Accounting Question

BU 660
Module four assignment templates
p 9-27
17 ed.
Absorption versus variable costing. Horace Company manufactures a professional-grade vacuum cleane
For 2020, Horace budgeted to produce and sell 25,000 units. The company had no price, spending, or efficiency va
writes off production-volume variance to cost of goods sold. Actual data for 2020 are given as follows:
Required:
1
2
3
4
Prepare a 2020 income statement for Horace Company using variable costing.
Prepare a 2020 income statement for Horace Company using absorption costing.
Explain the differences in operating incomes obtained in requirements 1 and 2.
Horace’s management is considering implementing a bonus for its supervisors based on gross m
What incentives will this bonus plan create for the supervisors? What modifications could Hora
1. The variable manufacturing cost per unit is $33 + $23 + $62 = $118.
2020 Variable-Costing Based Income Statement
units
Revenue
Variable costs
Beg Inventory
Variable Mfg. costs
Cost of goods avail for sale
Deduct End. Inventory
0
Variable cost of goods sold
Variable mkt. costs
Total variable costs
Contribution margin
Fixed costs
Fixed manufacturing costs
Fixed adm. Costs
Fixed mkt. costs
Total fixed costs
Operating income
2. Fixed manufacturing overhead rate = $1,550,000 / 25,000 units =
2020 Absorption-Costing Based Income Statement
units
Revenue
Cost of goods sold
Beg Inventory
Variable Mfg. costs (Units produced)
Allocated fixed mfg. costs
Cost of goods avail for sale
Deduct End. Inventory (units produced – units sold)
Add unfavorable production volume variance
(see note in orange below)
Cost of goods sold
0
0
Gross margin
Operating costs
Variable mkt. costs
Fixed adm. Costs
Fixed mkt. costs
0
Total operating costs
Operating income
Add unfavorable production volume variance
PVV = $1,550,000 budgeted fixed mfg. costs – $1,302,000 allocated fixed mfg. costs = $248,00
3
2020 operating income under absorption costing is greater than the operating income
because in 2020 inventory increased by 2,500 units. As a result, under absorption costing, a po
remained in the ending inventory, and led to a lower cost of goods sold (relative to variable co
difference in the two operating incomes is exactly the same as the difference in the fixed manu
Operating income under absorption costing
Operating income under variable costing
Difference in operating income under absorption vs. variable costing
Under absorption costing:
Fixed mfg. costs in ending inventory (2,500 units)
Fixed mfg. costs in beginning inventory (0 units )
Change in fixed mfg. costs between ending and beginning inventory
4
Relative to the alternative of using contribution margin (from variable costing), the abs
for Horace’s supervisors. It takes into account both variable costs and fixed costs—costs that th
The downside of using absorption-costing-based gross margin is the supervisor’s tempt
to shore up a sagging gross margin by building up inventories.
essional-grade vacuum cleaner and began operations in 2020.
price, spending, or efficiency variances and
are given as follows:
ariable costing.
bsorption costing.
ements 1 and 2.
its supervisors based on gross margin under absorption costing.
What modifications could Horace management make to improve such a plan? Explain briefly.
unit cost
$0
$0
$0
$0
0
$0
s/b 295,000
$0
$0
$0
$0 s/b 4,958,000
$0
$0 s/b 1,022,700
per unit
unit cost
$0
0
0
$0
$0 s/b 2,478,000
$0
$0
0
$0
s/b +248,000
$0
$0 s/b 4,414,000
$0
$0
$0
$0
$0 s/b 1,177,700
cated fixed mfg. costs = $248,000 U
r than the operating income under variable costing
t, under absorption costing, a portion of the fixed overhead
oods sold (relative to variable costing). As shown below, the
the difference in the fixed manufacturing costs included in ending vs. beginning inventory (under absorption costing).
$0
0
$0
units
$0
0
$0
per unit
0
0
0
0
om variable costing), the absorption-costing based gross margin has some pros and cons as a performance measure
sts and fixed costs—costs that the supervisors may be able to control in the long-run.
rgin is the supervisor’s temptation to use inventory levels to control the gross margin—in particular,
BU 660
Module four assignment templates
Ex 10-18
Corect answer is
Ex 10-19
Corect answer is
BUSN 351 BU 660
Ch 10
Ch 10
Ex 10-25
High -Low Method
Complete the two schedules below highlighted in yellow.
Part 1
Maintenance costs is mixed cost as shown in part 2.
#DIV/0!
Health insurance is fixed at $8,570.
Shipping cost is variable as shown below at a rate of
#DIV/0!
Part 2
Month
January
February
March
April
May
June
July
August
September
October
November
December
Complete this schedule to compute maintenance cost per unit of machine hours.
x
y
Machine Maint.
hrs
Cost
lowest units produced
Note: we use the cost associated with the lo
highest units produced
Note: we use the cost associated with the hi
high
High-low method
Change in cost
Change in units
low
0
0
TC calculate fixed cost using low
Estimate cost using low
Differ
0
0
slope or
VC rate
0 #DIV/0!
0
Units X VC
rate
TC- TVC
Total VC = FC
0 #DIV/0!
#DIV/0!
units x VC rate
FC +
TVC =
Total costs
#DIV/0!
#DIV/0!
#DIV/0!
units x VC rate
Estimate cost using high
FC +
TVC =
#DIV/0!
#DIV/0!
Total costs
#DIV/0!
Complete this schedule to compute shipping cost per units shipped.
x
y
Units
Shipping
shipped costs
Month
y/x
January
#DIV/0!
February
#DIV/0!
March
#DIV/0!
April
#DIV/0!
May
#DIV/0!
June
#DIV/0!
July
#DIV/0!
August
#DIV/0!
September
#DIV/0!
October
#DIV/0!
November
lowest units produced
Note: we use the cost associated with the lo
December
highest units produced
Note: we use the cost associated with the hi
slope or
high
low
Differ
VC rate
High-low method
Change in cost
0
0
0 #DIV/0!
Change in units
0
0
0
per machine hour.
per
achine hours.
se the cost associated with the lowest cost.
se the cost associated with the highest cost.
Cost increases $2.10 for each new unit of activity.
You can use either the highest or lowest units to compute the fixed cost.
TC formula = FC + (units x vc rate)
Total costs
Note: Total costs agrees with the maintenance costs in cell D20.
Note: Total costs agrees with the maintenance costs in cell D29.
se the cost associated with the lowest cost.
se the cost associated with the highest cost.
Cost increases $3.60 for each new unit shipped.