal-working machine is only 2 x
100 hours = 200 hours for the year).
The average labor wage rate is $15 per hour. The variable
overhead rate is the same for all three products. It is $20 per hour on the
metal-working machine (e.g., $40 for each portable grill).
The fixed overhead in the table shows product-level
costs. These costs are incurred if any amount of that model is produced. If no
units of that model are produced, these costs are completely avoidable.
Facility-level fixed manufacturing overhead costs are $30,000 per year. These
costs are unavoidable.
Required:
A) What is
the most profitable product? Explain your reasoning.
B) What
is the profit-maximizing product mix? Assuming that the company uses this
product mix, show an income statement for each product produced.
C) Without
regard to your answers to parts A and B, assume that the company decides to
produce only the portable heater. Halfway through the year, the metal-working
machine breaks down, injuring the machine operator, and prompting the labor
union to call a strike. The machine cannot be repaired or replaced for the rest
of the year, and in any case, the workers remain on strike. During the first
six months, the company produced 500 portable heaters, and by the end of the
year, the company sold 400, leaving 100 units in ending finished goods
inventory. Value this ending inventory for financial reporting purposes, in
accordance with S.F.A.S. 151.
15-13: ZFN
Factory capacity: 250,000 jeans per year
Units manufactured in 2005: 192,000 jeans
Variable manufacturing costs: $10 per jean
Fixed manufacturing overhead costs: $1,344,000
S. G. & A. expenses: $2 per jean (this is a sales commission)
Sales: 150,000 jeans at $25 per jean
Sales demand, sales price, and variable costs are all expected to remain unchanged in 2006 from 2005. Fixed manufacturing overhead costs are expected to increase by 10%.
Required:
Calculate 2005 income and projected 2006 income under Absorption Costing, under each of the following sets of assumptions:
A) The company accounts for inventory using FIFO, allocates fixed manufacturing overhead costs based on units produced, manufactures enough units in 2006 to plan for 60,000 units in ending inventory at the end of the year.
B) The company accounts for inventory using FIFO, allocates fixed manufacturing overhead costs based on units produced, manufactures at capacity in 2006.
C) The company accounts for inventory using LIFO, allocates fixed manufacturing overhead costs based on units produced, manufactures enough units in 2006 to plan for 60,000 units in ending inventory at the end of the year.
D) The company accounts for inventory using LIFO, allocates fixed manufacturing overhead costs based on units produced, manufactures at capacity in 2006.
Calculate 2005 income and projected 2006 income under Variable Costing, under FIFO, assuming the company manufactures enough units in 2006 to plan for 60,000 units in ending inventory at the end of the year.
15-14: Aztech Industries makes only one product. In
2001, the company started the year with zero beginning inventory.
The company reported the following results for 2005 and 2006:
|
|
2005 |
2006 |
|
Units made Units sold Average unit sales price Variable manufacturing
costs Fixed overhead
manufacturing costs Variable non-manufacturing
costs Fixed non-manufacturing costs |
20 18 $1,000 $1,400 $3,500 $ 180 $ 900 |
10 7 $1,000 $ 700 $3,500 $ 90 $ 900 |
Required:
A) How many units are in ending inventory at the end of 2006?
B) Calculate the cost of ending inventory at the end of 2006, assuming the
company uses Absorption Costing, and the FIFO (first-in, first-out) inventory
flow assumption.
C) Calculate operating income for 2006, assuming the company uses
Absorption Costing, and the LIFO (last-in, first-out) inventory flow
assumption.
D) Calculate operating income for 2006, using either FIFO or LIFO
(whichever you prefer), assuming the company uses Variable Costing.
E) Calculate the cost of ending inventory at the end of 2006, assuming the
company uses Variable Costing, using either FIFO or FIFO (whichever you
prefer).
F) Assume the company uses Absorption Costing. What is the Gross Margin in 2005?
G) Assume the company uses Variable Costing. What is the contribution
margin (i.e., the total contribution margin) for 2005?
15-15: A factory has fixed manufacturing overhead of $10,000,000 per year. Production capacity (practical capacity) is 20,000 units per year. The normal range of production, for purposes of SFAS No. 151, ranges from 12,000 units to 18,000 units annually. In the past, the company had always used actual production to calculate the fixed cost per unit. The company uses the FIFO inventory flow assumption. The company started the year with 3,000 units, produced 10,000 units, and sold 11,000 units.
Required: How much more income or less income will the company show this year under SFAS No. 151 than it would have shown under its old method of allocating fixed manufacturing overhead, assuming that the company uses the flexibility permitted under SFAS No. 151 to minimize the effect of this new pronouncement on its financial statements relative to its old accounting? Assume that this is the first year the company implements SFAS No. 151, and assume the pronouncement is implemented prospectively, so beginning inventory is not restated.
15-16: A factory has fixed manufacturing overhead of $10,000 per month. Practical capacity is 2,000 units per month. The normal range of production, for SFAS No. 151, ranges from 1,200 units to 1,800 units monthly. In the past, the company used practical capacity to calculate the fixed cost per unit, and recorded the volume variance in COGS. The company uses LIFO. The company started the month with 1,000 units, produced 1,200 units, and sold 1,300 units.
Required: How much more income or less income will the company show this month under SFAS No. 151 than it would have shown under its old method of allocating fixed manufacturing overhead, assuming that the company uses the midpoint of the range of normal capacity in the denominator of its fixed overhead rate? Assume that this is the first month the company implements SFAS No. 151, and assume the pronouncement is implemented prospectively, so that inventory produced in prior months and brought into the current month as beginning inventory is not restated.
The answer is zero. Since the company is on LIFO, and since current month sales exceed current month production, all fixed manufacturing overhead incurred this month is expensed this month, either as part of Cost of Goods Sold or as the volume variance.
15-17: In July, Border Industries made 1,000 units of its sole product, and sold 800 units. There were no beginning inventories. Its net income for the month using Variable Costing was $20,000. Its net income for the month using Absorption Costing was $24,000. Its contribution margin for the month was $50,000, and its gross margin for the month was also $50,000. Sales revenue for the month was $200,000. Border is on an actual costing system (i.e., overhead is allocated using a rate and allocation base that are based on actual amounts). There are no fixed direct costs.
Required:
A) How much fixed manufacturing overhead was incurred during the month?
B) How much fixed non-manufacturing overhead was incurred during the month?
C) What was the per unit variable manufacturing cost for the month?
D) What was
the total variable non-manufacturing costs incurred during the month?
E) What
is the cost of ending inventory under Absorption Costing?
F) What is the cost of ending inventory under Variable Costing?
15-18: Copernicus International uses Variable Costing, and
the weighted-average inventory flow assumption. The company started the period
with zero finished goods and 100 units of work-in-process. These units were 30%
complete with respect to materials and 70% complete with respect to labor and
variable manufacturing overhead. The cost of this beginning work-in-process was
$10,000 in materials and $40,000 in labor and variable manufacturing overhead.
During the period, the company completed these 100 units and started production
of another 50 units. At the end of the period, of the 50 units started during
the period, 20 were finished, and 30 were 20% complete with respect to
materials and 50% complete with respect to labor and variable manufacturing
overhead. Manufacturing costs incurred during the period were $8,000 for
materials and $32,000 for labor and variable manufacturing overhead. Fixed
manufacturing overhead for the period was $75,000. Fixed non-manufacturing
costs were $10,000. Variable non-manufacturing costs were a $20 sales
commission per unit sold. 85 units were sold, at an average sales price of
$2,000 per unit.
Required:
A) Prepare a Contribution Margin
format income statement for the period.
B) What are the balances in the work-in-process and finished goods inventory accounts at the end of the period?
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Management
Accounting Concepts and Techniques; copyright 2006; most recent update:
November 2010
For a printer-friendly version, contact Dennis Caplan at dcaplan@uamail.albany.edu