Huron chalk company manufacturers side walk chalk which it sells online by the box at $25 per unit.
Huron uses an actual costing system, which means that the actual costs consist of direct material, direct
labor , and manufacturing overhead are entered into work-in-process inventory. The actual application
rate of manufacturing overhead is computed each year; actual manufacturing over head is divided by
actual production (in units) to compute the application rate. Information on Huron’s first two years of
operations is as follows:
year 1
year 2
Sales (in units)
2500
2500
Production in units
3000
2000
Production costs:
Variable manufacturing costs
$ 10500
$7000
Fixed manufacturing overhead
21000
21000
12500
12500
10000
10000
Selling administrative expenses:
Variables
Fixed
Question 1 : what was huron’s total operating income across both years under absorption costing and
under variable costing?
Question 2: what was the total sales revenue across both years under absorption costing and under
variable costing?
Question 3: what was the total of all costs expensed on the operating income statements across both
years under absorption costing and under variables costing?
Ginn Tips on Activity 6.4
Dr. Ginn’s Tips for Doing Case 8-43 2, 3, 4
A. Please check the data file in the questions and answers discussion forum. Make sure you are
using the right data to solve the problem.
B. Consider the fundamental concepts you are expected to demonstrate by working this problem.
One major concept that is revealed in this problem is that there is a tradeoff between having a
more accurate balance sheet or a more accurate income statement. The fact is that the balance
sheet and the income statement articulate, so improvements to one may be to the detriment of
the other. Most agree that the balance sheet is forward looking because it reflects the
accumulated results of operations over the years. In contrast, the income statement is very
short term oriented because it focuses only on what happened in that period. The purpose of
this case is to show that, over time, absorption cost and variable cost give the same results.
However, it demonstrates that the matching of revenues and expenses under absorption costing
leads to temporary differences in operating income. Absorption costing might produce better
inventory valuations for the balance sheet, but this causes somewhat distorted calculations of
net income. Thus, this case reinforces the concept of matching revenues and expenses with use
of inventory as a buffer to control recognition of expenses.
C. Find a model in the chapter that provides an example of the application of both absorption
costing and variable costing. You might even find a model on the internet. Often there are
videos on the internet.
D. Lay out the problem. Your task is to assemble the data in examples of both absorption and
variable costing.
E. Use Excel to lay out the data. Begin by opening an Excel file. Label a worksheet as “data given”
and enter the data given in the text in the worksheet.
F. Analyze the calculations in both absorption costing and variable costing. To do this, you need to
compare the physical flow of goods depicted by volume with the financial flow depicted by the
data given to you. What you will find is calculations of both absorption costing rates and variable
costing rates that can be applied to the volume to make income statements based on either cost
assumptions.
G. Using Excel
Make a data given worksheet. Add the variable costs and fixed costs, then divide that total by
the number of units produced to get the absorption cost rate for each of the two years.
H. Calculate the Income statements for two years using both absorption costing and variable
costing.
I. Using Excel
Copy the data from the data given worksheet onto a new worksheet labeled “operating
income.” Add one new column in each of the two years under absorption costing and variable
costing reflecting actual volume for each revenue or expense to assist you in calculating
operating income under absorption costing. The reason you are doing this is so you can visualize
the actual volume of physical flow and enter them in a column adjacent to the values column.
Remember that volume multiplied by the absorption cost rate (or the variable cost rate) gives
you the dollar accounting values.
One concept that you to demonstrate is that you start with zero beginning inventory in year one
because it is their first year of operations. You can see that they produce 3000 units in year one
but only sell 2500. So what was the ending inventory of year 1? That same ending inventory
becomes the beginning inventory of year 2 where they sell 2500 units but only produce 2000. So
what was the ending inventory for year two?
Thus, you need to first enter or calculate the physical volumes for sales revenue, cost of goods
sold, cost of good manufactured, cost of goods available for sale, ending inventory, and cost of
goods sold. Next you calculate the dollar value of all these accounts by multiplying by the
relevant cost rate (i.e. absorption or variable). For example, calculate the sales values by
multiplying sales volume by sales price for each year.
J. Complete the analysis even if you have doubts.
K. Take a break and allow your brain to synthesize.
L. Note that the text provides a check figure of $13,750 for operating income using absorption
costing for year 1. Also the check figure for absorption costs is $104,500 expensed across both
years. Check to see if total sales revenues for two years are the same under absorption costing
and variable costing. Check to see if total expenses for two years are the same under absorption
costing and variable costing.
M. You need to review and amend your work until you get these results. If you cannot do so, you
can still turn it in for partial credit if you have laid out the data and finished the analysis.
Hudson Hornet Replicas
Year 1
Year 2
Sales (in units)
Production (in units)
3500
4000
3500
3000
Beginning Inventory
Ending Inventory
0
1000
1000
0
Production costs:
Variable manufacturing costs
Fixed manufacturing overhead
$
$
15,500.00
25,000.00
$
$
12,000.00
25,000.00
Selling and administrative expenses
Variable
Fixed
$
$
12,500.00
14,000.00
$
$
12,500.00
14,000.00
Sales Price Per Unit
$
25.00
$
25.00
Actual costs of direct material, direct labor, and manufacturing overhead are entered into work in processing.
Application rate is actual manufacturing overhead divided by actual production.
Physical Flow
Hudson Hornet Replicas
Absorption Costing
Sales price per unit
Absorption rate per unit
Sales (in units)
Production (in units)
Beginning Inventory
Cost of Goods Manufactured
Cost of Goods Available for Sale
Ending inventory
Cost of Goods Sold
Hudson Hornet Replicas
Variable Costing
Sales price per unit
Variable cost rate per unit
Year 1 Year 2
3500
3500 Sales Revenue
4000
3000 Less: Cost of Goods Sold
0
1000 Beginning inventory
4000
3000 Cost of goods manufactured
4000
4000 Cost of goods available for sale
1000
0 Ending inventory
3000
4000 Cost of goods sold
Year 1 Year 2
3500 3500
4000 3000
0 1000
4000 3000
4000 4000
500
0
3500 4000
Production (in units)
Production costs:
Variable manufacturing costs
Fixed manufacturing overhead
4000
3000
$ 15,500.00 $ 12,000.00
$ 25,000.00 $ 25,000.00
Actual costs of direct material, direct labor, and manufacturing overhead are entered into WIP.
Application rate is actual manufacturing overhead divided by actual production.
absorption cost rate
$
10.13 $
12.33
Production (in units)
Production costs:
Variable manufacturing costs
Fixed manufacturing overhead
4000
3000
$ 15,500.00 $ 7,000.00
$ 25,000.00 $ 25,000.00
Actual costs of direct material, direct labor, and manufacturing overhead are entered into work in processing.
Application rate is actual manufacturing overhead divided by actual production.
variable cost rate
$
3.88 $
2.33
2) What was Hudson Hornet Replicas total operating income across both years under absorption costing and under variable costing?
Hudson Hornet Replicas
Absorption Costing
Sales price per unit
Absorption rate per unit
Sales (in units)
Production (in units)
Beginning Inventory
Cost of Goods Manufactured
Cost of Goods Available for Sale
Ending inventory
Cost of Goods Sold
Gross Margin
Selling and administrative expenses:
Variable
Fixed
Operating Income
Year 1
3500
4000
0
4000
4000
1000
2500
Year 2
$
0
$
$
$
$
$
-
$ 12,500.00
$ 14,000.00
3500
3000
1000
3000
4000
0
4000
$
-
$
-
$
$
$
-
$
3,000.00
$
$
-
$
$
12,500.00 $
14,000.00 $
25,000.00
28,000.00
0
d under variable costing?
Hudson Hornet Replicas
Variable Costing
Sales price per unit
Variable cost rate per unit
Year 1
Sales Revenue
Less: Cost of Goods Sold
Beginning inventory
Cost of goods manufactured
Cost of goods available for sale
Ending inventory
Cost of goods sold
Variable selling and administrative expenses
Total Variable Costs
Contribution margin
less Fixed costs
Manufacturing
Selling and Administrative
Total Fixed Costs
Operating income
Year 2
3500 $
4000
$
3000
3000 $
500 $
2500 $
$ 12,500.00
$ 12,500.00
$ (12,500.00)
$ 25,000.00
$ 14,000.00
$ 39,000.00
3500 $
$
3000
$
3000
4000 $
$
0 $
$
4000 $
$ 12,500.00
$ 12,500.00
$ (12,500.00)
$ 25,000.00
$ 14,000.00
$ 39,000.00
-
-
2) What was total operating income across both years under absorption costing and under variable costing?
Hudson Hornet Replicas
Absorption Costing
Sales price per unit
$
25.00
$
Absorption rate per unit
$
10.13
$
Year 1
Sales (in units)
Production (in units)
Beginning Inventory
Cost of Goods Manufactured
Cost of Goods Available for Sale
Ending inventory
Cost of Goods Sold
Gross Margin
Selling and administrative expenses:
Variable
Fixed
Operating Income
25.00
12.33
Year 2
3500
4000
0
4000
4000
1000
2500
$
87,500.00
$
$
$
40,500.00
40,500.00
$
10,125.00
$
$
30,375.00
57,125.00
$
$
$
3500
3000
1000
3000
4000
0
4000
$
$
87,500.00 $
175,000.00
10,125.00
$
$
$
$
$
37,000.00 $
47,125.00
47,125.00
40,375.00
80,500.00
12,500.00
14,000.00
$
$
12,500.00 $
14,000.00 $
25,000.00
28,000.00
30,625.00
$
13,875.00
$ 44,500.00
Hudson Hornet Replicas
Variable Costing
Sales price per unit
Variable cost rate per unit
$
$
25.00
3.88
$
87,500.00
$
$
$
15,500.00
15,500.00
$
3,875.00
$
$
$
$
11,625.00
12,500.00
24,125.00
63,375.00
Manufacturing
Selling and Administrative
Total Fixed Costs
$
$
$
Operating income
$
Year 1
Sales Revenue
Less: Cost of Goods Sold
Beginning inventory
Cost of goods manufactured
Cost of goods available for sale
Ending inventory
Cost of goods sold
Variable selling and administrative expenses
Total Variable Costs
Contribution margin
less Fixed costs
$
$
25.00
2.33
$
87,500.00 $
$
3,875.00
$
$
$
$
$
$
$
12,000.00
15,875.00 $
$
15,875.00
12,500.00
28,375.00
59,125.00
25,000.00
14,000.00
39,000.00
$
$
$
25,000.00
14,000.00
39,000.00
24,375.00
$
20,125.00
Year 2
3500
4000
0
3000
3000
1000
2500
3500
3000
1000
3000
4000
0
4000
175,000.00
31,375.00
3,875.00
$ 44,500.00
3) What was the total sales revenue across both years under absorption costing and under variable costing?
Absorption Costing
Hudson Hornet Replicas
price per unit $
25.00
$
25.00
Year 1
Sales in dollars
Sales (in units)
Production (in units)
Year 2
$ 87,500.00
3500
4000
$ 87,500.00
3500
3000
$
175,000.00
Variable Costing
Hudson Hornet Replicas
price per unit $
25.00
Year 1
Sales in dollars
Sales (in units)
Production (in units)
$
25.00
Year 2
$ 87,500.00
3500
4000
$ 87,500.00
3500
3000
$
175,000.00
4) What was total costs across both years under absorption costing and under variable costing?
Huron Chalk Company
Absorption Costing
Sales price per unit
$
25.00
$
25.00
Year 1
Sales (in units)
3500 $ 87,500.00
Production (in units)
4000
rate
$
11.57
Cost of Sales
$ 40,500.00
Production costs:
Variable manufacturing costs
$ 15,500.00
Fixed manufacturing overhead
$ 25,000.00
Total manufacturing expenses
$ 40,500.00
Selling and administrative expenses:
Variable
$ 12,500.00
Fixed
$ 14,000.00
Operating Income
$ 20,500.00
total costs expensed
Year 2
$
3500 $ 87,500.00 $
3000
8.00
$ 28,000.00 $
175,000.00
68,500.00
$ 7,000.00
$ 21,000.00
$ 28,000.00
$ 12,500.00 $
$ 10,000.00 $
$ 37,000.00 $
25,000.00
24,000.00
57,500.00
$
117,500.00
Huron Chalk Company
Variable Costing
Sales price per unit
$
25.00
Year 1
$
25.00
Year 2
Sales (in units)
Production (in units)
Variable manufacturing costs
Variable selling and administrative expenses
Total Variable Expenses
Contribution Margin
3500 $ 87,500.00
3500 $ 87,500.00 $
4000
3000
$ 15,500.00
$ 7,000.00
$ 12,500.00
$ 12,500.00
$ 28,000.00
$ 19,500.00 $
$ 59,500.00
$ 68,000.00 $
Fixed manufacturing overhead
Fixed Selling and administrative expenses
Total Fixed Expenses
$ 25,000.00
$ 14,000.00
Operating Income
175,000.00
47,500.00
127,500.00
$ 21,000.00
$ 10,000.00
$ 39,000.00
$ 31,000.00 $
70,000.00
$ 20,500.00
$ 37,000.00 $
57,500.00
$
117,500.00
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