smch13

CHAPTER 14

CHAPTER 13

STANDARD COSTING AND VARIABLE COSTING

13-1 JIT and Costing MethodsThroughput 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 fixed production costs in inventory, thus postponing their appearance in the income statement 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 is relevant 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.

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

1.

Sales, 18,000 x $50

$900,000

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

360,000

Selling and administrative expenses 300,000Income

$ 60,0002.

Sales,

$900,000

Standard variable cost of sales, 18,000 x $10 180,000Standard gross margin, contribution margin 720,000

Fixed costs, $400,000 + $300,000

700,000Income

$ 20,000The cost of sales sections of the income statement focus attention on inventories.

Absorption VariableBeginning inventory

$ 0 $ 0

Variable production costs 200,000 200,000

Fixed production costs 400,000 0Total available 600,000 200,000

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

$540,000 $180,000Because actual production equalled the level used to set the standard, there is no volume variance. You might ask how much income the company should earn per 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.

Sales, 22,000 x $50

$1,100,000

Standard cost of sales, 22,000 x $30 660,000Standard gross margin

440,000

Selling and administrative expenses 300,000Income

$ 140,0002.

Sales, 22,000 x $50

$1,100,000

Standard variable cost of sales, 22,000 x $10 220,000Standard gross margin, contribution margin 880,000

Fixed costs, $400,000 + $300,000

700,000Income

$ 180,000The cost of sales sections of the income statement again focus attention on inventories.

Absorption VariableBeginning inventory, 13-5

$ 60,000 $ 20,000

Variable production costs 200,000 200,000

Fixed production costs 400,000 0Total available 660,000 220,000

Ending inventory 0 0Cost of sales

$660,000 $220,000Because 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

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

Cost of sales:

Beginning inventory:

30,000 x $3 90,000

Production costs:

130,000 x $3 390,000

90,000 x $3 ____ ___ 270,000 Total 390,000 360,000

Ending inventory:

30,000 x $3 90,000

20,000 x $3 ________ 60,000

Variable cost of sales 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

Cost of sales:

Beginning inventory:

30,000 x ($3 + $2)* 150,000

Production costs applied:

Variable--130,000 x $3 390,000

-- 90,000 x $3 270,000

Fixed costs applied:

130,000 x $2 260,000

90,000 x $2 ________ 180,000 Total 650,000 600,000

Ending inventory:

30,000 x $5 150,000

20,000 x $5 ________ 100,000 Standard cost of sales at $5 500,000 500,000 Volume variance:

$300,000 - $260,000 40,000 U

$300,000 - $180,000 ________ 120,000 U

Actual cost of sales 540,000 620,000

Gross margin 160,000 80,000

Selling and administrative 60,000 60,000

Income $100,000 $ 20,000

* Standard fixed overhead per unit is $2 ($300,000 total fixed manufacturing cost divided by 150,000 units at practical capacity).

2. B&Y should earn about $40,000 per month, the variable costing income. Absorption costing income depends on production, which over time must 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


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

Contribution margin 400,000 400,000

Fixed costs:

Production 300,000 300,000


Total fixed costs 360,000 360,000

Income $ 40,000 $ 40,000

Income Statements--Absorption Costing


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

Volume variance:

$300,000 - $260,000 40,000 U

$300,000 - $180,000 _________ 120,000 U

Actual cost of sales 540,000 620,000

Gross margin 160,000 80,000


Income $100,000 $ 20,000

Note to the Instructor: Because this exercise is quite straightforward and uncomplicated by variances for variable costs, it provides a basis for drawing attention to the essential differences between variable and 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

20,000 x $2 40,000

Difference in income due to fixed ________ ________

costs in inventory $ 60,000 $ 20,00013-9 Actual Costing Income Statements (15-20 minutes)

1.

January February

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

Cost of sales:

Beginning inventory 0 40,000

Production costs:

Variable, 20,000 x $10 200,000 200,000

Fixed 200,000 200,000 Total available for sale 400,000 440,000

Less ending inventory* 40,000 0Cost of sales 360,000 440,000Gross margin 180,000 220,000

Selling and administrative expenses 40,000 40,000

Income $140,000 $180,000

Inventory, $400,000/20,000 = $20 per unit, times 2,000 units = $40,000. There is no inventory at the end of February, so no calculation is needed.

2.

January February

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

Cost of sales, variable costs at $10/unit 180,000 220,000

Contribution margin at $20 360,000 440,000

Fixed costs, $200,000 + $40,000 240,000 240,000Income $120,000 $200,000

The cost of goods sold sections under variable costing appear below. January February

Beginning inventory $ 0 20,000

Variable production costs, 20,000 x $10 200,000 200,000

Total available for sale 200,000 220,000

Less ending inventory, 2,000 x $10 20,000 0Cost of sales $180,000 $220,0003.

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

Throughput 420,000 540,000

Other costs, $80,000 + $200,000 + $40,000 320,000 320,000Income $100,000 $220,000

13-10 Standard Fixed Cost and Volume Variance (15 minutes)

1. (a) (b)

Normal Practical

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

Divided by capacity measure 225,000 300,000

Equals standard fixed cost per unit $4 $3

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 U

13-11 Relationships (20-25 minutes)

1. (a) $10 per unit $10,000 favorable variance/1,000 units above normal

production

(b) $200,000 20,000 units x $10

2. (b) $60,000 20,000 units x $3

(c) 17,000 units $9,000 unfavorable variance/$3 per unit = 3,000 units below normal of 20,000

3. (a) $2 per unit $40,000/20,000

(d) $4,000 unfavorable (20,000 - 18,000) x $2

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 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 reiterate that 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 in applied 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. 10,001Sales at $10 $100,000 $100,000 $100,010 $99,990

Cost of sales at $7 70,000 70,000 70,007 69,993Standard gross margin 30,000 30,000 30,003 29,997

Volume 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.

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 $720,000

Cost of sales:

Beginning inventory $ 0 $120,000

Costs applied at $4 600,000 360,000Total available 600,000 480,000

Ending inventory at $4 120,000 0

Standard cost of sales at $4 480,000 480,000Standard gross margin 240,000 240,000

Volume variance 100,000F 140,000UActual gross margin and profit $340,000 $100,000Volume variances are $600,000 - $500,000 and $360,000 - $500,000.

2. Balance sheets

20X2 20X3 Cash = cumulative sales $ 720,000 $1,440,000

Inventory, 30,000 x $4 120,000 0

Plant, net 2,000,000 1,500,000 Total assets $2,840,000 $2,940,000Stockholders' equity ($2,500,000 + $340,000) $2,840,000 ($2,840,000 + $100,000) $2,940,0003.

Sales $720,000 $720,000

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

Cash = cumulative sales $ 720,000 $1,440,000

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

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

Volume variance* 80,000 F

Actual gross margin 395,000

Selling and administrative expenses 280,000

Profit $ 115,000

*

Actual production 12,000

Normal activity 10,000Difference 2,000

Standard fixed cost $40Volume variance, favorable $80,000An 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



Profit $ 65,000*


Normal activity 10,000

Difference 1,000

Standard fixed cost $40

Volume variance, unfavorable $40,000Beginning inventory, 3,000 x $65 $ 195,000



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


Standard cost of sales, 11,000 x $65 $ 715,000 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 rapidly than 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)

1.

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

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

Contribution margin, 9,000 x $75 675,000

Fixed costs:

Manufacturing $400,000

Selling and administrative 280,000

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

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



Fixed costs:


Selling and administrative 280,000

Total fixed costs 680,000

Profit $ 145,000An expanded cost of goods sold section shows

Beginning inventory, 3,000 x $25 $ 75,000


Total, 12,000 x $25 300,000


Standard cost of sales, 11,000 x $25 $ 275,0002. 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.

Loss at 9,000 units ($ 5,000)

Contribution margin on 2,000 units at $75 150,000 Income at 11,000 units $145,000 Income under absorption costing is more complicated. Both sales and production affect results. The following analysis might be useful.

Income at 9,000 units $115,000

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 $145,00013-18 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

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


Margin 965,000

Operating expenses:

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

Manufacturing 400,000


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 methods except that variable costing also expenses fixed production costs as incurred.

Other Variable Fixed

Materials Production Costs Production CostsAbsorption costing X X X

Variable costing X X Y

Throughput costing Z Y Y

X = treat as product cost, Y = expense as incurred, Z = expense as used in production

13-19 Effect of Measure of Activity(Continuation of 13-16) (15-20 minutes)

Standard fixed cost is $16 per unit, $400,000/25,000, and total standard cost is $41.

April

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






Profit $ 123,000* Actual production 12,000

Practical capacity 20,000

Difference ( 8,000)


Volume variance, unfavorable ($128,000)An expanded cost of goods sold section appears as follows.




Total, 12,000 x $41 492,000


Standard cost of sales, 9,000 x $41 $ 369,000 May Sales, 11,000 x $100 $1,100,000



Volume variance* ( 176,000)U



Profit $ 193,000*


Practical capacity 20,000

Difference (11,000)


Volume variance, unfavorable ($176,000)




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


Standard cost of sales, 11,000 x $41 $ 451,000 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 for the 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

Profit $ 2,530,000*

Actual Fixed Overhead Budgeted Fixed Overhead Applied Fixed Overhead 96,000 x $150

$14,870,000 $15,000,000 $14,400,000

$130,000 F $600,000 U

Budget variance Volume variance

**

Actual Variable Cost Standard Variable Cost 96,000 x $100

$9,550,000 $9,600,000

$50,000 F

Variable overhead variances

We cannot determine how much of the variable cost variance relates to spending and how much to efficiency.

An expanded cost of goods sold section appears as follows.


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 $22,500,00013-21 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 10,550,000Total fixed costs 25,420,000

Profit $ 1,630,000An expanded cost of goods sold section appears as follows.


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


Standard cost of sales, 90,000 x $100 $9,000,000The 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) Normal capacity 25,000 25,000 Production 35,000 16,0002. 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 68,000Contribution margin 432,000 612,000

Fixed costs 270,000 270,000Income $162,000 $342,000Variable cost of sales: Unit volumes = 24,000 and 34,000, from revenue/$20 selling price. We can use either month to find standard variable cost of sales, in several ways. Perhaps the most obvious is

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

With the $8 standard variable cost ($880,000/110,000), the total standard costs are $20 and $16.

80,000-unit 120,000-unit

Basis Basis Sales, 90,000 units $2,700,000 $2,700,000

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

Volume variance:

$960,000 - $1,320,000 360,000 F

$960,000 - $880,000 __________ 80,000 U

Actual cost of goods sold 1,440,000 1,520,000

Gross profit 1,260,000 1,180,000

Selling and administrative costs 250,000 250,000Income $1,010,000 $ 930,000 An expanded cost of sales section shows the following.

Production costs:

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

Fixed:

110,000 x $12 1,320,000

110,000 x $8 __________ 880,000 Total 2,200,000 1,760,000

Less ending inventory:

20,000 x $20 400,000

20,000 x $16 320,000 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) (15-20 minutes)

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 inventory.

80,000-unit basis 120,000-unit basis Fixed costs in ending inventory:

20,000 x $12 $ 240,000

20,000 x $8 $160,000

Add variable costing income 770,000 770,000

Absorption costing income $1,010,000 $930,00013-25 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 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 units

Because 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 units

Because 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 than variable 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 is the $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 in formula fashion, to see the relationships. Thus,

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

costing

= (unit sales x ($10 - $4) - $240,000

Income, absorption = variable costing income +/- (inventory change x

costing per-unit fixed cost)

= variable costing income +/- (inventory change

x $3)

The second group, perhaps less inventive but with an understanding of the calculation of the volume variance, will work toward the answers by filling in the details of income statements reflecting each method.

13-26 All-Fixed Company (20 minutes)

1. Absorption costing

May June July Unit sales 9,000 10,000 11,000

Unit production 11,000 10,000 9,000

Sales at $5 $45,000 $50,000 $55,000

Beginning inventory 0 4,000 4,000

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 of income, 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 is also 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.

2. Variable costing

May June July Sales at $5 $45,000 $50,000 $55,000

Fixed costs 20,000 20,000 20,000

Profit $25,000 $30,000 $35,000 Because there are no variable costs, profit is simply sales - $20,000.

13-27 Standard Costing--Absorption and Variable (20-30 minutes)

1. $32 $15 + $6 + $11 Variable overhead = $2 x 0.50 = $1. Fixed overhead = $500,000/50,000 = $10, or ($500,000/25,000 DLH) x 0.50 DLH per unit of product. Total standard variable production costs are $22.

2.

Sales (40,000 x $40) $1,600,000

Standard 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) 160,000Standard cost of sales (40,000 x $32) 1,280,000Standard gross margin [40,000 x ($40 - $32)] 320,000

Volume variance [(45,000 - 50,000) x $10] 50,000U


Selling and administrative expenses 200,000Income $ 70,0003.

Sales (40,000 x $40) $1,600,000

Standard variable cost of sales:

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

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

Selling and administrative expenses 200,000Total fixed costs 700,000Income $ 20,000Alternatively, income is simply [40,000 x ($40 - $22)] - $700,000 = $720,000 - $700,000 = $20,000.

13-28 Absorption Costing and Variable Costing (20-25 minutes)

1. $40, $600,000/15,000

2. Income statement

Sales, 14,000 x $90 $1,260,000






Profit $ 230,000*



Difference 1,000

Standard fixed cost (requirement 1) $40

Volume variance, favorable $40,000An expanded cost of goods sold section follows.




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


Standard cost of sales, 14,000 x $65 $ 910,0003. Income statement, variable costing

Sales, 14,000 x $90 $1,260,000



Fixed costs:


Selling and administrative 160,000 Total fixed costs 760,000

Profit $ 150,000An expanded cost of goods sold section follows.



Total available, 19,000 x $25 475,000


Standard cost of sales, 14,000 x $25 $350,00013-29 Absorption Costing and Variable Costing--Variances (15-20 minutes)

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

2.

Actual Fixed Overhead Budgeted Fixed Overhead Applied Fixed Overhead $3 x 290,000

$910,000 $900,000 $870,000

$10,000 U $30,000 U

Budget variance Volume variance $40,000 U

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 $2,155,0004.

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 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:

Variable, 37,000 x $8 $296,000

Fixed 600,000 896,000

Profit $ 189,000* Budgeted production 39,000


Difference 1,000


Volume variance, unfavorable $25,000An expanded cost of goods sold section appears as follows.

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




Standard cost of sales, 37,000 x $40 $1,480,0002. Income statement, variable costing

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


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

Variable selling and

administrative expenses, 37,000 x $8 296,000

Contribution margin, 37,000 x $47* 1,739,000

Fixed costs:

Manufacturing $1,000,000

Selling and administrative 600,000 1,600,000 Profit $ 139,000* $70 - $15 - $8 = $47 contribution margin

An expanded cost of goods sold section follows.

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


Standard cost of sales, 37,000 x $15 $555,000 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

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





Selling and administrative expenses:

Variable 40,000 x $8 $320,000

Fixed 600,000 920,000Profit $ 305,000*



Difference 1,000


Volume variance, favorable $25,000

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



Standard cost of sales, 40,000 x $40 $1,600,0002. Income statement, variable costing

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


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

Variable selling and

administrative expenses, 40,000 x $8 320,000

Contribution margin, 40,000 x $47 1,880,000

Fixed costs:

Manufacturing $1,000,000

Selling and administrative 600,000 1,600,000Profit $ 280,000An expanded cost of goods sold section follows.

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


Standard cost of sales, 40,000 x $15 $600,0003. 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

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 $37,0002. Variable costing income statement

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

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

Standard gross margin 320,000

Variances:

Materials $3,000U

Labor 4,000F

Variable overhead 2,000U 1,000 U


Fixed costs:

Production $ 37,000


Income $ 52,000 Note that the incomes are easily reconciled:

Increase in inventory (24,000 - 20,000) 4,000

Multiplied by $2 standard fixed cost $2

Difference in incomes ($60,000 - $52,000) $8,00013-33 Conversion of Absorption Costing Statement from Normal to Practical Capacity (Continuation of 13-32) (15-20 minutes)1. $1.60 ($40,000/25,000)

2.

Sales $1,000,000

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

Standard gross profit 288,000

Variances:

Materials $3,000U

Labor 4,000F

Variable overhead 2,000U

Fixed overhead--budget 3,000F

--volume** 1,600U 400 F

Actual gross profit 288,400

Selling and administrative expenses 230,000Income $ 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) $1,60013-34 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 $ 50There was no fixed overhead budget variance, nor variable cost variances. Budgeted variable costs for 210,000 units are $840,000, which equalled actual variable costs.

2.

Memorandum

To: Lynn Maffett

From: Student

Subj: Operating results

Date: Today

The difficulty with interpreting our results is that we use absorption costing. Under absorption costing, our income depends partly on production. The original budget assumed that we would produce 220 thousand units, but we actually produced only 210 thousand units. We therefore deferred $50 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 Note to the Instructor: The difference in volume variances (between budgeted and actual) equals the actual volume variance because the budgeted amount was zero. Note that had there been a budgeted volume variance, it would be necessary to use the differences in volume variances, not the actual amount.

It is worth pointing out that the budgeted income statement shows income higher than the company can maintain at that level of sales, which reflects production in excess of sales. The company cannot continue for long to produce in excess of sales. The sequel to this assignment uses variable costing and shows that production does not affect income using that method.

13-35 Reconciling Incomes--Variable Costing (Continuation of 13-34) (15 minutes)

1. Budgeted income statement

Sales (211.5 x $20) $4,230.0

Standard cost of sales (211.5 x $4) 846.0 Contribution margin 3,384.0

Fixed costs ($1,800 + $1,100)* 2,900.0 Income $ 484.0 * 220 x $5, from 13-33

Actual income statement

Sales (214.0 x $20) $4,280.0

Standard cost of sales (214.0 x $4) 856.0 Contribution margin 3,424.0

Fixed costs 2,900.0 Income $ 524.02. The difference in incomes of $40 thousand ($524 - $484) is simply the additional contribution margin from selling 2,500 more units.

Additional volume 2,500

Times contribution margin ($20 - $4) $16

Additional contribution margin $40,000The change in production is irrelevant, as is the level of production, so that the variable costing income statements give a clearer picture of the economic situation than do the absorption costing statements.

13-36 Analyzing Income Statements (15-20 minutes)

1. Statement A was prepared using variable costing, statement B using absorption costing. We can determine this several ways: (1) production costs are higher in statement B because fixed costs are included; (2) ending inventory is higher in statement B because of the fixed costs included in inventory; (3) "other costs" are higher in statement A because of the inclusion of fixed costs as a direct charge-off in the income statement.

2. (a) $900,000, the difference between production costs in the two statements

(b) $300,000, the amount shown as "other costs" in statement B

(c) 30,000 units. Since one-third of production costs are included in ending inventory in both statements and 20,000 units were sold, 20,000 is two- thirds of production. Also, the variable costing statement shows $1,800,000 in production costs (must be only variable costs); since variable cost per unit is $60, production must have been 30,000 units ($1,800,000/$60).

(d) Ending inventory is 10,000 units (production of 30,000 - 20,000 sold). Inventory cost is $60 per unit under variable costing, which is given. Under absorption costing, $90 per unit is the cost ($900,000/10,000 units).

3. There is no correct answer to this question. If one accepts the view that sales managers are most likely to prefer absorption costing because of the need to "cover" all costs, then the sales manager would probably have prepared the absorption costing statement, the controller the variable costing statement. (It might also be argued that the controller would prefer the simpler and more direct treatment that variable costing affords, though this is only our opinion.) Others would assume that the absorption costing statement was prepared by the controller, on the theory that the controller would be influenced by the demands of financial accounting. Still others might suggest that the emphasis on "covering all costs" is more likely to come from the controller, or that the desire to show the best picture would probably be consistent with the optimism of the sales force rather than the conservatism of the accounting personnel. Perhaps this is a good place to discuss (and maybe destroy) some stereotypes.

13-37 Conversion of Income Statement (15-20 minutes)

Income Statement, Morgan Division

Sales (33,100 x $40) $1,324,000

Variable cost of sales (33,100 x $15) 496,500 Contribution margin [33,100 x ($40 - $15)] 827,500

Fixed costs:


Selling and administrative 276,300 756,300Income $ 71,200CalculationsSales 33,100 units, $1,324,000/$40 per unit

Variable cost per unit $15

Absorption cost of sales $893,700

Divided by sales, in units 33,100

Equals absorption cost per unit $27

Less fixed cost per unit 12Equals variable cost per unit $15Fixed production costs $480,000

Volume variance, unfavorable $21,600

Divided by fixed cost per unit $12

Equals volume of production less than

volume used to set fixed cost per unit 1,800

Add production 38,200 Equals volume used to set fixed cost per unit 40,000

Times fixed cost per unit $12 Equals budgeted fixed costs $480,000 Note to the Instructor: You might want to remind your students that they can check their answers by determining the difference they should expect to find between absorption costing income and variable costing income. After calculating sales of 33,100 units, you know the difference between production and sales.

Sales, calculated 33,100 units

Production, given 38,200

Difference, change in inventory (increase) 5,100 units

Times fixed cost per unit, given $12Equals difference in income $ 61,200

Subtracted from absorption costing income, given 132,400Equals variable costing income, as above $ 71,200Variable costing income is lower than absorption costing income because some fixed costs ($61,200) are carried forward into the next period through the increase in inventory. You may also want to remind your students that they do not need to know the number of units in inventory at either the beginning or the end of the quarter; all they need to know is the change in inventory.

13-38 Effects of Costing Methods on Balance Sheet (30 minutes)

1. McPherson Company

Budgeted Income Statement for 20X2

Sales (100,000 units) $1,000,000

Cost of sales:

Beginning inventory $ 200,000

Production costs:

Fixed 300,000

Variable 750,000 Total $1,250,000

Ending inventory* 630,000 Cost of sales 620,000

Gross profit 380,000

Other expenses:

Variable $ 50,000

Fixed 50,000 Total 100,000

Income $ 280,000* Fixed manufacturing costs $300,000

Divided by production of 150,000 units

Equals standard fixed cost per unit $2.00

Variable cost per unit 5.00 Total cost per unit $7.00

Times number of units in inventory:

Beginning inventory 40,000

Production 150,000 Available for sale 190,000

Sales 100,000 90,000 Equals ending inventory $630,000 McPherson Company

Pro Forma Balance Sheet

December 31, 20X2

Assets Equities

Cash and receivables Current liabilities $ 240,000

$400,000 - $250,000 $ 150,000 Long-term bank loan 460,000 Inventory 630,000 Stockholders' equity

Total current assets 780,000 ($760,000 + $280,000) 1,040,000

Fixed assets, net 960,000 __________

Total $1,740,000 Total $1,740,0002. Current assets = $780,000 = 3.25

Current liabilities $240,000

Total debt = $700,000 = 67.3%

Owners' equity $1,040,000

3. Yes and no. Since the use of absorption costing does enable the company to meet the requirements, it is de facto helpful. Most students will see that the company is probably in a worse situation because its cash is $250,000 lower and it has inventory equal to 90% of 20X2 sales. Such a large amount might be hard to sell.

13-39 CVP Analysis and Absorption Costing (20 minutes)

1.

Sales, 82,000 units at $40 $3,280,000

Standard variable cost of sales at $24 1,968,000 Contribution margin 1,312,000

Fixed costs 800,000 Profit $ 512,0002. The results in the income statement here do not depend on production, only on sales. The manager is therefore better able to see whether she met her objectives, and if not, why not. Here, the difference between the original objective of a $480,000 profit and the actual $512,000 is 2,000 units at a contribution margin of $16, for $32,000.

You might wish to show the following reconciliation of incomes.

Variable costing $512,000

Absorption costing 440,000

Difference $ 72,000

Explained by:

Sales 82,000

Production 70,000 Difference 12,000

Times standard fixed cost per unit $6 Difference in incomes $72,000 You might also wish to show the following derivations for the income statement, even though students need not analyze that statement to complete the assignment.

Total fixed costs $800,000

Fixed manufacturing costs, 75% of total $600,000

Divided by 100,000 units = standard fixed cost per unit $ 6

Plus variable cost 24

Standard cost per unit $30Production variances of $180,000 = (100,000 - 70,000) x $6, all volume variance.

13-40 Standard Costing--Activity-Based Overhead Rates (25 minutes)

1. $0.15 per part and $64.80 per machine hour

Part-related Machine-relatedBudgeted overhead $1,200,000 $6,480,000

Measure of activity 8,000,000 parts 100,000 MH

Rates $0.15 $64.80

2.

Parts (given) $27.50

Part-related overhead (11 x $0.15) 1.65

Machine-related overhead (0.15 x $64.80) 9.72 Total standard cost $38.873. We can calculate budget and volume variances for each overhead element.

Part-related Overhead Actual Budget Applied ($1,200,000/12) 60,000 x $1.65

$105,300 $100,000 $99,000

$5,300 $1,000

Unfavorable budget variance Unfavorable volume variance

$6,300

Unfavorable total variance

Machine-related Overhead Actual Budget Applied ($6,480,000/12) 60,000 x $9.72

$542,230 $540,000 $583,200

$2,230 $43,200

Unfavorable budget variance Favorable volume variance

$40,970

Unfavorable total variance

Note to the Instructor: This assignment illustrates standard cost calculations with more than one basis for applying overhead, the underlying principle of which we have developed since Chapter 3, most relevantly for this purpose in Chapters 12 and 13.

13-41 Preparing Income Statements (30 minutes)

1. Income statements

March FebruarySales $1,256.8 $1,452.4

Standard variable cost of sales 510.3 580.5

Variable cost variances* 18.5 U 17.2 U

Variable cost of sales 528.8 597.7

Contribution margin 728.0 854.7

Fixed costs:

Production 299.8 305.2

Selling and administrative expenses 406.4 412.6

Total fixed costs 706.2 717.8Profit $ 21.8 $ 136.9* February $7.1 + $6.9 + $3.2 = $17.2; March $8.4 + $7.8 + $2.3 = $18.5

2. $6.5 favorable in March, $11.9 unfavorable in February.

March FebruaryTotal overhead variance $ 8.9 F $15.8 U

Variable overhead variance 2.3 U 3.2 U

Fixed overhead variance $11.2 F $12.6 U

Actual fixed overhead $299.8 $305.2

Budgeted fixed overhead 304.5 304.5

Budget variance $ 4.7 F $ 0.7 U

Volume variance $11.2 - $4.7 $ 6.5 F

$12.6 - $0.7 $ 11.9 U

Note to the Instructor: This assignment is less straightforward than others of the same type. It also offers the opportunity to pursue such questions as:

1. Was production higher in February or in March? March because of the favorable volume variance.

2. Was production above the amount used to set standard fixed costs in February or in March? Yes in March, favorable volume variance. No in February, unfavorable volume variance.

13-42 Incorporating Variances into Budgets (30 minutes)

1.

Materials VariancesPrice variance:

Standard quantity required for planned production

24,000 units x 3 gallons per unit 72,000

Additional quantity expected to be used, 10% of standard 7,200 Total materials expected to be used 79,200

Expected price savings on materials:

Standard cost per gallon $3

Expected savings per gallon 5% $ 0.15 Expected favorable variance $11,880Use variance:

Additional quantity expected to be used, from above 7,200 gals.

Standard cost per gallon $3 Expected unfavorable variance $21,600Labor VariancesRate variance:

Standard quantity of labor required (24,000 units

x 2 hrs. per unit) 48,000 hrs.

Expected savings in hours, 4% of standard 1,920 Expected actual hours 46,080

Expected excess labor rate:

Standard cost per hour $10

Expected increase 6% $ 0.60 Expected unfavorable variance $27,648Efficiency variance:

Expected savings in hours, from above 1,920 hrs.

Standard cost per hour $10 Expected favorable variance $19,200Variable Overhead VariancesSpending variance:

Expected hours of labor, see computation of labor

variances, above 46,080 hrs.

Expected excess spending:

Standard cost per hour $12

Expected increase 5% $ 0.60 Expected unfavorable variance $27,648Efficiency variance:

Expected savings in labor hours, see computation

of labor variance, above 1,920 hrs.

Standard cost per hour $12 Expected favorable variance $23,0402.

Viner Company

Budgeted Income Statement

for the Year 20X1

Sales (20,000 units x $100) $2,000,000

Cost of sales, at standard (20,000 units x $53) 1,060,000Gross profit, at standard 940,000

Less manufacturing variances: (favorable)

Material price ($11,880)

Material use 21,600

Labor rate 27,648

Labor efficiency (19,200)

Variable overhead spending 27,648

Variable overhead efficiency (23,040) Total 22,776Gross profit 917,224

Fixed costs:

Manufacturing 300,000

Selling and administrative 400,000 700,000 Income before taxes $ 217,224 Note to the Instructor: Several points about this problem are worth special note.

1. Variances should be computed using production rather than sales figures. Some students may not have seen this at first.

2. The anticipated wage increase should probably have been incorporated in the standard since the increase is certain. To bring this point to light, you might ask the students for recommendations. To the extent that the other anticipated variances have been experienced, the question of the currentness of standards is also relevant.

3. The students may want to (or you might prompt them to) bring up the question whether variances should be allocated between the units sold and the units remaining on hand. There are no beginning inventories so we can be sure that the ending inventory is equal to at least the excess of production over sales (4,000 units). Since we know that at least one standard (labor rate) is clearly out of date, there is an argument for assigning some of the variance from this standard to the ending inventory.

4. You could point out that the budgeted material price variance has been computed under the assumption that materials purchases will equal material used. If the company plans a change in its materials inventory, the variance as computed would be in error. You might wish to discuss what effect a planned change (increase or decrease) would have on the variance.

13-43 Costs and Decisions (20 minutes)

Memorandum

To: Mr. Beatty

From: Student

Subj: Special order

Date: Today

I have prepared the following analysis showing that we did increase profits as a result of accepting the special order. Please examine the comparative income statements that use variable costing.

Without Actual, With

Special Order Special OrderTotal sales $2,500,000 $2,620,000

Standard variable cost of goods sold at $10 1,000,000 1,100,000Contribution margin 1,500,000 1,520,000

Fixed costs ($6 x 130,000) 780,000 780,000Subtotal, manufacturing margin 720,000 740,000

Selling and administrative expenses 710,000 710,000Income $ 10,000 $ 30,000 The statements show that the sale provided positive contribution margin. The income statements you showed me reflect no increase in production to meet the order. Thus the effect o

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