Management Accounting III

Great Outdoze, Inc., manufactures high-quality sleeping bags, which sell for $130 each. The variable costs of production are as follows:

  Direct material

$

40

  Direct labor

$ 

22

 Variable manufacturing overhead

$16

Budgeted fixed overhead in 20x4 was $400,000 and budgeted production was 25,000 sleeping bags. The years actual production was 25,000 units, of which 22,000 were sold. Variable selling and administrative costs were $2 per unit sold; fixed selling and administrative costs were $60,000.

Required:

1.

Calculate the product cost per sleeping bag under (a) absorption costing and (b) variable costing.

2.

Prepare operating income statements for the year using:

a.

Absorption costing.

b.

Variable costing.

3.

Reconcile reported operating income under the two methods using the shortcut method.

Chenango Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $25. The variable costs of production for one case of cans are as follows:

 Direct material

$

7.50

 Direct labor

2.50

 Variable manufacturing overhead

6.00

Total variable manufacturing cost per case

$

16.00

Variable selling and administrative costs amount to $.50 per case. Budgeted fixed manufacturing overhead is $400,000 per year, and fixed selling and administrative cost is $37,500 per year. The following data pertain to the company’s first three years of operation. ( unit refers to one case of cans.)

Year 1

Year 2

Year 3

Planned production (in units)

80,000

80,000

80,000

Finished-goods inventory (in units), January 1

0

0

20,000

Actual production (in units)

80,000

80,000

80,000

Sales (in units)

80,000

60,000

90,000

Finished-goods inventory (in units), December 31

0

20,000

10,000

Actual costs were the same as the budgeted costs.

Required:

1.

Prepare operating income statements for Chenango Can Company for its first three years of operations using:

a.

Absorption costing:

b.

Variable costing:

2.

Reconcile Chenango Can Company’s operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method.

3.

Suppose that during Chenango's fourth year of operation actual production equals planned production actual costs are equal to budgeted costs, and the company ends the year with no inventory on hand.

a.

What will be the difference between absorption-costing operating income and variable-costing operating income in year 4?

b.

What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing?