Solutions

13. a. Expected overhead = ($42,900 x 12) + ($6 x 156,000)

= $514,800 + $936,000
= $1,450,800

Predetermined overhead rate = $1,450,800 ÷ 156,000 = $9.30 per DL hour

Overhead per unit = $9.30 x 3 hours per unit = $27.90

b. Manufacturing Overhead 128,550

Various Accounts 128,550

Work in Process Inventory (12,780 x $9.30) 118,854

Manufacturing Overhead 118,854

15. a. Manufacturing Overhead 66,000

Cost of Goods Sold 66,000

b. Manufacturing overhead 66,000

Work in Process Inventory 10,560
Finished Goods Inventory 2,640
Cost of Goods Sold 19,800

WIP $384,000 384,000 ÷ 1200,000 = 32% .32 x $66,000 = $21,120

FG 96,000 96,000 ÷ 1200,000 = 8% .08 x $66,000 = 5,280
CGS 720,000 720,000 ÷ 120,000 = 60% .60 x $66,000 = 39600
Total $1200,000

c. The method in part (b) would be more appropriate in this instance

because of the magnitude of the amount of overapplied overhead. It is
5.5 percent of the total balances in all of the accounts containing
overhead, so to close it directly to cost of goods sold would cause a
distortion of the costs remaining in inventory.

19. a. MHs Total Cost = Variable Cost + Fixed Cost

High activity 34,000 $ 6,100 $2,720 $3,380
Low activity 31,000 5,860 2,480 3,380
Differences 3,000 $ 240

Variable rate = $240 ÷ 3,000 MHs = $0.08 per MH

High activity variable cost = 34,000 x $0.08 = $2,720

Low activity variable cost = 31,000 x $0.08 = $2,480

Fixed cost at high activity = $6,100 - $2,720 = $3,380

Fixed cost at low activity = $5,860 - $2,480 = $3,380
 Budget formula: TC = FC + VC(X)
TC = $3,380 + $0.08 MH

b. TC = $3,380 + $0.08(33,175) = $3,380 + $2,654 = $6,034

25. a. 250 300 350 400

Variable costs:
Supplies @ $4.00 per DLH $1,000 $1,200 $1,400 $1,600
Direct labor @ $7.00 per DLH 1,750 2,100 2,450 2,800
Utilities @$5.40 per DLH 1,350 1,620 1,890 2,160
Fixed costs:
Direct labor 500 500 500 500
Utilities 350 350 350 350
Rent 450 450 450 450
Advertising 75 75 75 75
Total cost $5,475 $6,295 $7,115 $7,935

b. Cost per DLH $21.90 $20.98 $20.33 $19.84

c. $20.33 x 1.4 = $28.46 hourly charge

$28.46 x 1.25 hours per repair = $35.58 or $36 per customer repair

27. a. (18,000 – 16,560) x $8.50 = 1,440 x $8.50 = $2,240

b. (18,000 – 16,560) x ($8.50 - $1.50) = 1,440 x $7.00 = $10,080

c. Absorption costing would have produced the higher net income

because it would have required $2,160 (1,440 x $1.50) of fixed
manufacturing overhead to be inventoried rather than to be charged
against income.

29. a. Ingredients $224,000

Labor 104,000
Variable overhead 192,000
Total variable cost $520,000
Divided by units ÷104,000
Variable cost per unit $5.00

Total variable cost $520,000

Fixed overhead 93,600
Total cost $613,600
Divided by units ÷104,000
Absorption cost per unit $5.90
 b. Variable cost of goods sold = 98,000 x $5.00 = $490,000

c. Absorption cost of goods sold = 98,000 x $5.90 = $578,200

d. Ending inventory (variable costing) = 6,000 x $5.00 = $30,000

Ending inventory (absorption costing) = 6,000 x $5.90 = $35,400

e. Fixed overhead charged to expense (variable costing) = $93,600

Fixed overhead charged to expense (absorption costing) = $90,000

31. a. 1. KICK’IN SPORTSWEAR

Income Statement (Absorption Costing Basis)
For the Month Ended April 30, 2008

Sales ($7,200,000 ÷ $72 = 100,000 units sold) $7,200,000

Cost of goods sold ($51 x 100,000) (5,100,000)
Production volume variance ($15 x 42,500)* (637,500)
Gross margin $1,462,500
Fixed selling & administrative expenses (1,200,000)
Income before taxes $ 262,500
*
Total production (100,000 units sold + 7,500 units inventoried) 107,500
Expected production (150,000)
Units creating volume variance 42,500

2. Differences in incomes = $150,000 - $262,500 = $(112,500)

This amount is equal to the increase in inventory of 7,500 units x $15
per unit fixed overhead deferred in ending inventory under
absorption costing.

b. The vice-president of marketing should find the variable costing

approach to income determination desirable for many reasons,
including the following:
 Variable costing income varies with units sold, not units produced.
 Fixed manufacturing overhead costs are charged against revenue in
the period in which they are incurred; consequently, manufacturing
cost per unit does not change with a change in production level.
 The contribution margin offers a useful tool for marketing decisions
that consider changes in relationships among costs, volume levels,
and profit figures.
(CMA adapted)
34. a. Normal Exp. Prac. Theor.
76,000 72,000 80,000 100,000
Variable costs:
Indirect material $ 95,000 $ 90,000 $100,000 $125,000
 Indirect labor 76,000 72,000 80,000 100,000
Factory utilities 1,520 1,440 1,600 2,000
Factory maintenance 12,920 12,240 13,600 17,000
Material handling 4,560 4,320 4,800 6,000
Machine depreciation 2,280 2,160 2,400 3,000
Total variable costs $192,280 $182,160 $202,400 $253,000

Fixed costs:
Factory utilities $ 3,000 $ 3,000 $ 3,000 $ 3,000
Factory maintenance 10,000 10,000 10,000 10,000
Material handling 8,000 8,000 8,000 8,000
Building rent 25,000 25,000 25,000 25,000
Supervisors’ salaries 72,000 72,000 72,000 72,000
Factory insurance 6,000 6,000 6,000 6,000
Total fixed costs $124,000 $124,000 $124,000 $124,000

b. Variable OH rate per unit $2.53 $2.53 $2.53 $2.53

Fixed OH rate per unit 1.63 1.72 1.55 1.24

c. 1. Variable Manufacturing Overhead 87,500

Raw Materials (Supplies) Inventory 87,500
To record indirect material at $1.25 per unit produced

Variable Manufacturing Overhead 70,000

Wages Payable (or Cash) 70,000
To record indirect labor at $1.00 per unit produced

Variable Manufacturing Overhead 1,400

Fixed Manufacturing Overhead 3,000
Utilities Payable (or Cash) 4,400
To record factory utilities

Variable Manufacturing Overhead 11,900

Fixed Manufacturing Overhead 10,000
Cash (or Supplies) 21,900
To record factory maintenance

Variable Manufacturing Overhead 4,200

Fixed Manufacturing Overhead 8,000
Cash 12,200
To record material handling charges

Variable Manufacturing Overhead 2,100

Accumulated Depreciation 2,100
To record depreciation at $0.03 per unit produced
 Fixed Manufacturing Overhead 25,000
Cash 25,000
To record building rent

Fixed Manufacturing Overhead 72,000

Salaries Payable (or Cash) 72,000
To record supervisors’ salaries

Fixed Manufacturing Overhead 6,000

Cash (or Prepaid Ins. or Ins. Payable) 6,000
To record factory insurance

Work in Process Inventory 297,500

Variable Manufacturing Overhead 177,100
Fixed Manufacturing Overhead 120,400
To apply variable and fixed manufacturing overhead to WIP

2. Actual fixed overhead $124,000

Applied fixed overhead (70,000 x $1.72) 120,400
Underapplied fixed overhead $ 3,600

c. Use of expected capacity would create costs that would be more closely
related to actual production costs. However, use of practical capacity
would help indicate to management the costs of unused capacity.

40. a. MHs Total Cost = Variable Cost + Fixed Cost

High activity 2,700 $13,154 $8,640 $4,520
Low activity (1,400) (9,000) 4,480 4,520
Differences 1,300 $ 4,154
Variable rate = $4,154 ÷ 1,300 MHs = $3.20 per MH
High activity variable cost = 2,700 × $3.20 = $8,640
Low activity variable cost = 1,400 × $3.20 = $4,480

Fixed cost at low activity = $9,000 – $4,480 = $4,520

Total R&M cost = $4,520 + $3.20MH

b. x y xy x2
1,400 $ 9,000 $ 12,600,000 1,960,000
1,900 10,719 20,366,100 3,610,000
2,000 10,900 21,800,000 4,000,000
2,500 13,000 32,500,000 6,250,000
2,200 11,578 25,471,600 4,840,000
2,700 13,154 35,532,000 7,290,000
1,700 9,525 16,192,500 2,890,000
2,300 11,670 26,841,000 5,290,000
16,700 $89,546 $191,303,200 36,130,000
 x = 16,700  8 = 2,087.50
y = $89,546  8 = $11,193.25

b
 xy  n( x)( y )  $191,303,200  8(2,087.50)($11,193.25)  $4,363,400  $3.44
 x  n( x )
2 2
36,130,000  8( 2,087.50)(2,087.50) 1,268,750

a  y  b x  $11,193.25  $3.44( 2,087.50)  $4,012.25

y = $4,012.25 + $3.44MH
d. Part (b) computations provide the better answer. The least squares
regression approach takes into consideration all of the available data
and employs a mathematical algorithm to minimize the variance around
the fitted regression line.

44. a. Precision Motors

Income Statement (Variable)
For the Year Ended December 31, 2009
Sales $1,015,000
Variable Cost of Goods Sold:
Work in Process 1/1/09 46,400
Finished goods 1/1/09 $ 16,950
Manufacturing costs incurred 650,600
Total costs available $713,950
Work in process 12/31/09 (61,900)
Finished goods 12/31/09 (13,180) (638,870)
Product Contribution Margin $ 376,130
Variable Selling Expenses (50,750)
Contribution Margin $ 325,380
Fixed Expenses
Factory overhead $ 42,300
Selling 44,250
Administrative 75,000 (161,550)
Operating Income $ 163,830

Supporting calculations

Variable finished goods inventory at 1/1/09:

Absorption finished goods inventory $18,000
Less fixed overhead (1,050 hours × $1 per hour) (1,050)
Variable finished goods inventory $16,950

Variable work in process inventory at 1/1/09:

Absorption work in process inventory $48,000
Less fixed overhead (1,600 hours × $1 per hour) (1,600)
Variable work in process $46,400
 Variable manufacturing costs incurred during 2009:
Direct material $370,000
Direct labor (23,000 hours × $6 per hour) 138,000
Variable overhead (23,000 hours × $6.20 per hour) 142,600
Variable manufacturing costs $650,600

The direct labor rate is ($150,000 ÷ 25,000 hours) or $6.00 per hour.

The variable overhead rate is ($155,000 ÷ 25,000 hours) or $6.20 per hour.

Variable work in process inventory at 12/31/09:

Absorption work in process inventory $64,000
Less fixed overhead (2,100 hours × $1) (2,100)
Variable work in process inventory $61,900

Variable finished goods inventory at 12/31/09:

Absorption finished goods inventory $14,000
Less fixed overhead (820 hours × $1) (820)
Variable finished goods inventory $13,180

Variable selling expenses = Sales × 5% = $1,015,000 × 5% = $50,750

Fixed selling expenses:

Total selling expenses $95,000
Less variable selling expenses (50,750)
Fixed selling expenses $44,250

b. The difference in the operating income of $270 is caused by the different

treatment of fixed manufacturing overhead. Under absorption costing,
fixed overhead costs are assigned to inventory and are not expensed
until the goods are sold. Under variable costing, these costs are treated
as expenses in the period incurred. Since the direct labor hours in the
work in process and finished goods inventories had a net increase of 270
hours, the absorption costing operating profit is higher because the fixed
factory overhead associated with the increased labor hours in inventory
is not expensed when absorption costing is used.

1/1/09 12/31/09
Inventories Inventories Differences
Work in process 1,600 2,100 500
Finished goods 1,050 820 (230)
Total 2,650 2,920 270

The increase in hours (270) times the fixed overhead rate ($1 per hour)
equals the difference in operating incomes ($270).
c. The main advantage of variable costing is that it reveals the marginal
cost of production. That is, variable costing facilitates making decisions
about pricing, changes in volume and changes in cost structure. Variable
costing also facilitates identification of the break-even point. Further,
variable costing does not lend itself to managerial manipulation of
income. The major disadvantage is that variable costing treats fixed
overhead as a period cost and, therefore may violate the matching
principle if one believes fixed manufacturing overhead is a product cost.