# Week 3 absorption cost | Accounting homework help

Week 3 ABSORPTION COST

PROBLEMS 5-17 Nickelson Company

PROBLEM 5-21 Linden Company

PROBLEM 5-22 SANDI SCOTT

P6-16 AnimPix, Inc.

P6-17 Precision Manufacturing Inc

P6-18 Rocky mountain corporation

PROBLEMS 5-17 Nickelson Company
Variable and Absorption Costing Unit Product Costs and Income Statements
P5-17 Nickleson Company manufactures and sells one product. The following information
pertains to each of the company’s first three years of operation:
Variable costs per unit:
Manufacturing:
Direct materials ……………………………………. \$ 25
Direct labor …………………………………………… \$16
Fixed costs per year:
Fixed manufacturing overhead…………………….. \$ 300, 000
Fixed selling and administrative expenses……. \$ 180, 000

During its first year of operations Nickelson produced 60, 000 units and sold 60,000 units.
During its second year of operations it produced 75, 000 units and sold 50,000 units.
In its third year, Nickelson produced 40, 000 units and sold 65, 000 units. The selling
price of the company’s product is \$ 56 per unit.

REQUIRED:
1. Compute the company’s break-even-point in units sold.
2. Assume the company uses variable costing:
a. Compute the unit product cost for year 1, year 2, and year 3.
b. Prepare an Income statement for year 1, year, 2, and year 3.
3. Assume the company uses absorption costing:
a. Compute the unit product cost for year 1, year 2, and year 3.
b. Prepare an income statement for year 1, year 2, and year 3.
4. Compare the net operating income figures that you computed in requirements 2
and 3 to the break-even point that you computed in requirement 1 . Which net operating income figure seem counterintuitive? Why?

PROBLEM 5-21 Prepare and Reconcile Variable Costing Statements (LO 5-1, LO 5-2, LO 5-3)
P5-21 Linden Company manufactures and sells a single product. Cost data for the product follow:
Variable costs per unit:
Direct materials……………………………………………. \$ 6
Direct labor …………………………………………………. 12
Total variable costs per unit……………………………………. \$ 25
Fixed costs per month :
Fixed manufacturing overhead …………………….. \$ 240, 000
Fixed selling and administrative ……………………. \$ 180, 000
Total fixed cost per month ………………………………………. \$ 420, 000
The product sells for \$40 per unit. Production and sales data for May and June, the first two
months of operation, are as follows:
Units Units
Produced Sold
May……………………… 30, 000 26, 000
June……………………..30, 000 34, 000
Income statements prepared by the accounting department, using absorption costing, are
presented below:
May June
Sales………………………………………………………. \$ 1, 040, 000 \$ 1, 360, 000
Cost of goods sold…………………………………..780, 000 1, 020, 000
Gross margin………………………………………….260, 000 340, 000
Selling and administrative expense………. 260, 000 282, 000
Net operating income…………………………… \$2, 000 \$ 58, 000

REQUIRED:
1. Determine the unit product cost under:
a. Absorption costing
b. Variable costing
2. Prepare contribution formal variable costing income statements for May and June.
3. Reconcile the variable costing and absorption costing net operating incomes.
4. The company’s Accounting Department has determined the break-even point to be
28,000 units per month, computed as follows:
Fixed cost per month = \$ 420,000       = 28,000 units
Unit contribution margin          \$ 15 per unit
Upon receiving this figure, the president commented. “There’s something peculiar here. The controller says that the break-even point is 28,000 units per month. Yet we sold only 26, 000 units in May, and the income statement we received showed a \$ 2, 000 profit. Which figure do we believe?” Prepare a brief explanation of what happened on the May income statement.

PROBLEM 5-22 SANDI SCOTT
Absorption and Variable Costing: Production Constant, Sales Fluctuate (LO 5-1, LO 5-2, LO 5-3)

P5-22 Sandi Scott obtained a patent on a small electronic device and organized Scott Products, Inc. to
produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to healthy profit. For this reason, she was surprised to see a loss for the month on her income statement.

This statement was prepared by her accounting service which takes great pride in providing its
timely financial data. The statement follows:
Scott Products, Inc.
Income Statement
Sales (40,000 units)……………………………………                                                 \$200, 000
Variable expenses
Variable cost of goods sold……………………………….                   \$ 80,000
Variable selling and administrative expenses …                                              30,000                 110, 000
Contribution margin…………………………………………                                                           90, 000

Fixed expenses
Fixed manufacturing overhead ……………………….                                    75, 000
Fixed selling and administrative expenses……….                               20, 000                              95, 000
Net operating loss …………………………………………                                                \$ (5,000)

Ms. Scott is discouraged over the loss for the month because she had planned to use the
statement to encourage investors to purchase stock in the new company. A friend who is a CPA,
insists that the company should be using absorption costing rather than variable costing. He
argues that if absorption costing had been used, the company would have reported a profit for
the month.
Selected cost data relating to the product and to the first month of operation follow:
Units produced ……………………………………………………………………… 50, 000
Units sold ………………………………………………………………………………. 40, 000
Variable cost per unit:
Direct materials………………………………………………………… \$ 1.00
Direct labor …………………………………………………………..…. \$ 0.80
Variable manufacturing overhead …………………………… \$ 0.20
Variable selling and administrative expenses………….. \$0.75

REQUIRED:

also does realistic computer animation for special effect in movies.
1. Complete the following:
a. Complete the product cost under absorption cost.
b. Redo the company’s income for the month using the absorption costing.
c. Reconcile the variable and absorption costing net operating income (loss) figures.
2. Was the CPA correct in suggesting that the company really earned a “profit” for the month?
Explain?
3. During the second month of operations, the company again produced 50,000 units but sold 60,000 units (Assume no change in total fixed costs).
a. Prepare a contribution format income statement for the month using variable costing.
b. Prepare an income statement for the month using the absorption costing.
c. Reconcile the variable costing net operating incomes.

PROBLEM 6-16 Second – Stage Allocation and Product Margins (LO 6-4, LO 6-5)

P6-16 AnimPix, Inc. is a small company that creates computer-generated animation for films and television. Much of the company’s work consists of short commercials for television, but the company The young founders of the company have become increasingly concerned with the economics of the business-particularly because many competitors have sprung up recently in the local area.

To help understand the company’s cost-structure, an activity-based costing system has been designed.
Three major activities carried out in the company; animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company bids on the projects. This is an intensive activity that involves individuals from all parts of the company in creating storyboards and prototype stills to be shown to the prospective client. After the client has accepted a project, the animation goes into production and contract administration begins. Technical staff do almost all the work involved in animation production, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measure and rates are listed below:

Activity Cost Pool                                Activity Measure                     Activity Rate
Animation concept………………… Number of proposals                  \$ 6, 000 per proposal
Animation production……………. Minutes of animation                   \$ 7, 700 per minute of animation
Contract administration………… Number of contracts                                   \$ 6, 600 per contract

These activity rates include all of the costs of the company, except for the costs of idle capacity and re-organization-sustaining costs. There are no direct labor or indirect materials costs.
Preliminary analysis using these activity rates has indicated that the local commercials segment of the market maybe unprofitable. This segment is higly competitive.

Producers of local commercials may ask several companies like Anim Pix to bid which results in an unusually low ratio of accepted contracts to bids.
Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Because animation work is billed at standard rates according to the running time of the completed animation, the revenues from these short projects tend to be below average. Data concerning activity in the local commercials market appear below:
Local               Activity Measure Commercials
Number of proposals ……………………..20
Minutes of animation …………………….12
Number of contracts ………………………8
The total sales for local commercials amounted to \$240,000.

REQUIRED:
1. Determined the cost of serving the local commercial market.
2. Prepare a report showing the margin earned serving the local commercial market.
(Remember, this company has no direct materials or direct labor costs.)
3. What would you recommend to management concerning the local commercial market?

PROBLEM 6-17 Precision Manufacturing , Inc.
Comparing Traditional and Activity – Based Product Margins (LO 6-1, LO 6-3)

P6-17 Precision Manufacturing Inc. (PMI) makes two type of industrial component parts – the
EX300 and the TX500. An absorption costing income statement for the most recent
period is shown below:

Precision Manufacturing Inc.
Income Statement
Sales ……………………………………………………….. \$ 1, 700, 000
Cost of goods sold……………………………………1, 200, 000
Gross margin……………………………………………500, 000
Net operating loss ………………………………….. \$( 50, 000)
PMI produced and sold 60,000 units of EX300 at a price of \$20 per unit and 12, 500 units of TX500 at a price of \$40 per unit. The company’s traditional cost system allocated manufacturing overhead to products using a plantwide overhead rate and direct labor dollar as the allocation base. Additional information relating to the company’s two product lines is shown below:
EX300                         TX500                         Total
Direct materials…………………         \$ 366, 325       \$ 162, 550       \$ 528, 875
Direct labor……………………….       \$ 120, 000       \$ 42, 500         162, 500
Cost of goods sold……………..                                                                      \$ 1, 200,000

The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that \$50,000 and \$100,000 of the company’s advertising expenses could directly traced to EX300 and TX500, respectively. The remainder of the selling and administrative expenses was organization – sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:
Activity

Manufacturing
Activity cost Pool (and activity measure)         Overhead         EX 300                        TX 500                        Total

Machining (machine-hours)…………………   \$198, 250        90,000                        62,500             152,500
Setups (setup hours)……………………………  150, 000       75                    300                  375
Product-sustaining costs……………………… 100, 000          1                      1                      2
Other ( organization-sustaining costs)              60, 375                        NA                   NA                   NA

Total manufacturing overhead cost……..        \$ 508, 625

REQUIRED:
1. Using Exhibit 6-12 as a guide, compute the product margins for the EX300 and TX500 under the company’s traditional costing system.
2. Using Exhibit 6-10 as a guide, compute the product margins for EX300 and TX500 under the activity-based costing system.
3. Using Exhibit 6-13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity – based cost assignments differ.

PROBLEM 6-18 Comparing Traditional and Activity-Based Product Margin (LO 61, LO 6-3,
LO 6-4, LO 6-5).

Rocky mountain corporation makes two types of hiking boots – Xactive and the Pathbreaker . Data concerning these two product lines appear below:
Xactive            Pathbreaker
Selling price per unit…………………………………………… \$ 127. 00                    \$89. 00
Direct materials per unit……………………………………..    64. 80              51.00
Direct labor per unit ……………………………………………  18. 20                        13.00
Direct labor hours per unit …………………………………     1. 4 DLHs        1.0 DLHs
Estimated annual production and sales………………              25, 000 units    75,000 units
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:
Estimated total manufacturing overhead……………………….. \$2, 200, 000
Estimated total direct labor-hours ………………………………….110, 000 DLHs

REQUIRED:
1. Using Exhibit 6-12 as a guide, compute the product margins for the Xactive and the Path breaker products under the company’s traditional costing system.
2. The company I considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (Other cost pool includes organizationsustaining costs and idle capacity costs):

Estimated         Expected Activity
Activities and Activity Measures              Overhead cost         Xactive                        Pathbreaker      Total
Supporting direct labor (direct labor-hours)       \$ 797, 500     35,000             75,000              110, 000
Batch setups (setups)……………………         680, 000          250                  150                    400
Batch setups…………………………               650, 000          1                      1                      2
Other……………………………………………72, 500                        NA                   NA                   NA
Total manufacturing overhead cost………….. \$2, 200, 000

Using Exhibit 6-10 as a guide, compute the product margins for the Xactive and the Path-breaker products under the activity-based costing system.
3. Using Exhibit 6-13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignment. Explain why the traditional and activity-based cost assignments differ.

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