Chapter 8 Textbook Solutions For Student

SOLUTIONS TO DO IT! REVIEW

DO IT! REVIEW 8.12

a. Manufacturing cost per unit—absorption costing

Direct material $30
Direct labour 12
Variable overhead 3
Fixed overhead ($108,000 ÷ 12,000 units) 9
$54

b. Fresh Air Products

Income Statement—Absorption Costing
For the first month of operations

Sales (10,000 units × $110) $1,100,000

Cost of goods sold:
Beginning inventory —
Plus: Cost of goods manufactured (12,000 × $54) $648,000
Goods available for sale 648,000
Less: ending inventory (2,000 × $54) 108,000 540,000
Gross margin 560,000
Less: S&A [(10,000 × $4) + $200,000] 240,000
Operating income $320,000

LO 1,3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t003 cpa-e002 CM: Mgt. Accounting; PS
and DM
DO IT! REVIEW 8.13

a.1. Manufacturing cost per unit—variable costing

Direct material $30
Direct labour 12
Variable overhead 3
$45

2. Fresh Air Products

Income Statement—Variable Costing
For the first month of operations

Sales (10,000 units × $110) $1,100,000

Less: variable costs
Variable COGS (10,000 units × $45) $450,000
Variable S&A expenses (10,000 units × $4) 40,000 490,000
Contribution margin 610,000
Less: fixed costs
Fixed manufacturing overhead 108,000
Fixed selling and administrative expenses 200,000 308,000
Operating income $302,000

b. Variable costing operating income $302,000

Plus: Fixed manufacturing overhead costs deferred
in ending inventory (2,000 units × $9) 18,000
Absorption costing operating income $320,000

LO 2,3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t003 cpa-e002 CM: Mgt. Accounting;
PS and DM

EXERCISE 8.17

a. Absorption costing:

First determine per unit manufacturing cost—

Variable manufacturing costs $40

Fixed manufacturing costs ($100,000 ÷ 10,000) 10
Per-unit absorption cost: $50
 ASIAN WINDOWS
Income Statement
For the Year Ended December 31, 2022
Absorption Costing
_______________________________________________________

Sales (8,500 shades × $90) $765,000

Less: COGS (8,500 shades × $50) 425,000
Gross profit 340,000
Less: selling and administrative expenses
Variable (8,500 × $9) $76,500
Fixed 250,000 326,500
Net income $13,500

b. ASIAN WINDOWS
Income Statement
For the Year Ended December 31, 2022
Variable Costing

Sales (8,500 shades × $90) $765,000

Less: variable costs
Variable COGS (8,500 shades × $40) $340,000
Variable S&A (8,500 units × $9) 76,500 416,500
Contribution margin 348,500
Less: fixed costs
Fixed manufacturing overhead 100,000
Fixed S&A expense 250,000 350,000
Net income (loss) $(1,500)
EXERCISE 8.22

a. & b. Manufacturing Cost Per Unit

Absorption Variable
Direct material $0.26 $0.26
Direct labour 0.34 0.34
Variable manufacturing overhead 0.38 0.38
Fixed manufacturing overhead
($96,459 ÷ 260,700) 0.37 —
Manufacturing cost per unit $1.35 $0.98
 c. EMPEY MANUFACTURING
Income Statement
For the Year Ended December 31, 2022
Absorption Costing

Sales (260,700 units × $2) $521,400

Less: COGS (260,700 units × $1.35) 351,945
Gross profit 169,455
Less: selling and administrative expenses
Variable (260,700 units × $0.26) $67,782
Fixed ($38,500 + $42,625) 81,125 148,907
Net income $20,548

d. Net income is the same under both costing methods, $20,548.

The net incomes are the same because units produced equal
units sold for the year. When this condition occurs, both methods
deduct all the fixed manufacturing overhead costs in the current
year. There is no ending inventory in which fixed manufacturing
overhead costs can be deferred.

e. It would be beneficial for Empey Manufacturing to prepare both a

variable-costing income statement and an absorption-costing
income statement for a variety of reasons. First, to satisfy the
requirements of generally accepted accounting principles, the
company is required to prepare an absorption-costing income
statement.
EXERCISE 8.22 (Continued)

However, management frequently requests a variable-costing

income statement because it provides useful information for
decision-making purposes. The variable-costing income
statement provides information that is necessary for cost-volume-
profit analysis as well as incremental analysis. In addition, net
income calculated in a variable-costing income statement more
 closely follows changes in sales; it is a better indicator of
performance.

Also, net income calculated in a variable-costing income

statement is not affected by changes in production the way
absorption- costing net income is. Finally, variable-costing
statements are more closely matched to the actual cash flow in an
organization as the manufacturing overhead costs are expensed
in the month in which the cash outlay occurs.

LO 1,2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t003 cpa-e002 CM: Mgt. Accounting;
PS and DM

EXERCISE 8.23

a. Manufacturing Cost Per Unit—Variable Costing

Direct materials ($79,000 ÷ 9,000 units produced) $ 8.78
Direct labour ($30,000 ÷ 9,000 units) 3.33
Variable manufacturing overhead ($21,500 ÷ 9,000 units) 2.39
Manufacturing cost per unit $14.50
Finished goods inventory = (9,000 – 8,200 units) × $14.50 =
$11,600

b. Absorption costing would show a higher net income

because some of the fixed costs are deferred to future
periods in the ending inventory. As illustrated below, FGI
will be $4,000 (800 units × $5) higher under absorption
costing, which will cause its net income to be $4,000 higher.

Manufacturing Cost Per Unit—Absorption Costing

Variable costing per unit (from a.) $14.50
Fixed manufacturing overhead ($45,000 ÷ 9,000) 5.00
Manufacturing cost per unit $19.50
Finished goods inventory cost = (9,000 – 8,200 units) × $19.50 =
$15,600

EXERCISE 8.23 (Continued)

Inventory (absorption costing) $15,600

Inventory (variable costing) 11,600
 Fixed overhead deferred in ending inventory $4,000

Or, fixed manufacturing overhead per unit × ending

inventory
$45,000 ÷ 9,000 = $5.00; $5.00 × 800 = $4,000
LO 1,2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t003 cpa-e002 CM: Mgt. Accounting; PS
and DM

EXERCISE 8.24

a. Variable utility expense: $3,000

(12 months × 500 hours per month × $0.50 per hour)

Fixed utility expense: $18,000

(12 months × $1,500 per month)

Manufacturing cost using variable approach:

Direct material $54,000
Direct labour 43,000
Indirect material (nails) 350
Utilities (variable) 3,000
$100,350

b. Manufacturing cost using absorption approach:

Variable cost from a. $100,350
Utilities (fixed) 18,000
Rent 21,400
$139,750

c. The entire difference in costs between the two methods results

from having fixed overhead included as part of manufacturing
costs only under the absorption costing method. This difference
amounts to $39,400 (Fixed utilities cost, $18,000 + fixed rent,
$21,400).
LO 1,2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t003 cpa-e002 CM: Mgt. Accounting; PS
and DM
EXERCISE 8.25

a. First determine unit manufacturing costs:

TPC VC AC

Direct materials $8 $8 $8
Direct labour 9 9
Variable MOH 12 12
Fixed MOH ($18,000 ÷ 3,000) 6
Unit manufacturing cost $8 $29 $35

Then determine the value of ending inventory:

TPC VC AC
$2,90
Beginning inventory (100 units) $ 800 0 $ 3,500
Finished goods added (3,000
24,000 87,000 105,000
units)
Goods available for sale (3,100
24,800 89,900 108,500
units)
Cost of goods sold (2,800 units) 22,400 81,200 98,000
Value of ending inventory (300
$2,400 $8,700 $10,500
units)

Absorption-costing net income will be $1,800 more than net

income using variable costing: FMOH deferred in ending
inventory equals 300 units × $6.00 FMOH per unit, or
($10,500 – $8,700).

b. Variable-costing net income will be $6,300 more than net

income using throughput costing because of conversion
costs deferred in ending inventory equalling 300 units ×
$21.00 per unit, or ($8,700 – $2,400).