Need accounting help with: Variable and Absorption Costing Unit Product Costs and Income Statement

Dec 30th, 2015
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Accounting
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Question description

Please complete in Excel.

Problem 5-17 Variable and Absorption Costing Unit Product Costs and Income Statement

Nickelson Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations.

Variable costs per unit:

Manufacturing 

$25

Direct Labor

$16

Variable manufacturing overhead

$5

Variable selling and administrative

$2

Fixed Cost per Year:

Fixed manufacturing overhead

$300,000

Fixed selling and administrative expenses

$180,000

During the first year of operations Nickelson produced 60,000 units and sold 60,000 units. During its second year of operations it produced 75,000 units and sold 50,000 units. In its third year, Nickelson produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $56 per unit.

Required:

1.  Compute the company’s break-even point in units sold.

2.  Assume the company uses variable costing:

a.  Compute the unit product cost per year 1, 2, and 3.

b.  Prepare an income statement for year 1, 2, and 3.

3.  Assume the company uses absorption costing:

a.  Compute the unit product cost for year 1, 2, and 3.

b.  Prepare an income statement for year 1, 2, and 3.

4.  Compare the net operating income figures that you computed in requirements 2 and 3 to the break-even point that you computed in requirement 1. Which net operating income figures seem counterintuitive? Why?

Problem 5-21 Prepare and Reconcile Variable Costing Statements

Linden Company manufactures and sells a single product. Cost data for the product follows:

Variable Cost Per Unit:

Direct materials

$6

Direct Labor

12

Variable factory overhead

4

Variable selling and administrative

3

Total variable costs per unit

$25

Fixed costs per month:

Fixed manufacturing overhead

$240,000

Fixed selling and administrative

180,000

Total fixed cost per month

$420,000

The product sells for $40 per unit. Production and sales data for May and June, the first two months of operations, are as follows:

  Units  Units

  Produced  Sold

May   30,000  26,000

June  30,000  34,000

Income Statements prepared by the accounting department, using absorption costing, are presented below:

  May  June

Sales   $1, 040,000  $1,360,000

Cost of goods sold  $  780,000  1,020,000

Gross margin  260,000  340,000

Selling and administrative expenses  258,000   282,000

Net Operating income  2,000  $58,000

Required:

1.  Determine the unit product cost under:

a.  Absorption costing.

b.  Variable costing.

2.  Prepare a contribution format variable costing income statements for May and June.

3.  Reconcile the variable costing and absorption costing net operating incomes.

4.  The company’s Accounting Department has determined the break-even point to be 28,000 units per month, computed as follows:

Fixed cost per month  =  $420,000  = 28,000 units

Unit contribution margin  $15 per unit

 

Upon receiving this figure, the president commented, “There’s something peculiar here. The controller says that the break-even point is 28,000 units per month. Yet we sold only 26,000 units in May, and the income statement we received showed a $2,000 profit. Which figure do we believe.” Prepare a brief explanation of what happened on the May income statement.

5-22 Absorption and Variable Costing; Product Constant, Sales Fluctuate

Sandi Scott obtained a patent on a small electronic device and organized Scott Products, Inc., to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to a healthy profit. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data. The statement follows:

Scott Products, Inc.

Income Statement

Sales (40,000 units)   $200,000

Variable expenses:

  Variable cost of goods sold  $80, 000

  Variable selling and administrative expenses  30,000   110,000

Contribution margin  90,000

Fixed expenses:

  Fixed manufacturing overhead   75,000  95,000

  Fixed selling and administrative expenses  20,000  $ (5,000)

Net operating loss

Ms. Scott is discouraged over the loss shown for the month, particularly because she had planned to use the statement to encourage investors to purchase stock in the new company. A friend, who is a CPA, insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month.

Selected cost data relating to the product and to the first month of operations follow:

Unit produced   50,000

Units sold   40,000

Variable cost per unit: 

Direct materials   $1.00

Direct Labor  $0.80

Variable manufacturing overhead  $0.20

Variable selling and administrative expenses   $0. 75

Required:

1.  Complete the following:

a.  Compute the unit product cost under absorption costing.

b.  Redo the company’s income statement for the month using absorption costing.

c.  Reconcile the variable and absorption costing net operating income (loss) figures.

2.  Was the CPA correct in suggesting that the company really earned a “profit” for the month? Explain.

3.  During the second month of operations, the company again produced 50,000 units but sold 60,000 units. (Assume no change in total fixed costs.)

a.  Prepare a contribution format income statement for the month using variable costing.

b.  Prepare an income statement for the month using absorption costing.

c.  Reconcile the variable costing and absorption costing net operating incomes.

Problem 6-16 Second Stage Allocations and Product Margins

AnimPix, Inc., is a small company that create computer-generated animations for films and television. Much of the company’s work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies.

The young founders of the company have become increasingly concerned with the economics of the business- particularly because many competitors have sprung up recently in the local area. To help understand the company’s cost structure, an activity-based cost systems has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating storyboards and prototype stills to be shown to the prospective client. After the client has accepted a project, animation goes into production and contract administration begins. Technical staff do almost all of the work involved in animation production, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures and rates are listed below:

Activity Cost Pool  Activity Measure  Activity Rate

Animation concept…………………………….Number of proposals……………..  .$6,000 per proposal

Animation production……………………….Minutes of animation……………….$7,700 per minute of animation

Contract administration…………………….Number of contracts…………………$6,600 per contract

These activity rates include all of the costs of the company, except for the costs of idle capacity and organization-sustaining costs. There are no direct labor or direct material costs.

  Preliminary analysis using these activity rates has indicated that the local commercial segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask several companies like AnimPix to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Because animation work is billed at standard rates according to the running time of the completed animation, the revenues from these short projects tend to be below average. Data concerning activity in the local commercials market appear below:

Activity Measure    Local Commercials

Number of proposals………………………………………………………………………………20

Number  of animations……………………………………………………………………………12

Number of contracts………………………………………………………………………………...8

The total sales for local commercials amounted to $240,000.

Required:

1.  Determine the cost of serving the local commercial market.

2.  Prepare a report showing the margins earned serving the local commercial market. (Remember,

3.  What would you recommend to management concerning the local commercials market?

Problem 6-17 Comparing Tradition and Activity-Based Product Margins

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts- the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below:

Precision Manufacturing Inc. Income Statement

Sales……………………………………………………………………………………………………………….$1,700,000

Cost of goods sold…………………………………………………………………………………………….1,200,000

Gross margins………………………………………………………………………………………………………500,000

Selling and administrative expenses…………………………………………………………………....550,000

Net operating loss………………………………………………………………………………………………  $50,000

PMI produced and sold 60,000 units of EX300 at a price of $20 per unit and 12,500 units of TX500 at a price $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

   EX300  TX500  Total

Direct materials………………………………………..$366,325  $162,550  $ 528,875

Direct labor………………………………………………$120,000  $42,500  162,500

Manufacturing overhead  508, 625

Cost of goods sold   $1,200,000

The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that the $50,000 and $100,000 of the company’s advertising expenses could be directly traced to EX300 and TX500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

  Manufacturing  Activity

Activity Cost Pool (and Activity Measure)   Overhead  EX300  TX500  Total

Machining (Machine-hours)………………………………..$198, 250  90,000  62,500  152,500

Setups (setup hours)……………………………………………..150,000  75   300  375

Product-sustaining (number of products)……………...100,000  1  1  1

Other (organization-sustaining costs)……………………...60,000  NA   NA  NA

Total manufacturing overhead cost………………………$508,628

Required:

1.  Using Exhibit 6-12 as a guide, compute the product margins for the EX300 and TX500 under the company’s traditional costing system.

2.  Using Exhibit 6-10 as a guide, compute the product margins for EX300 and TX500 under the activity-based costing system.

Using Exhibit 6-13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity

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