CMA PRACTICE ESSAY TYPE QUESTIONS VARIABLE ABSORPTION AND THOROUGH COSTING
Q1 For 20x4, Nichols, Inc. had sales of 75,000 units and production of 100,000 units. Other information for the year included:
Direct manufacturing labor $187,500
Variable manufacturing overhead 100,000
Direct materials 150,000
Variable selling expenses 100,000
Fixed administrative expenses 100,000
Fixed manufacturing overhead 200,000
There was no beginning inventory.
Required:
a. Compute the ending finished goods inventory under both absorption and variable costing.
b. Compute the cost of goods sold under both absorption and variable costing.
Answer:
a. Absorption Variable
Direct materials $150,000 $150,000
Direct manufacturing labor 187,500 187,500
Variable manufacturing overhead 100,000 100,000
Fixed manufacturing overhead 200,000 0
Total $637,500 $437,500
Unit costs:
$637,500/100,000 units $6.375
$437,500/100,000 units $4.375
Ending inventory:
25,000 units x $6.375 $159,375
25,000 units x $4.375 $109,375
b. Cost of goods sold:
75,000 x $6.375 $478,125
75,000 x $4.375 $328,125
Difficulty: 2 Objective: 1
Q2 . Bruster Company sells its products for $66 each. The current production level is 25,000 units, although only 20,000 units are anticipated to be sold.
Unit manufacturing costs are:
Direct materials $12.00
Direct manufacturing labor $18.00
Variable manufacturing costs $9.00
Total fixed manufacturing costs $180,000
Marketing expenses $6.00 per unit, plus $60,000 per year
Required:
a. Prepare an income statement using absorption costing.
b. Prepare an income statement using variable costing.
Answer:
a. Absorption-costing income statement:
Sales (20,000 x $66) $1,320,000
Cost of goods sold (20,000 x $46.20*) 924,000
Gross margin $396,000
Marketing:
Variable (20,000 x $6) $120,000
Fixed 60,000 180,000
Operating income $216,000
* $12.00 + $18.00 + $9.00 + ($180,000/25,000) = $46.20
b. Variable-costing income statement:
Sales (20,000 x $66) $1,320,000
Variable costs:
Cost of goods sold (20,000 x $39*) $780,000
Marketing (20,000 x $6) 120,000 900,000
Contribution margin $420,000
Fixed costs:
Manufacturing $180,000
Marketing 60,000 240,000
Operating income $180,000
* $12.00 + $18.00 + $9.00 = $39
Difficulty: 2 Objective: 2
Q3 . Ireland Corporation planned to be in operation for three years.
· During the first year, 20x1, it had no sales but incurred $120,000 in variable manufacturing expenses and $40,000 in fixed manufacturing expenses.
· In 20x2, it sold half of the finished goods inventory from 20x1 for $100,000 but it had no manufacturing costs.
· In 20x3, it sold the remainder of the inventory for $120,000, had no manufacturing expenses and went out of business.
· Marketing and administrative expenses were fixed and totaled $20,000 each year.
Required:
a. Prepare an income statement for each year using absorption costing.
b. Prepare an income statement for each year using variable costing.
Answer:
a. Absorption-costing income statements:
20x1 20x2 20x3
Sales $0 $100,000 $120,000
Cost of goods sold 0 80,000 80,000
Gross margin $0 $20,000 $40,000
Marketing and administrative 20,000 20,000 20,000
Operating income $(20,000) $ 0 $20,000
b. Variable-costing income statements:
20x1 20x2 20x3
Sales $ 0 $100,000 $120,000
Variable expenses 0 60,000 60,000
Contribution margin $ 0 $40,000 $60,000
Fixed expenses:
Manufacturing $40,000 $ 0 $ 0
Marketing and administrative 20,000 20,000 20,000
Total fixed $60,000 $20,000 $20,000
Operating income $(60,000) $20,000 $40,000
Difficulty: 3 Objective: 2
Q4 . Jarvis Golf Company sells a special putter for $20 each. In March, it sold 28,000 putters while manufacturing 30,000. There was no beginning inventory on March 1. Production information for March was:
Direct manufacturing labor per unit 15 minutes
Fixed selling and administrative costs $ 40,000
Fixed manufacturing overhead 132,000
Direct materials cost per unit 2
Direct manufacturing labor per hour 24
Variable manufacturing overhead per unit 4
Variable selling expenses per unit 2
Required:
a. Compute the cost per unit under both absorption and variable costing.
b. Compute the ending inventories under both absorption and variable costing.
c. Compute operating income under both absorption and variable costing.
Answer:
a. Absorption Variable
Direct manufacturing labor ($24/4) $ 6.00 $ 6.00
Direct materials 2.00 2.00
Variable manufacturing overhead 4.00 4.00
Fixed manufacturing overhead ($132,000/30,000) 4.40 ___0
Total cost per unit $16.40 $12.00
b. Absorption Variable
Beginning inventory $0 $0
Cost of goods manufactured:
30,000 x $16.40 $492,000
30,000 x $12.00 _______ $360,000
Cost of goods available for sale $492,000 $360,000
Cost of goods sold:
28,000 x $16.40 $459,200
28,000 x $12.00 _______ $336,000
Ending inventory $ 32,800 $ 24,000
Answer:
c. Absorption-costing income statement:
Sales (28,000 x $20) $560,000
Cost of goods sold (28,000 x $16.40) 459,200
Gross margin 100,800
Less:
Variable selling and administrative $56,000
Fixed selling and administrative 40,000 96,000
Operating income $ 4,800
Variable-costing income statement:
Sales (28,000 x $20) $560,000
Variable COGS (28,000 x $12) $336,000
Variable selling expenses (28,000 x $2) 56,000 392,000
Contribution margin 168,000
Fixed costs:
Manufacturing $132,000
Selling and administrative 40,000 172,000
Operating income $ (4,000)
Difficulty: 2 Objective: 2
Q5 . Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200 equal size lots.
As the lots are sold, they are cleared at an average cost of $5,000.
Storm drains and driveways are installed at an average cost of $8,000 per site.
Sales commissions are 10 % of selling price.
Administrative costs are $850,000 per year.
The average selling price was $160,000 per lot during 20x2 when 50 lots were sold.
During 20x3, the company bought another 2,000-acre island and developed it exactly the same way. Lot sales in 20x3 totaled 300 with an average selling price of $160,000. All costs were the same as in 20x2.
Required:
Prepare income statements for both years using both absorption and variable costing methods.
Answer:
Cost per site: Absorption Variable
Land cost $10,000,000/200 sites $50,000 $0
Clearing costs 5,000 5,000
Improvements 8,000 8,000
Total $63,000 $13,000
Absorption-costing income statements: 20x2 20x3
Sales $8,000,000 $48,000,000
Cost of goods sold:
50 x ($50,000 + $8,000 + $5,000) 3,150,000
300 x ($50,000 + $8,000 + $5,000) ________ 18,900,000
Gross margin $4,850,000 $29,100,000
Variable marketing 800,000 4,800,000
Fixed administrative 850,000 850,000
Operating income $3,200,000 $23,450,000
Variable-costing income statements: 20x2 20x3
Sales $8,000,000 $48,000,000
Variable expenses:
Cost of operations:
50 x $13,000 650,000
300 x $13,000 3,900,000
Selling expenses 800,000 4,800,000
Contribution margin $6,550,000 $39,300,000
Fixed expenses:
Land 10,000,000 10,000,000
Administrative 850,000 850,000
Operating income $(4,300,000) $28,450,000
Difficulty: 3 Objective: 2
Q6 . Megredy Company prepared the following absorption-costing income statement for the year ended May 31, 20x4.
Sales (16,000 units) $320,000
Cost of goods sold 216,000
Gross margin $104,000
Selling and administrative expenses 46,000
Operating income $ 58,000
Additional information follows:
Selling and administrative expenses include $1.50 of variable cost per unit sold. There was no beginning inventory, and 17,500 units were produced. Variable manufacturing costs were $11 per unit. Actual fixed costs were equal to budgeted fixed costs.
Required:
Prepare a variable-costing income statement for the same period.
Answer:
Sales $320,000
Variable expenses:
Manufacturing cost of goods sold1 $176,000
Selling and administrative2 24,000 200,000
Contribution margin $ 120,000
Fixed expenses:
Fixed factory overhead3 $43,750
Fixed selling and administrative4 22,000 65,750
Operating income $ 54,250
1 16,000 units x $11 = $176,000
2 16,000 units x $1.50 = $24,000
3 [($216,000/16,000 units) - $11] x 17,500 units = $43,750
4 $46,000 - $24,000 = $22,000
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