Accounting problems converted into excel

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Problem 5-17

1. The break-even point in units sold can be computed using the contribution margin per unit as follows:

Selling price per unit	$56
Variable cost per unit	48
Contribution margin per unit	$ 8

Break-even unit sales = Fixed expenses ÷ Unit contribution margin

= $480,000 ÷ $8 per unit

= 60,000 units

2 a. Under variable costing, only the variable manufacturing costs are included in product costs.

	Year 1	Year 2	Year 3
Direct materials	$25	$25	$25
Direct labor	16	16	16
Variable manufacturing overhead	5	5	5
Variable costing unit product cost	$46	$46	$46

Note that selling and administrative expenses are not treated as product costs; that is, they are not included in the costs that are inventoried. These expenses are always treated as period costs.

2 b. The variable costing income statements appear below:

	Year 1	Year 2	Year 3
Sales	$3,360,000	$2,800,000	$3,640,000
Variable expenses:
Variable cost of goods sold @ $46 per unit	2,760,000	2,300,000	2,990,000
Variable selling and administrative @ $2 per unit	120,000	100,000	130,000
Total variable expenses	2,880,000	2,400,000	3,120,000
Contribution margin	480,000	400,000	520,000
Fixed expenses:
Fixed manufacturing overhead	300,000	300,000	300,000
Fixed selling and administrative	180,000	180,000	180,000
Total fixed expenses	480,000	480,000	480,000
Net operating income (loss)	$ 0	$ (80,000)	$ 40,000

3 a. The unit product costs under absorption costing:

	Year 1	Year 2	Year 3
Direct materials	$25	$25	$25.00
Direct labor	16	16	16.00
Variable manufacturing overhead	5	5	5.00
Fixed manufacturing overhead	*5	**4	***7.50
Absorption costing unit product cost	$51	$50	$53.50
* $300,000 ÷ 60,000 units = $5 per unit.
$300,000 ÷ 75,000 units = $4 per unit. * $300,000 ÷ 40,000 units = $7.50 per unit.

3 b. The absorption costing income statements appears below:

	Year 1	Year 2	Year 3
Sales	$3,360,000	$2,800,000	$3,640,000
Cost of goods sold	3,060,000	2,500,000	3,390,000
Gross margin	300,000	300,000	250,000
Selling and administrative expenses	300,000	280,000	310,000
Net operating income (loss)	$ 0	$ 20,000	$ (60,000)

Cost of goods sold computations:

Year 1: 60,000 units × $51 per unit = $3,060,000

Year 2: 50,000 units × $50 per unit = $2,500,000

Year 3: (25,000 × $50 per unit) + (40,000 × $53.50 per unit) = $3,390,000

	Year 1	Year 2	Year 3
Units sold	60,000	50,000	65,000
Break-even point in units	60,000	60,000	60,000
Units above (below) break-even point	0	(10,000)	5,000

Variable costing net operating income (loss)	$0	$(80,000)	$ 40,000
Absorption costing net operating income (loss)	$0	$ 20,000	$(60,000)

The absorption costing net operating incomes in years 2 and 3 are counter-intuitive. In year 2, the number of units sold is below the break-even point; however, absorption costing reports a net operating income greater than zero. In year 3, the number of units sold is above the break-even point; however, absorption costing reports a net operating income less than zero.

Problem 5-21

1.	a. and b.	Absorption Costing	Variable Costing
	Direct materials	$ 6	$ 6
	Direct labor	12	12
	Variable manufacturing overhead	4	4
	Fixed manufacturing overhead ($240,000 ÷ 30,000 units)	8	—
	Unit product cost	$30	$22

2.		May	June
	Sales	$1,040,000	$1,360,000
	Variable expenses:
	Variable cost of goods sold @ $22 per unit	572,000	748,000
	Variable selling and administrative expense @ $3 per unit	78,000	102,000
	Total variable expenses	650,000	850,000
	Contribution margin	390,000	510,000
	Fixed expenses:
	Fixed manufacturing overhead	240,000	240,000
	Fixed selling and administrative expenses	180,000	180,000
	Total fixed expenses	420,000	420,000
	Net operating income (loss)	$ (30,000)	$ 90,000

3.		May	June
	Variable costing net operating income (loss)	$ (30,000)	$ 90,000
	Add fixed manufacturing overhead cost deferred in inventory under absorption costing (4,000 units × $8 per unit)	32,000
	Deduct fixed manufacturing overhead cost released from inventory under absorption costing (4,000 units × $8 per unit)		(32,000)
	Absorption costing net operating income	$ 2,000	$ 58,000

4. As shown in the reconciliation in part (3) above, $32,000 of fixed manufacturing overhead cost was deferred in inventory under absorption costing at the end of May, because $8 of fixed manufacturing overhead cost “attached” to each of the 4,000 unsold units that went into inventory at the end of that month. This $32,000 was part of the $420,000 total fixed cost that has to be covered each month in order for the company to break even. Because the $32,000 was added to the inventory account, and thus did not appear on the income statement for May as an expense, the company was able to report a small profit for the month even though it sold less than the break-even volume of sales. In short, only $388,000 of fixed cost ($420,000 – $32,000) was expensed for May, rather than the full $420,000, as contemplated in the break-even analysis. As stated in the text, this is a major problem with the use of absorption costing internally for management purposes. The method does not harmonize well with the principles of cost-volume-profit analysis, and can result in data that are unclear or confusing.

Problem 5-22

1.	a.	Absorption costing unit product cost is:
		Direct materials	$1.00
		Direct labor	0.80
		Variable manufacturing overhead	0.20
		Fixed manufacturing overhead ($75,000 ÷ 50,000 units)	1.50
		Absorption costing unit product cost	$3.50

	b.	The absorption costing income statement is:

		Sales (40,000 units)	$200,000
		Cost of goods sold (40,000 units × $3.50 per unit)	140,000
		Gross margin	60,000
		Selling and administrative expenses ($20,000 + 40,000 units × $0.75 per unit)	50,000
		Net operating income	$ 10,000

c.	The reconciliation is as follows:

	Variable costing net operating loss	$ (5,000)
	Add fixed manufacturing overhead cost deferred in inventory under absorption costing (10,000 units × $1.50 per unit)	15,000
	Absorption costing net operating income	$ 10,000

2. Under absorption costing, the company did earn a profit for the month. However, before the question can really be answered, one must first define what is meant by a “profit.” The central issue here relates to timing of release of fixed manufacturing overhead costs to expense. Advocates of variable costing would argue that all such costs should be expensed immediately, and that no profit is earned unless the revenues of a period are sufficient to cover the fixed manufacturing overhead costs in full. From this point of view, then, no profit was earned during the month, because the fixed costs were not fully covered.

Advocates of absorption costing would argue, however, that fixed manufacturing overhead costs attach to units of product as they are produced, and that such costs do not become expense until the units are sold. Therefore, if the selling price of a unit is greater than the unit cost (including a proportionate amount of fixed manufacturing overhead), then a profit is earned even if some units produced are unsold and carry some fixed manufacturing overhead with them to the following period. A difficulty with this argument is that “profits” will vary under absorption costing depending on how many units are added to or taken out of inventory. That is, profits will depend not only on sales, but on what happens to inventories. In particular, profits can be consciously manipulated by increasing or decreasing a company’s inventories.

The variable costing income statement is:

Sales (60,000 units × $5 per unit)		$300,000
Variable expenses:
Variable cost of goods sold (60,000 units × $2 per unit)	$120,000
Variable selling and administrative expenses (60,000 units × $0.75 per unit)	45,000	165,000
Contribution margin		135,000
Fixed expense:
Fixed manufacturing overhead	75,000
Fixed selling and administrative expense	20,000	95,000
Net operating income		$ 40,000

The absorption costing income statement would be constructed as follows:

The absorption costing unit product cost will remain at $3.50, the same as in part (1).

	Sales (60,000 units × $5 per unit)	$300,000
	Cost of goods sold (60,000 units × $3.50 per unit)	210,000
	Gross margin	90,000
	Selling and administrative expenses (60,000 units × $0.75 per unit + $20,000)	65,000
	Net operating income	$ 25,000

c.	The reconciliation is as follows:

		Variable costing net operating income	$ 40,000
		Deduct fixed manufacturing overhead cost released from inventory under absorption costing (10,000 units × $1.50 per unit)	15,000
		Absorption costing net operating income	$ 25,000

Problem 6-16

1. The cost of serving the local commercial market according to the ABC model can be determined as follows:

		(a)		(b)	(a) × (b)
Activity Cost Pool		Activity Rate		Activity	ABC Cost
Animation concept........	$6,000	per proposal	20	proposals	$120,000
Animation production....	$7,700 per minute of animation	12	minutes	92,400
Contract administration.	$6,600	per contract	8	contracts		52,800
					$265,200

2. The margin earned serving the local commercial market is negative, as shown below:

Profitability Analysis
Sales...................................................			$240,000
Costs:
Animation concept.............................	$120,000
Animation production..........................	92,400
Contract administration.......................	52,800	265,200
.................................................Margin				$(25,200)

3. It appears that the local commercial market is losing money and the company would be better off dropping this market segment. However, not all of the costs included above may be avoidable. If more than $25,200 of the total costs of $265,200 is not avoidable, then the company really isn’t losing money on the local commercial market and the segment should not be dropped. These issues will be discussed in more depth in later chapters.

Problem 6-17

1. Under the traditional direct labor-dollar based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows:

Predetermined	= Estimated total manufacturing overhead cost
overhead rate		Estimated total direct labor dollars
	=	$508,625 = $3.13 per DL$
		$162,500

The product margins using the traditional approach would be computed as follows:

		EX300	TX500		Total
Sales...................................	$1,200,000		$500,000	$1,700,000
Direct materials....................	366,325		162,550	528,875
Direct labor..........................	120,000		42,500	162,500
Manufacturing overhead
applied @ $3.13 per direct
labor-dollar........................		375,600	133,025	508,625
Total manufacturing cost......		861,925		338,075		1,200,000
Product margin....................	$ 338,075	$161,925	$ 500,000

Note that all of the manufacturing overhead cost is applied to the products under the company’s traditional costing system.

2. The first step is to determine the activity rates:

	(a)
	Total	(b)	(a) ÷ (b)
Activity Cost Pools	Cost	Total Activity	Activity Rate
Machining.............	$198,250	152,500 MHRs	$1.30 per MHR
Setups..................	$150,000	375 setup hrs.	$400 per setup hr.
Product sustaining. $100,000	2 products	$50,000 per product

*The Other activity cost pool is not shown above because it includes organization-sustaining and idle capacity costs that should not be assigned to products.

Under the activity-based costing system, the product margins would be computed as follows:

		EX300		TX500		Total
Sales.........................	$1,200,000		$500,000	$1,700,000
Direct materials..........	366,325		162,550	528,875
Direct labor................	120,000		42,500	162,500
Advertising expense ...	50,000		100,000	150,000
Machining..................	117,000		81,250	198,250
Setups.......................	30,000		120,000	150,000
Product sustaining......		50,000			50,000		100,000

Total cost..................		733,325			556,300		1,289,625

Product margin..........	$ 466,675			$(56,300)	$ 410,375

3. The quantitative comparison is as follows:

	EX300	TX500				Total
	(a)	(a) ÷ (c)	(b)	(b) ÷ (c)			(c)
Traditional Cost System	Amount	%	Amount	%			Amount
Direct materials.................................	$366,325	69.3%	$162,550	30.7%	$	528,875
Direct labor.......................................	120,000	73.8%	42,500	26.2%			162,500
Manufacturing overhead....................	375,600	73.8%	133,025	26.2%			508,625
Total cost assigned to products..........	$861,925		$338,075		1,200,000
Selling and administrative..................							550,000
Total cost..........................................					$1,750,000
Activity-Based Costing System
Direct costs:
Direct materials..............................	$366,325	69.3%	$162,550	30.7%	$	528,875
Direct labor....................................	120,000	73.8%	42,500	26.2%			162,500
Advertising expense........................	50,000	33.3%	100,000	66.7%			150,000
Indirect costs:
Machining.......................................	117,000	59.0%	81,250	41.0%			198,250
Setups............................................	30,000	20.0%	120,000	80.0%			150,000
Product sustaining..........................	50,000	50.0%	50,000	50.0%			100,000
Total cost assigned to products..........	$733,325		$556,300		1,289,625
Costs not assigned to products:
Selling and administrative................							400,000
Other.............................................							60,375
Total cost..........................................					$1,750,000

The traditional and activity-based cost assignments differ for three reasons. First, the traditional system assigns all $508,625 of manufacturing overhead to products. The ABC system assigns only $448,250 of manufacturing overhead to products. The ABC system does not assign the $60,375 of other activity costs to products because they represent organization-sustaining costs. Second, the traditional system uses one unit-level activity measure, direct labor dollars, to assign 73.9% of all overhead to the EX300 product line and 26.1% of all overhead to the TX500 product line. The ABC system assigns 59.0% of Machining costs to the EX300 product line and 41.0% to the TX500 product line. The ABC system assigns 20.0% of Setup costs (a batch-level activity) to the EX300 product line and 80.0% to the TX500 product line. The ABC system assigns 50% of Product sustaining costs (a product-level activity) to each product line. Third, the traditional system does not trace any advertising expenses to the two products. The ABC system traces $50,000 of advertising to the EX300 and $100,000 of advertising to the TX500 product line.

Problem 6-18

35,000 units of Xactive @ 1.4 DLH per unit + 75,000 units of the Pathbreaker @ 1.0 DLH per unit = 35,000 DLHs + 75,000 DLHs = 110,000 DLHs

Consequently, the product margins using the traditional approach would be computed as follows:

	Xactive	Pathbreaker	Total
Sales	$3,175,000	$6,675,000	$9,850,000
Direct materials	1,620,000	3,825,000	5,445,000
Direct labor	455,000	975,000	1,430,000
Manufacturing overhead applied @ $20.00 per direct labor-hour	700,000	1,500,000	2,200,000
Total manufacturing cost	2,775,000	6,300,000	9,075,000
Product margin	$ 400,000	$ 375,000	$ 775,000

2. The first step is to determine the activity rates:

Activity Cost Pools	(a) Total Cost	(b) Total Activity	(a) ÷ (b) Activity Rate
Supporting direct labor	$797,500	110,000	DLHs	$7.25	per DLH
Batch setups	$680,000	400	setups	$1,700	per setup
Product sustaining	$650,000	2	products	$325,000	per product

*The Other activity cost pool is not shown above because it includes organization-sustaining and idle capacity costs that should not be assigned to products.

Under the activity-based costing system, the product margins would be computed as follows:

	Xactive	Pathbreaker	Total
Sales	$3,175,000	$6,675,000	$9,850,000
Direct materials	1,620,000	3,825,000	5,445,000
Direct labor	455,000	975,000	1,430,000
Supporting direct labor	253,750	543,750	797,500
Batch setups	425,000	255,000	680,000
Product sustaining	325,000	325,000	650,000
Total cost	3,078,750	5,923,750	9,002,500
Product margin	$ 96,250	$ 751,250	$ 847,500

54 Managerial Accounting, 14th Edition

7-15

3. The quantitative comparison is as follows:

	Xactive	Pathbreaker	Total
Traditional Cost System	(a) Amount	(a) ÷ (c) %	(b) Amount	(b) ÷ (c) %	(c) Amount
Direct materials	$1,620,000	29.8%	$3,825,000	70.2%	$5,445,000
Direct labor	455,000	31.8%	975,000	68.2%	1,430,000
Manufacturing overhead	700,000	31.8%	1,500,000	68.2%	2,200,000
Total cost assigned to products	$2,775,000		$6,300,000		$9,075,000

Activity-Based Costing System
Direct costs:
Direct materials	$1,620,000	29.8%	$3,825,000	70.2%	$5,445,000
Direct labor	455,000	31.8%	975,000	68.2%	1,430,000
Indirect costs:
Supporting direct labor	253,750	31.8%	543,750	68.2%	797,500
Batch setups	425,000	62.5%	255,000	37.5%	680,000
Product sustaining	325,000	50.0%	325,000	50.0%	650,000
Total cost assigned to products	$3,078,750		$5,923,750		9,002,500
Costs not assigned to products:
Other					72,500
Total cost					$9,075,000

Estimated total manufacturing overhead c

ost

Predetermined

overhead rate

Estimated total direct labor-hours

$2,200,000

= = $20.00 per DLH

110,000 DLHs*