Q1. During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows:
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Year 1
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Year 2
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Sales (@ $61 per unit)
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$976,000
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$1,586,000
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Cost of goods sold (@ $33 per unit)
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528,000
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858,000
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Gross margin
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448,000
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728,000
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Selling and administrative expenses*
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298,000
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328,000
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Net Operating income
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$150,000
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$400,000
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* $3 per unit variable; $250,000 fixed each year.
The company's $33 unit product cost is computed as follows:
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Direct materials
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6
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Direct labor
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9
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Variable manufacturing overhead
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4
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Fixed manufacturing overhead ($294,000 ÷ 21,000 units)
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14
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Absorption costing unit product cost
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33
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Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.
Production and cost data for the two years are:
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Year 1
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Year 2
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Units produced
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21,000
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21,000
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Units sold
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16,000
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26,000
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Required:
1. Prepare a variable costing contribution format income statement for each year.
2. Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses should be indicated by a minus sign.)
Q2. High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant's operation:
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Beginning inventory
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0
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Units produced
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43,000
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Units sold
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38,000
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Selling price per unit
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$76
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Selling and administrative expenses:
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Variable per unit
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$2
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Fixed per month
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$555,000
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Manufacturing costs:
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Direct materials cost per unit
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$16
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Direct labor cost per unit
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$9
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Variable manufacturing overhead cost per unit
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$2
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Fixed manufacturing overhead cost per month
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$774,000
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Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May.
Required:
1. Assume that the company uses absorption costing.
a. Determine the unit product cost.
b. Prepare an income statement for May.
2. Assume that the company uses variable costing.
a. Determine the unit product cost.
b. Prepare a contribution format income statement for May.
Q3. Tami Tyler opened Tami's Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler's personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.
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Tami's Creations, Inc. Income Statement For the Quarter Ended March 31
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Sales (23,000 units)
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$834,900
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Variable expenses:
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Variable cost of goods sold
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$285,200
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Variable selling and administrative
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179,400
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464,600
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Contribution margin
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370,300
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|
Fixed expenses:
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|
|
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Fixed manufacturing overhead
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215,800
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|
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Fixed selling and administrative
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215,000
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430,800
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Net operating loss
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$(60,500)
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Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company would probably have reported at least some profit for the quarter.
At this point, Ms. Tyler is manufacturing only one product, a swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:
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Units produced
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26,000
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Units sold
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23,000
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Variable costs per unit:
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Direct materials
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$7.50
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Direct labor
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$3.00
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Variable manufacturing overhead
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$1.90
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Variable selling and administrative
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$7.80
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Required:
1. Complete the following:
a. Compute the unit product cost under absorption costing.
b. Redo the company's income statement for the quarter using absorption costing.
c. Reconcile the variable and absorption costing net operating income (loss) figures.
3. During the second quarter of operations, the company again produced 26,000 units but sold 29,000 units. (Assume no change in total fixed costs.)
a. Prepare a contribution format income statement for the quarter using variable costing.
b. Prepare an income statement for the quarter using absorption costing.
c. Reconcile the variable costing and absorption costing net operating incomes.