Key Inputs for income statement computation are

April May
Beginning inventory 0 150
Production 500 400
Goods available for sale 500 500
Unit solds 350 520
Ending inventory 150 30

Budgeted fixed cost per unit and budgeted total manufacturring cost per unit under absorpstion costing are
April
(a) Budgeted fixed manufacturing cost 2,000,000
(b) Budgeted production 500
(c')=(a)/(b) Budgeted fixed manufatcturing cost perunit 4,000
(d) Budgeted variable manufacturing cost per unit 10000
(e')=(c')+(d) Budgeted total manufacturing cost per unit 14,000

Variabel Costing
Apr-08
Revenues 8,400,000
Variable costs
'Beginning inventory 0 1,500,000
'Variable manufacturing costs 5,000,000 4,000,000
Çost of goods available for sale 5,000,000 5,500,000
'Deduct ending inventory 1,500,000 300,000
'Variable cost of good solds 3,500,000 5,200,000
'Variable operating costs 1,050,000 1,560,000
'Total variable costs 4,550,000
Contribution margin 3,850,000
Fixed costs
'Fixed manufacturing cost 2,000,000 2,000,000
'Fixed operating costs 600,000 600,000
'Total fixed costs 2,600,000
Operating income 1,250,000

Absorption costing
Apr-08
Revenues 8,400,000
Cost of goods sold
'Beginning inventory - 2,100,000
'Variable manufacturing costs 5,000,000 4,000,000
Állocated fixed manufacturing costs 2,000,000 1,600,000
 Çost of good avaliabe for sale 7,000,000 7,700,000
Deduct ending invetory 2,100,000 420,000
Adjustment for prod-vol.variance - 400,000
Cost of goods sold 4,900,000
Gross margin 3,500,000
Operating cost
Variable operating cost 1,050,000 1,560,000
Fixed operating costs 600,000 600,000
Total operating costs 1,650,000
Operating income 1,850,000
absorpstion costing are
May
2,000,000
500
4,000
10000
14,000

May-08
12,480,000

6,760,000
5,720,000

2,600,000
3,120,000

May-08
12,480,000
7,680,000
4,800,000

2,160,000
2,640,000
 Year Year
2016 2017
Units in beginning inventory 0 80000
Units produced during the year 400000 240000
Units sold during the year 320000 320000
Units in ending inventory 80000 0

Selling price per unit 2,000

Manufacturing costs
Variable per unit produced
'Direct materials 660
'Direct labour 240
'Variable overhead 160
Fixed per year 5,000,000
Selling price per unit
Variable per unit sold 160
Fixed per year 2,800,000

Adsorbtion costing 2016 2017

Product cost
DM 660 660
DL 240 240
VOH 160 160
FOH 12.50 20.83
Inventory 35.00
Total Product cost 1,073 1,116
Period cost
Selling price per unit
VOH 160 160
FOH 8.75 8.75
Inventory 35.00
Total period cost 204 169
COGS 1,276 1,285
Selling price per unit 2,000 2,000
Net Income 724 715

Varibel costing
Product cost
DM 660 660
DL 240 240
VOH 160 160
Invetory 35.00
Total Product cost 1,060 1,095
Period cost
FOH 15.63 15.63

Selling price per unit

VOH 160 160
FOH 8.75 8.75
Invetory 35.00 -
Total period cost 219 184
COGS 1,279 1,279
Selling price per unit 721 721

Absorption costing operating income-Variable costing operating income = Fixed manufacturing cost in ending inven
In the year 2016
3 35

In the year 2017

5 - 35
facturing cost in ending inventory-Fixed manufacturing costs in beginning inventory
 absorption costing
Product Costing Sales 800,000.00
(COGS) Variable 320,000.00
Fixed 96,000.00 Variable
Gross Profit

Period Costing (SGA) Variable 80,000.00

Fixed 70,000.00 Fix
Operating Income 1,366,000.00

24,000.00

Year Year
2016 2017
Units in beginning inventory 0 8 80000
Units produced during the year 400000 240000
Units sold during the year 320000 320000
Units in ending inventory 80000 0

Selling price per unit 2,000

Manufacturing costs
Variable per unit produced
'Direct materials 660 Producti
'Direct labour 240
'Variable overhead 160 Sales
Fixed per year 5,000,000
Selling price per unit Invetory
Variable per unit sold 160
Fixed per year 2,800,000
Variable Costing Abs Direct
Sales 800,000.00 DM 2 2
(Variable COGS) 320,000.00 DL 1.25 1.25
(Variable SGA) 80,000.00 VOH 0.75 0.75
Contribution Margin FOH 1.2 0
5.20 4.0
(Fix manufacturing cost) 120,000.00 Pretend my FOH
(Fix SGA) 70,000.00 120,000.00 1.20
Operating Income 1,390,000 production 100000

Sales 80000 96,000.00

- 24,000.00
Inventory 20000 24,000.00

Absorption Costing Variable Costing

2016 2017 2016 2017
COGS DM 660 660 COGS 660 660
DL 240 240 240 240
VOH 160 160 160 160
FOH 15.63 15.63 SGA
VOH 160 160
Product cost 1,076 1,076 1,220 1,220

in 2016 choose absorption costing

400000 in 2017 choose variable costing

320000 in 2016 GROSS PROFIT is better in Abstion costing than Variable Costing. That makes pr
where in 2016 production>sales, my income statement of AC>VC, while in 2017 produc
80000
Recommendation for this company is to increase sales in 2016 so, no more inventory in

SGA at the time of incurrence or at the time the finished to which the fixed overhead are so
VOH 160 160 COGS (Fixed 12.50 20.83
FOH 8.75 8.75 SGA (FOH) 8.75 8.75
Period Cost 169 169 21 30

Operating income 1,244 1,244 1,241 1,250

Sales 2,000 2,000 2,000 2,000
Net income statement 756 756 759 750

3
5
 Production > Sales = Profit greater

Absorption costing Variable costing

2016 2017 2016
Sales 640,000,000 640,000,000 640,000,000
COGS (Variable)
(DM) 264,000,000 158,400,000 264,000,000
(DL) 96,000,000 57,600,000 96,000,000
(VOH) 64,000,000 38,400,000 64,000,000
(Fixed OH) 4,000,000 5,000,000
Gross Profit 212,000,000 380,600,000 SGA (variable) 51,200,000

Contribution margin 164,800,000

47,200,000

ble Costing. That makes productivity looks more efficent with produced 400000 units, meanwhile in 2017 I choose variable costing CONTR
>VC, while in 2017 production<sales, my income statement of AC<Variable costing.

6 so, no more inventory in the end of the year, and because in 2017 no inventory in the beginning of the year, the company can increase p

the fixed overhead are sold

SGA (Variable) 51,200,000 51,200,000 COGS (Fixed OH) 5,000,000
(Fixed OH) 2,800,000 2,800,000 SGA (Fixed OH) 2,800,000

Operating Income 158,000,000 326,600,000 157,000,000

 20.83 12.50
12.50 - 1,000,000
1,000,000
- 1,000,000
1,000,000
able costing
2017
640,000,000

158,400,000
57,600,000
38,400,000
-
51,200,000

334,400,000

choose variable costing CONTRIBUTION MARGIN is higher. That means with produced 240000 unit the company still have higher income

ear, the company can increase production which will raise sales and profit.

4,000,000
2,800,000

327,600,000
mpany still have higher income
Cost, Volume, and Profit analysis
Example
contribution income statement Sales price 20
VC 12
Sales
-Variable income Fixed 60000
Contribution margin
-fix how many unit do I have to sell in order to brea
Profit is Zero Break event in unit :

Break Analysis so, $60000/$(20-12)

Total revenues = Total Cost so, in 75000 unit I should break even
(salesprice.x)=Fix+(Var.x)
lets see
Break event unit = $Fixed cost/$(sp-v.c) sales is 7500x20 = 150000
VC. 75000x20 = 90000
$(SP-V.C)=$CM Cost marginal
Fixed
Profit

So I, break event, I got no money I g

Another point of formula

Example
Break event sales $ = $Fixed cost/CM ratio Sales price
VC
CM ratio = $CM/Sales price
Fixed $

so break event sales = 60000/0.4

Let see, I want to make profit $2000

so the formula become
Total revenue= Total cost +profit

(SP.x)=F+(VC.X)+profit

Break event unit = ($Fixed cost+profit or -loss)/$(sp-v.c)

 so lets back to my example
I got
Break even unit = (60000+20000)/(2
So 10000units that would be
Sales 10000x$20 = 200000
Variable cost 10000x$12 = 120000
CM 80000
Fixed 60000
Profit 20000 so it work, I got profit $20

Now lets see break even sales

Break event sales $ =($Fixed cost+profit or -loss)/CM ratio

so break event sales = 60000+20000

Margin of safety = total sales - break event sales

have to sell in order to break event?

$60000/$(20-12) =75000 unit

00 unit I should break event

00x20 = 150000
0x20 = 90000
60000
60000
0

k event, I got no money I got no friends

20 CM =8/20 = 0.4
12

60000

event sales = 60000/0.4 =150000 dollar

want to make profit $20000

mula become
ck to my example

n unit = (60000+20000)/(20-12)=I got sell 10.000 unit

8000
so it work, I got profit $20000 0.4

ss)/CM ratio CM ration when break event unit is zero and constant

event sales = 60000+20000/-.4 =200000 dollars

Key Co. is a mutiple product manufacture. In order to meet costumer's need, Delta Co currrent produce three d
the supplier, Delta Co, would charge Rs.50 /product, regardless of the blade type.
For the next year, Key Co. has projected the costs of its won blade production as follow, based on projected vol
Direct material : $ 300,000
Direct labour : $ 260,000
Variable overhead: $ 220,000 assume 1 Rs=1$
Fixed overhead:
Factory supervision: $ 140,000
Other fixed cost $ 260,000
Total production cost $ 1,180,000

1. For this part only, assume that the space presently occupied by blade production could be leased to another
2. How has the composition of manufacturing costs changed during recent years? How has this change affected
3. Analyse which one is the best for management? Why?

answers:
3) Analyses for management
This is the make or the buy, so compare the incremental cost to make the incremental buy
make the blades
Incremental cost per unit
Direct material (Rs.300000/40000units) Rs 7.5
Direct labour (Rs. 260000/40000units) Rs 6.5
Variable overhed (Rs. 220000/40000units) Rs 5.5
Fixed overhead (Rs. 400000/400000units) Rs 10
Total cost 29.5

compare to make the blade for 40000units Rs.29.5, with the cost to buy Rs.50. There is net of loss of
Rs. 20.5 if the Key Co chose to buy blades.

2) lets the Key Co will be indifferent between buyin and making the blades when the total cost of Rs. 50 per uni
the volume.

(Direct material+Direct labour+Variable overhead) x Volume + Fixed overhead = Cost to buy x Volume
lets volume in units = X
(7.5+6.5+5.5)X+400000=50x

19.5 X + $400000 = $50 X

30.5 X = 400000
X = 13115 units of blades
as volume of production decrease the average per unit cost of in house production increase
If the volume falss below 13115 units, then x would prefer to buy blades from supplier

3) IF the space presently occupied by blade production could be leased to another firm for Rs 45000 per year
The Key Co would face an opportunity cost accosiated in with-in house with in-house production for the 40000u
of Rs. 25 per unit
New cost to make 29.5+1.124 = Rs. 54.5
The Key Co should not buy because the cost to make Rs. 30.65 lower thant the cost to buy Rs. 50.00
to sell the company blades for the motors line.
the company currently produces all the blades it requires. In order to meet's needs. X currently produces three
the supplier would change Rs. 25/blades, regardless of blade type. For the next year X has projected the cost of
projected volume of 10000 units):
Direct materials $75000
Direct labour $65000
Variabel overhead $55000
Fixed overhead.
Factory supervision $35000
Other fixed cost $65000
Total production costs $295000

Assume (1) the equipment utilied to produce the blades has no alternative use and no market value, (2) the spa
purchases rather than makes the blades and (3) factory supervision cost reflects the salary of the production su
Required
i) determine the net profit or loss of purchasing (rather than manufacturing) the blades required for motor prod
ii) determine the level of motor production where x would be indifferent between buying and producing the bla
that influence the decision?
iii)For this part only, assume that the space presently occupied by blade production could be leased to another

Solution:
a) this is make or buy decision, so compare the incremental cost to make with the incremental cost to by
Make the blades
Incremental Cost per unit
Direct materials (Rs. 75000/10000units) Rs 7.5
Direct labour (Rs. 65000/10000units) Rs 6.5
Variable overhead (Rs. 55000/10000units) Rs 5.5
Supervision (Rs. 35000/10000units) Rs 3.5
Total cost 23

compare the cost to make the blade for 10000motors i.e Rs.23, with the cost to buy Rs. 25. There is a net loss o
b) X will be indifferent between buying and making the blades when the total cost for making and buying will be
the volume plus the fixed avoidable costs are equal to the supplier's offered cost of Rs. 25 perunit times the vo
(Direct material + Direct labour + Variable overhead) x volume + supervision = Cost to buy x volume

let volume in units=x

(7.5+6.5+5.5).X+35000=25.X
19.5X+35000=25X
X=6364 units of blades.
as volume of production decrease the average perunit cost of in house production increase. If the volume falls b

c) If the space presently occupied by blade production could be leased to another firm for Rs 45000 peryear. X w
production for the 10000 units of Rs 4.5 perunit.
New cost to make = 23+4.5=27.50
No x should buy because the cost to make Rs 27.50, is higher than the cost to buy Rs 25.00
Delta Co currrent produce three different type for each motor model.

as follow, based on projected volume of 40000 units

ction could be leased to another firm for Rs.45000 per year. How would this effect the make or buy decision? Why?
ars? How has this change affected the design of cost accounting system?

emental buy

. There is net of loss of

en the total cost of Rs. 50 per unit times the

= Cost to buy x Volume

ction increase

ther firm for Rs 45000 per year

-house production for the 40000units

e cost to buy Rs. 50.00

eeds. X currently produces three different blades for each motor model (nine different bladé).
t year X has projected the cost of its won blade production as follows (based one

e and no market value, (2) the space occupied by blade production will remain iddle if the company
ts the salary of the production supervisor who would be determined from the firm if blade production ceased.

he blades required for motor production in the next year.

een buying and producing the blades. If the future volume level were predicted to decrease would

ction could be leased to another firm for Rs. 45000 per year. How would this effect the make or buy solution?

the incremental cost to by

o buy Rs. 25. There is a net loss of Rs 2.00 if X choose to buy blades.
cost for making and buying will be equal at the volume level where the variable cost per unit times
ost of Rs. 25 perunit times the volume.
Cost to buy x volume

tion increase. If the volume falls below 6364 motors. Then X would prefer to buy blades from supplier

her firm for Rs 45000 peryear. X would face an opportunity cost accosiated in with in-house with in-house

buy Rs 25.00