Accounting

Al Yamama University
College of Business
Class activity: Variable Costing and Segment Reporting
Module: ACC 202 Managerial Accounting
Chapter: 4
Task 1:
Dexter Corporation produces and sells a single product, a wooden hand loom for weaving
small items such as scarves. Selected cost and operating data relating to the product for two
years are given below:
Selling price per unit
Manufacturing costs:
Variable per unit produced:
Direct materials
Direct labor
Variable overhead
Fixed per year
Selling and administrative costs:
Variable per unit sold
Fixed per year
$50
$11
$6
$3
$120,000
Units in beginning inventory
Units produced during the year
Units sold during the year
Units in ending inventory
Year 1 Year 2
0
2,000
10,000 6,000
8,000
8,000
2,000
0
$4
$70,000
Required:
1. Assume the company uses absorption costing.
a. Compute the unit product cost in each year.
b. Prepare an income statement for each year.
2. Assume the company uses variable costing.
a. Compute the unit product cost in each year.
b. Prepare an income statement for each year.
3. Reconcile the variable costing and absorption costing net operating incomes.
Solution:
For year 2: Ending inventory in year 1 (2000) was sold in year 2 and so the 2000 units
should be multiplied by 32. The other 6000 remaining should be multiplied by 40.
For year 1: 8000 can be sold
from previous years and
therefore we can calculate
the Cost of Goods Sold
(COGS) as follows: (Units in
beginning inventory + Units
produced – Units in ending
inventory) * Unit product
cost.
Bear in mind that:
• The total net profit over the two years will be the same for both costing
methods, amounting to $36,000.
• The total Fixed Manufacturing Overhead Cost (FMOC) for the two years will be
identical for both costing methods, totaling $240,000 (which is the sum of
$120,000 for each year). However, the allocation of this total amount across
the two years will differ between the two costing methods.
Explanation of reconciliation:
Under absorption costing (AC), we have allocated only $96,000* as FMOC in the first
year, and the remaining $24,000 is added to the second year’s FMOC (the second
year FMOC is $120,000)**. Therefore, the total FMOC for the second year under AC
amounts to $144,000 (the sum of $24,000 and $120,000). On the other hand, under
variable costing (VC), we have expensed the entire $120,000 as FMOC in the first year
and again $120,000 in the second year.
Consequently, the difference between the two costing methods in the first year is an
additional $24,000 in FMOC for VC (this extra amount resulted in a larger decrease in
net income compared to AC). So, when reconciling, we add this amount to the AC
net income for the first year.
For the second year, the opposite occurred. The difference between the two costing
methods in the second year is an additional $24,000 in FMOC for AC (this extra
amount was carried over from the first year, leading to a larger decrease in net
income compared to VC). Thus, when reconciling, we deduct this amount from the
AC net income for the second year.
*12 (FMOC per unit for the first year) x 8000 (sold units in the first year) = 96,000
** The carryover FMOC from the first year is $24,000 ($12 x 2,000 unsold units from the first year). The FMOC
allocated for the second year under AC is $120,000 ($20 x 6,000 units sold in the second year), resulting in a total
FMOC of $144,000 for the second year under AC (24,000+120,000).
Task 2:
Solution:
Al Yamama University
College of Business
Class activity: Variable Costing and Segment Reporting
Module: ACC 202 Managerial Accounting
Chapter: 4
Task 1:
Dexter Corporation produces and sells a single product, a wooden hand loom for weaving
small items such as scarves. Selected cost and operating data relating to the product for two
years are given below:
Selling price per unit
Manufacturing costs:
Variable per unit produced:
Direct materials
Direct labor
Variable overhead
Fixed per year
Selling and administrative costs:
Variable per unit sold
Fixed per year
$50
$11
$6
$3
$120,000
Units in beginning inventory
Units produced during the year
Units sold during the year
Units in ending inventory
Year 1 Year 2
0
2,000
10,000 6,000
8,000
8,000
2,000
0
$4
$70,000
Required:
1. Assume the company uses absorption costing.
a. Compute the unit product cost in each year.
b. Prepare an income statement for each year.
2. Assume the company uses variable costing.
a. Compute the unit product cost in each year.
b. Prepare an income statement for each year.
3. Reconcile the variable costing and absorption costing net operating incomes.
Task 2: