ADMS 2510 Managerial Accounting Chapter 8-online quiz - All Answers are Correct

Question 1 Sunrise Pools and Spas manufactures fibreglass forms for in-ground pools and swim spas for all-season use. The company uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. The company has provided the data for their swim spa business in years 1, 2, and 3 shown below. The company’s fixed manufacturing overhead per unit was constant at $4,000 for all three years: Year 1 Year 2 Year 3 Inventories: Beginning (units) Ending (units) Variable costing operating income $ 293,90 0 $ 270,70 0 $ 253,30 0 Required: 1. Determine each year’s absorption costing operating income. Present your answer in the form of a reconciliation report. 2- a. In year 4, the company’s variable costing operating income was $255,200 and its absorption costing operating income was $278,700. Did inventories increase or decrease during year 4? Increase 2- b. How much fixed manufacturing overhead cost was deferred or released from inventory during year 4? Explanation: 1. Year 1 Year 2 Year 3 Beginning inventories (units) Ending inventories (units) Change in inventories (units) 70 (60) 55 Variable costing operating income $ 293,900 $ 270,700 $253,300 Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing (70 units × $4,000 per unit; 55 units × $4,000 per 280,000 220,000 unit) Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing (60 units × $4,000 per unit) (240,000) Absorption costing operating income $ 573,900 $ 30,700 $473,300 2. Because absorption costing operating income was less than variable costing operating income in Year 4, inventories must have increased during the year and hence fixed manufacturing overhead was deferred in inventories. The amount deferred is just the difference between the two operating incomes or − $23,500 = $255,200 − $278,700. Note: Using the change in inventory to do reconciliation is easy when production levels remain the same from year to year but students should be cautioned that when production levels change, so do fixed overhead costs per unit and you then must calculate overhead costs released and deferred in inventories separately. Question 2 Baxtell Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations: Variable costs per unit: Manufacturing: Direct materials $ 45 Direct labour 13 Variable manufacturing overhead 4 Variable selling and administrative 6 Fixed costs per year: Fixed manufacturing overhead 375,00 0 Fixed selling and administrative expense 238,50 0 During the year, the company produced 31,250 units and sold 26,500 units. The selling price of the company’s product is $94 per unit. Required: 1. Assume that the company uses absorption costing. a. Compute the unit product cost. b. Prepare an income statement for the year. 2. Assume that the company uses variable costing. a. Compute the unit product cost. b. Prepare an income statement for the year. Explanation: 1. a. The unit product cost under absorption costing would be: Direct materials $ 45 Direct labour 13 Variable manufacturing overhead 4 Total variable manufacturing costs 62 Fixed manufacturing overhead ($375,000 ÷ 31,250 units) 12 Unit product cost $ 74 b. The absorption costing income statement: Sales: (26,500 units × $94 per unit) = $2,491,000 Add cost of goods manufactured: (31,250 units × $74 per unit) = $2,312,500 Less ending inventory: (4,750 units × $74 per unit) = $351,500 Selling and administrative expenses: (26,500 units × $6 per unit) + $238,500 = $397,500. 2. a. The unit product cost under variable costing would be: Direct materials $ 45 Direct labour 13 Variable manufacturing overhead 4 Unit product cost $ 62 b. The variable costing income statement: Sales: (26,500 units × $94 per unit) = $2,491,000 Add variable manufacturing costs: (31,250 units × $62 per unit) = $1,937,500 Less ending inventory: (4,750 units × $62 per unit) = $294,500 Variable selling expense: (26,500 units × $6 per unit) = $159,000 Variable cost of goods sold: The variable cost of goods sold could be computed more simply as: 26,500 units × $62 per unit = $1,643,000. Question 3 Bharat Bicycle, located in India, produces an inexpensive yet rugged bicycle for use on crowded city streets. The company sells the bicycle for 630 rupees. (Indian currency is denominated in rupees, denoted by R.) Selected data for the company’s operations last year follow: Units in beginning inventory 0 Units produced 13,000 Units sold 11,600 Units in ending inventory 1,400 Variable costs per unit: Direct materials R 189 Direct labour R 164 Variable manufacturing overhead R 70 Variable selling and administrative R 44 Fixed costs: Fixed manufacturing overhead R 975,00 0 Fixed selling and administrative R 650,00 0 An absorption costing income statement prepared by the company’s accountant appears below: Sales (11,600 units × R630 per unit) R 7,308,000 Cost of goods sold: Beginning inventory R 0 Add cost of goods manufactured (13,000 units × R ?per unit) 6,474,000 Goods available for sale 6,474,000 Less ending inventory (1,400 units × R ?per unit) 697,200 5,776,800 Gross margin 1,531,200 Selling and administrative expenses: Variable selling and administrative 510,400 Fixed selling and administrative 650,000 1,160,400 Operating income R 370,800 Required: 1. Determine how much of the ending inventory of R697,200 above consists of fixed manufacturing overhead cost deferred in inventory to the next period. 2. Prepare an income statement for the year using the variable costing method. Explanation: 1. 1,400 units × R75 per unit fixed manufacturing overhead = R105,000 2. Add variable manufacturing costs: (13,000 units × R423 per unit) = R5,499,000 Less ending inventory: (1,400 units × R423 per unit) = R592,200 Variable cost of goods sold: The variable cost of goods sold could be computed more simply as: 11,600 units sold × R423 per unit = R4,906,800. Variable selling and administrative: (11,600 units × R44 per unit) = R510,400 The difference in operating income between variable and absorption costing can be explained by the deferral of fixed manufacturing overhead cost in inventory that has taken place under the absorption costing approach. Note from part (1) that R105,000 of fixed manufacturing overhead cost has been deferred in inventory to the next period. Thus, operating income under the absorption costing approach is R105,000 higher than it is under variable costing. Question 4 Canada Brewers Ltd. has just created a new division to manufacture and sell single-cup coffee makers under licence from a major single-cup coffee producer. The facility is highly automated and so has high monthly fixed costs, as shown in the following schedule of budgeted monthly costs. This schedule was prepared based on an expectation of a monthly product