Chapter: 8

1.
a. Inventory decreases by 5,000 units, so operating income is greater under variable costing.

b. Fixed overhead rate per unit = $13,000,000 / 24,000 = $541.67

Difference in reported operating income $541.67 5,000 = $2,708,350

2.
a. Inventory remains unchanged, so there is no difference in reported income under the two methods of
product costing.

b. No difference.

3.
a. Inventory increases by 3,200 units, so operating income is greater under absorption costing.

b. Fixed overhead rate per unit = $13,000,000 / 14,000 = $928.57

Difference in reported operating income = $928.57 3,200 = $2,971,424

2. Calculation of break-even point:

fixed cost
Break-even point =
unit contribution margin

$12,900,000
=
$3,650 $2,900

17,200 units
=
3. Inventory calculations (units):

Finished-goods inventory, January

4,400 units
1
Add: Units produced 18,200
Less: Units sold 21,600

Finished-goods inventory,
1,000 units
December 31

Change in units:
Finished goods inventory, January 1 4,400 units
Less: Finished goods inventory, December
1,000
31

Change in inventory units 3,400 units

1.
Variable costing:

Inventoriable costs under variable costing:

Direct
material $ 560,560
used
Direct
labor 269,360
incurred
Variable
manufactur
191,100
ing
overhead

Total $ 1,021,020

Cost per unit produced = $1,021,020/18,200 units = $56.10 per unit

Ending inventory: 1,000 units $56.10 per unit = $56,100

2.

Absorption costing:

Predetermined fixed-overhead rate

fixed manufacturing overhead $389,480

= =
planned production 18,200 units

= $21.40 per unit

Difference in fixed
overhead expensed under = (change in inventory in units) (predetermined fixed-overhead rate)
absorption and variable costing

= (3,400 units) ($21.40 per unit)

= $72,760

Difference in reported operating income:

Since inventory decreased during the year, operating income reported under absorption costing will be
$72,760 lower than income reported under variable costing.

4. 1.
a. Inventory decreases by 3,600 units, so operating income is greater under variable costing.
b. Fixed overhead rate per unit = $3,520,000 / 20,000 = $176

Difference in reported operating income = $176 3,600 = $633,600

2.
a. Inventory remains unchanged, so there is no difference in reported income under the two methods
of product costing.

b. No difference.

3.
a. Inventory increases by 1,400 units, so operating income is greater under absorption costing.

Fixed overhead rate per unit = $3,520,000 / 11,000 = $320

Difference in reported operating income = $320 1,400 = $448,000

5. 1.
Inventoriable costs under absorption costing:

Direct material used $280,000

Direct labor 134,400
Variable manufacturing overhead 68,000
Fixed manufacturing overhead 108,000

Total $590,400

2.
Inventoriable costs under variable costing:

Direct material used $280,000

Direct labor 134,400
Variable manufacturing overhead 68,000

Total $482,400

6.
Inventory calculations (units):

Finished-goods inventory, January

0 units
1
Add: Units produced 21,200
Less: Units sold 19,800

Finished-goods inventory, 1,400 units

December 31

1.
Variable costing:

Inventoriable costs under variable costing:

Direct
material $ 648,720
used
Direct
labor 311,640
incurred
Variable
manufactur
203,520
ing
overhead

Total $ 1,163,880

Cost per unit produced = $1,163,880/21,200 units = $54.90 per unit

Ending inventory: 1,400 units $54.90 per unit = $76,860

2.

Absorption costing:

Predetermined fixed-overhead rate

fixed manufacturing overhead $455,800

= =
planned production 21,200 units

= $21.50 per unit

Difference in fixed
overhead expensed under = (change in inventory in units) (predetermined fixed-overhead rate)
absorption and variable costing

= (1,400 units) ($21.50 per unit)

= $30,100

Difference in reported income:

Since units of inventory increased during the year, operating income reported under absorption costing
will be $30,100 higher than that reported under variable costing.

7. 1.
Inventoriable costs under variable costing:

Direct material used $217,000

Direct labor 81,200
Variable manufacturing overhead 42,000

Total $340,200

2.
Inventoriable costs under absorption costing:

Direct material used $217,000

Direct labor 81,200
Variable manufacturing overhead 42,000
Fixed manufacturing overhead 70,000

Total $410,200

8. 1.
Cost per unit:
Absorption Variable
Costing Costing
Direct material $18.10 $18.10
Direct labor 10.10 10.10
Manufacturing overhead
Variable 7.30 7.30

Fixed ($187,200 26,000) 7.20

Total absorption cost per unit $42.70

Total variable cost per unit $35.50

2.
a.
Sales revenue (at $65.90 per unit) = $1,522,290
Cost of goods sold (at absorption cost of $42.70 per unit) = $986,370.00
Variable selling and adminstrative costs (at $1.90 per unit) = $43,890

b.
Sales revenue (at $65.90 per unit) = $1,522,290
Variable manufacturing costs (at variable cost of $35.50 per unit) = $820,050.00
Variable selling and administrative costs (at $1.90 per unit) = $43,890

9.
4. Is the company "investing its quality expenditures differently for the two machines.

Yes

Explanation:
2.
Sales revenue:
$29,200 120 = $3,504,000

Reliability engineering:
1,560 hours $70 = $109,200

Appraisal (inspection):
260 hours $45 = $11,700

Internal failure (rework at ITI):

120 units 30% $1,860 = $66,960

Warranty costs:
120 units 60% $820 = $59,040

3.
Sales revenue:
$25,900 160 = $4,144,000

Reliability engineering:
1,960 hours $70 = $137,200

Appraisal (inspection):
420 hours $45 = $18,900

Internal failure (rework at ITI):

160 units 25% $1,560 = $62,400

Warranty costs:
160 units 10% $310 = $4,960

4.
Yes, the company is "investing" its quality expenditures differently for the two machines. ITI is spending
more up-front on no. 172 with respect to prevention and appraisal-almost 71% of the total quality
expenditures. (This figure is approximately 50% for no. 165.) The operating result is lower internal and
external failure costs and, perhaps more important, lower total quality costs as a percentage of sales
(6.90% for no. 172 and 8.80% for no. 165).