Hilton MAcc Ch17 Solution
Content
CHAPTER 17
Absorption, Variable, and Throughput Costing
ANSWERS TO REVIEW QUESTIONS
17-6 Under absorption costing, all manufacturing-overhead costs (including fixed costs)
are assigned to units of product as product costs. Under variable costing, fixed
manufacturing-overhead costs are not assigned to units of product as product costs;
rather they are treated as period costs and expensed during the period in which they
are incurred. Under throughput costing, only the unit-level spending for direct costs
is assigned as a product cost.
17-7
Some managerial accountants believe that absorption costing may provide an
incentive for managers to overproduce inventory so that the fixed manufacturing
overhead costs may be spread over a larger number of product units, thereby
lowering the reported product cost per unit. Throughput costing avoids this
potential problem by not assigning fixed manufacturing overhead as a product cost.
17-11 Variable costing is consistent with cost-volume-profit analysis because it properly
reflects the cost behavior of variable and fixed costs. Only variable manufacturing
costs are treated as inventoriable product costs. Fixed manufacturing costs are
recorded as a lump sum and expensed during the period incurred. CVP analysis also
properly maintains the cost-behavior distinction between variable and fixed costs. In
contrast, absorption costing is inconsistent with CVP analysis, because fixed
overhead is applied to manufactured goods as a product cost on a per-unit basis.
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SOLUTIONS TO EXERCISES
EXERCISE 17-19 (25 MINUTES)
Inventory calculations (units):
Finished-goods inventory, January 1 ..............................................
Add: Units produced ..........................................................................
Less: Units sold ..................................................................................
Finished-goods inventory, December 31 .........................................
1.
0
10,000
9,000
1,000
units
units
units
units
Variable costing:
Inventoriable costs under variable costing:
Direct material used ................................................................................
Direct labor incurred ...............................................................................
Variable manufacturing overhead .........................................................
Total ..........................................................................................................
$ 80,000
40,000
24,000
$144,000
Cost per unit produced = $144,000/10,000 units = $14.40 per unit
Ending inventory: 1,000 units × $14.40 per unit ...............................
2.
$ 14,400
Absorption costing:
Predetermined fixed-overhead rate
=
fixed manufacturing overhead
$50,000
=
= $5.00 per unit
planned production
10,000 units
Difference in fixed
overhead expensed under
absorption and variable costing
=
⎛ change in ⎞ ⎛ predetermined ⎞
⎜
⎟ ⎜
⎟
⎜ inventory ⎟ × ⎜ fixed-overhead ⎟
⎜ in units ⎟ ⎜
⎟
rate
⎝
⎠ ⎝
⎠
=
(1,000 units) × ($5.00 per unit)
=
$5,000
Difference in reported income:
Since inventory increased during the year, income reported under absorption
costing will be $5,000 higher than income reported under variable costing.
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Solutions Manual
EXERCISE 17-19 (CONTINUED)
3.
Throughput costing:
Inventoriable costs under throughput costing:
Direct material used ................................................................................
Total ..........................................................................................................
$80,000
$80,000
Cost per unit produced = $80,000/10,000 units = $8.00 per unit
Ending inventory: 1,000 units × $8.00 per unit .................................
$ 8,000
EXERCISE 17-20 (10 MINUTES)
1.
Inventoriable costs under variable costing:
Direct material used ................................................................................
Direct labor ...............................................................................................
Variable manufacturing overhead .........................................................
Total ..........................................................................................................
2.
Inventoriable costs under absorption costing:
Direct material used ................................................................................
Direct labor ...............................................................................................
Variable manufacturing overhead .........................................................
Fixed manufacturing overhead ..............................................................
Total ..........................................................................................................
3.
$203,000
70,000
35,000
$308,000
$203,000
70,000
35,000
56,000
$364,000
Inventoriable costs under throughput costing:
Direct material used* ...............................................................................
Total ..........................................................................................................
$203,000
$203,000
*Under this scenario, direct material cost is the only throughput cost.
SOLUTIONS TO PROBLEMS
PROBLEM 17-27 (35 MINUTES)
1.
Total cost:
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2.
3.
Direct material (10,000 units x $36)…………...
$ 360,000
Direct labor………………………………………..
135,000
Variable manufacturing overhead…………….
195,000
Fixed manufacturing overhead………………..
660,000
Variable selling and administrative costs
(9,600 units x $24)……………………………
230,400
Fixed selling and administrative costs………
354,000
Total…………………………………………….
$1,934,400
The cost of the year-end inventory of 400 units (10,000 units produced – 9,600 units
sold) is computed as follows:
Absorption Variable Throughput
Costing
Costing
Costing
$360,000 $360,000
Direct material………………………….. $ 360,000
135,000
135,000
Direct labor………………………………
Variable manufacturing overhead…..
195,000
195,000
660,000 ________ ________
Fixed manufacturing overhead………
Total product cost………………… $1,350,000
$690,000 $360,000
$69
$36
Cost per unit (total ÷ 10,000 units)…
$135
Year-end inventory (400 units x cost
$ 27,600 $ 14,400
per unit)……………………………... $ 54,000
The total costs would be allocated between the current period’s income statement
and the year-end inventory on the balance sheet. Thus:
Absorption costing: $1,934,400 - $54,000 = $1,880,400
Variable costing: $1,934,400 - $27,600 = $1,906,800
Throughput costing: $1,934,400 - $14,400 = $1,920,000
Alternatively, these amounts can be derived as follows:
Cost of goods sold:
9,600 units x $135 ...............................
9,600 units x $69 .................................
9,600 units x $36 .................................
Direct labor................................................
Variable manufacturing overhead ..........
Fixed manufacturing overhead ...............
Variable selling and administrative
costs ....................................................
Fixed selling and administrative costs ..
Total .....................................................
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17-4
Absorption
Costing
$1,296,000
Variable
Costing
$662,400
660,000
230,400
354,000
$1,880,400
Throughput
Costing
$345,600
135,000
195,000
660,000
230,400
230,400
354,000
354,000
$1,906,800 $1,920,000
© 2005 The McGraw-Hill Companies, Inc.
Solutions Manual
4.
Throughput-costing income statement:
Sales revenue (9,600 units x $216) .....................
Less: Cost of goods sold ....................................
Gross margin ........................................................
Less: Operating costs:
Direct labor......................................................
Variable manufacturing overhead.................
Fixed manufacturing overhead .....................
Variable selling and administrative costs....
Fixed selling and administrative costs ........
Total operating costs ...............................
Net income ............................................................
$2,073,600
345,600
$1,728,000
$ 135,000
195,000
660,000
230,400
_ 354,000
$1,574,400
$ 153,600*
*As a check: Net income = sales revenue - all costs expensed
= $2,073,600 - $1,920,000 (from req. 3)
= $153,600
PROBLEM 17-28 (35 MINUTES)
1.
Absorption-costing income statements:
Sales revenue ..................................................................................
Less: Cost of goods sold:
Beginning finished-goods inventory ................................
Cost of goods manufactured ............................................
Cost of goods available for sale .......................................
Ending finished-goods inventory .....................................
Cost of goods sold .............................................................
Gross margin ..................................................................................
Selling and administrative expenses ............................................
Operating income ...........................................................................
Year 1
$62,500a
Year 2
$62,500d
$
0
31,500b
$31,500
5,250c
$26,250
$36,250
22,500
$13,750
$ 5,250e
28,000f
$33,250
0
$33,250
$29,250
22,500
$ 6,750
units × $25 per unit
+ $21,000 (i.e., both variable and fixed costs)
c500 units × ($31,500/3,000 units)
d2,500 units × $25 per unit
eSame as year 1 ending inventory
f$7,000 + $21,000 (i.e., both variable and fixed costs)
a2,500
b$10,500
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2.
Variable-costing income statements:
Sales revenue ..................................................................................
Less: Cost of goods sold:
Beginning finished-goods inventory ................................
Cost of goods manufactured ............................................
Cost of goods available for sale .......................................
Ending finished-goods inventory .....................................
Cost of goods sold .............................................................
Variable selling and administrative costs ........................
Total variable costs: .......................................................................
Contribution margin .......................................................................
Less: Fixed costs:
Manufacturing .....................................................................
Selling and administrative .................................................
Total fixed costs .................................................................
Operating income ...........................................................................
units × $25 per unit
variable manufacturing cost only, $10,500
c500 units × ($10,500/3,000 units)
d2,500 units × $25 per unit
eSame as year 1 ending inventory
fThe variable manufacturing cost only, $7,000
Year 1
$62,500a
Year 2
$62,500d
$
0
10,500b
$10,500
1,750c
$ 8,750
$12,500
$ 1,750e
7,000f
$ 8,750
0
$ 8,750
$12,500
$21,250
$41,250
$21,250
$41,250
$21,000
10,000
$31,000
$10,250
$21,000
10,000
$31,000
$10,250
a2,500
bThe
3.
Reconciliation of reported income under absorption and variable costing:
Year
1
2
Change in
Inventory
(in units)
500 increase
500 decrease
×
×
Actual
FixedOverhead
Rate
$7
$7*
Difference in
Fixed
Overhead
Expensed
$ 3,500
$(3,500)
AbsorptionCosting Income
Minus VariableCosting Income
$3,500
(3,500)
*The 500 units which were sold in year 2, but which were manufactured in year 1,
include an absorption-costing product cost of $7 per unit for fixed overhead. Since
these 500 units were manufactured in year 1, it is the year 1 fixed-overhead rate that
is relevant to this calculation, not the year 2 rate.
Explanation: At the end of year 1, under absorption costing, $3,500 of fixed overhead
remained stored in finished-goods inventory as a product cost (year 1 fixed-overhead rate
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Solutions Manual
of $7 per unit × 500 units = $3,500). However, in year 1, under variable costing, that fixed
overhead was expensed as a period cost.
In year 2, under absorption costing, that same $3,500 of fixed overhead was
expensed when the units were sold. However, under variable costing, that $3,500 of fixed
overhead cost had already been expensed in year 1 as a period cost.
McGraw-Hill/Irwin
Managerial Accounting, 6/e
© 2005 The McGraw-Hill Companies, Inc.
17-7
Absorption, Variable, and Throughput Costing
ANSWERS TO REVIEW QUESTIONS
17-6 Under absorption costing, all manufacturing-overhead costs (including fixed costs)
are assigned to units of product as product costs. Under variable costing, fixed
manufacturing-overhead costs are not assigned to units of product as product costs;
rather they are treated as period costs and expensed during the period in which they
are incurred. Under throughput costing, only the unit-level spending for direct costs
is assigned as a product cost.
17-7
Some managerial accountants believe that absorption costing may provide an
incentive for managers to overproduce inventory so that the fixed manufacturing
overhead costs may be spread over a larger number of product units, thereby
lowering the reported product cost per unit. Throughput costing avoids this
potential problem by not assigning fixed manufacturing overhead as a product cost.
17-11 Variable costing is consistent with cost-volume-profit analysis because it properly
reflects the cost behavior of variable and fixed costs. Only variable manufacturing
costs are treated as inventoriable product costs. Fixed manufacturing costs are
recorded as a lump sum and expensed during the period incurred. CVP analysis also
properly maintains the cost-behavior distinction between variable and fixed costs. In
contrast, absorption costing is inconsistent with CVP analysis, because fixed
overhead is applied to manufactured goods as a product cost on a per-unit basis.
McGraw-Hill/Irwin
Managerial Accounting, 6/e
© 2005 The McGraw-Hill Companies, Inc.
17-1
SOLUTIONS TO EXERCISES
EXERCISE 17-19 (25 MINUTES)
Inventory calculations (units):
Finished-goods inventory, January 1 ..............................................
Add: Units produced ..........................................................................
Less: Units sold ..................................................................................
Finished-goods inventory, December 31 .........................................
1.
0
10,000
9,000
1,000
units
units
units
units
Variable costing:
Inventoriable costs under variable costing:
Direct material used ................................................................................
Direct labor incurred ...............................................................................
Variable manufacturing overhead .........................................................
Total ..........................................................................................................
$ 80,000
40,000
24,000
$144,000
Cost per unit produced = $144,000/10,000 units = $14.40 per unit
Ending inventory: 1,000 units × $14.40 per unit ...............................
2.
$ 14,400
Absorption costing:
Predetermined fixed-overhead rate
=
fixed manufacturing overhead
$50,000
=
= $5.00 per unit
planned production
10,000 units
Difference in fixed
overhead expensed under
absorption and variable costing
=
⎛ change in ⎞ ⎛ predetermined ⎞
⎜
⎟ ⎜
⎟
⎜ inventory ⎟ × ⎜ fixed-overhead ⎟
⎜ in units ⎟ ⎜
⎟
rate
⎝
⎠ ⎝
⎠
=
(1,000 units) × ($5.00 per unit)
=
$5,000
Difference in reported income:
Since inventory increased during the year, income reported under absorption
costing will be $5,000 higher than income reported under variable costing.
McGraw-Hill/Irwin
17-2
© 2005 The McGraw-Hill Companies, Inc.
Solutions Manual
EXERCISE 17-19 (CONTINUED)
3.
Throughput costing:
Inventoriable costs under throughput costing:
Direct material used ................................................................................
Total ..........................................................................................................
$80,000
$80,000
Cost per unit produced = $80,000/10,000 units = $8.00 per unit
Ending inventory: 1,000 units × $8.00 per unit .................................
$ 8,000
EXERCISE 17-20 (10 MINUTES)
1.
Inventoriable costs under variable costing:
Direct material used ................................................................................
Direct labor ...............................................................................................
Variable manufacturing overhead .........................................................
Total ..........................................................................................................
2.
Inventoriable costs under absorption costing:
Direct material used ................................................................................
Direct labor ...............................................................................................
Variable manufacturing overhead .........................................................
Fixed manufacturing overhead ..............................................................
Total ..........................................................................................................
3.
$203,000
70,000
35,000
$308,000
$203,000
70,000
35,000
56,000
$364,000
Inventoriable costs under throughput costing:
Direct material used* ...............................................................................
Total ..........................................................................................................
$203,000
$203,000
*Under this scenario, direct material cost is the only throughput cost.
SOLUTIONS TO PROBLEMS
PROBLEM 17-27 (35 MINUTES)
1.
Total cost:
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17-3
2.
3.
Direct material (10,000 units x $36)…………...
$ 360,000
Direct labor………………………………………..
135,000
Variable manufacturing overhead…………….
195,000
Fixed manufacturing overhead………………..
660,000
Variable selling and administrative costs
(9,600 units x $24)……………………………
230,400
Fixed selling and administrative costs………
354,000
Total…………………………………………….
$1,934,400
The cost of the year-end inventory of 400 units (10,000 units produced – 9,600 units
sold) is computed as follows:
Absorption Variable Throughput
Costing
Costing
Costing
$360,000 $360,000
Direct material………………………….. $ 360,000
135,000
135,000
Direct labor………………………………
Variable manufacturing overhead…..
195,000
195,000
660,000 ________ ________
Fixed manufacturing overhead………
Total product cost………………… $1,350,000
$690,000 $360,000
$69
$36
Cost per unit (total ÷ 10,000 units)…
$135
Year-end inventory (400 units x cost
$ 27,600 $ 14,400
per unit)……………………………... $ 54,000
The total costs would be allocated between the current period’s income statement
and the year-end inventory on the balance sheet. Thus:
Absorption costing: $1,934,400 - $54,000 = $1,880,400
Variable costing: $1,934,400 - $27,600 = $1,906,800
Throughput costing: $1,934,400 - $14,400 = $1,920,000
Alternatively, these amounts can be derived as follows:
Cost of goods sold:
9,600 units x $135 ...............................
9,600 units x $69 .................................
9,600 units x $36 .................................
Direct labor................................................
Variable manufacturing overhead ..........
Fixed manufacturing overhead ...............
Variable selling and administrative
costs ....................................................
Fixed selling and administrative costs ..
Total .....................................................
McGraw-Hill/Irwin
17-4
Absorption
Costing
$1,296,000
Variable
Costing
$662,400
660,000
230,400
354,000
$1,880,400
Throughput
Costing
$345,600
135,000
195,000
660,000
230,400
230,400
354,000
354,000
$1,906,800 $1,920,000
© 2005 The McGraw-Hill Companies, Inc.
Solutions Manual
4.
Throughput-costing income statement:
Sales revenue (9,600 units x $216) .....................
Less: Cost of goods sold ....................................
Gross margin ........................................................
Less: Operating costs:
Direct labor......................................................
Variable manufacturing overhead.................
Fixed manufacturing overhead .....................
Variable selling and administrative costs....
Fixed selling and administrative costs ........
Total operating costs ...............................
Net income ............................................................
$2,073,600
345,600
$1,728,000
$ 135,000
195,000
660,000
230,400
_ 354,000
$1,574,400
$ 153,600*
*As a check: Net income = sales revenue - all costs expensed
= $2,073,600 - $1,920,000 (from req. 3)
= $153,600
PROBLEM 17-28 (35 MINUTES)
1.
Absorption-costing income statements:
Sales revenue ..................................................................................
Less: Cost of goods sold:
Beginning finished-goods inventory ................................
Cost of goods manufactured ............................................
Cost of goods available for sale .......................................
Ending finished-goods inventory .....................................
Cost of goods sold .............................................................
Gross margin ..................................................................................
Selling and administrative expenses ............................................
Operating income ...........................................................................
Year 1
$62,500a
Year 2
$62,500d
$
0
31,500b
$31,500
5,250c
$26,250
$36,250
22,500
$13,750
$ 5,250e
28,000f
$33,250
0
$33,250
$29,250
22,500
$ 6,750
units × $25 per unit
+ $21,000 (i.e., both variable and fixed costs)
c500 units × ($31,500/3,000 units)
d2,500 units × $25 per unit
eSame as year 1 ending inventory
f$7,000 + $21,000 (i.e., both variable and fixed costs)
a2,500
b$10,500
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2.
Variable-costing income statements:
Sales revenue ..................................................................................
Less: Cost of goods sold:
Beginning finished-goods inventory ................................
Cost of goods manufactured ............................................
Cost of goods available for sale .......................................
Ending finished-goods inventory .....................................
Cost of goods sold .............................................................
Variable selling and administrative costs ........................
Total variable costs: .......................................................................
Contribution margin .......................................................................
Less: Fixed costs:
Manufacturing .....................................................................
Selling and administrative .................................................
Total fixed costs .................................................................
Operating income ...........................................................................
units × $25 per unit
variable manufacturing cost only, $10,500
c500 units × ($10,500/3,000 units)
d2,500 units × $25 per unit
eSame as year 1 ending inventory
fThe variable manufacturing cost only, $7,000
Year 1
$62,500a
Year 2
$62,500d
$
0
10,500b
$10,500
1,750c
$ 8,750
$12,500
$ 1,750e
7,000f
$ 8,750
0
$ 8,750
$12,500
$21,250
$41,250
$21,250
$41,250
$21,000
10,000
$31,000
$10,250
$21,000
10,000
$31,000
$10,250
a2,500
bThe
3.
Reconciliation of reported income under absorption and variable costing:
Year
1
2
Change in
Inventory
(in units)
500 increase
500 decrease
×
×
Actual
FixedOverhead
Rate
$7
$7*
Difference in
Fixed
Overhead
Expensed
$ 3,500
$(3,500)
AbsorptionCosting Income
Minus VariableCosting Income
$3,500
(3,500)
*The 500 units which were sold in year 2, but which were manufactured in year 1,
include an absorption-costing product cost of $7 per unit for fixed overhead. Since
these 500 units were manufactured in year 1, it is the year 1 fixed-overhead rate that
is relevant to this calculation, not the year 2 rate.
Explanation: At the end of year 1, under absorption costing, $3,500 of fixed overhead
remained stored in finished-goods inventory as a product cost (year 1 fixed-overhead rate
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© 2005 The McGraw-Hill Companies, Inc.
Solutions Manual
of $7 per unit × 500 units = $3,500). However, in year 1, under variable costing, that fixed
overhead was expensed as a period cost.
In year 2, under absorption costing, that same $3,500 of fixed overhead was
expensed when the units were sold. However, under variable costing, that $3,500 of fixed
overhead cost had already been expensed in year 1 as a period cost.
McGraw-Hill/Irwin
Managerial Accounting, 6/e
© 2005 The McGraw-Hill Companies, Inc.
17-7
