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STRATEGIC COST MANAGEMENT - Solutions Manual

CHAPTER 10 VARIABLE COSTING: A TOOL FOR EVALUATING MANAGEMENT PERFORMANCE

Answer to Questions 1. The variable costing technique does not consider fixed costs as unimportant or irrelevant, but it maintains that the distinction between behaviors of different costs is crucial for certain decisions. 2. The central issue in variable costing is what is the proper timing for release of fixed manufacturing overhead as expense: at the time of incurrence, or at the time the finished units to which the fixed overhead relates are sold. 3. Direct costing would be more accurately called variable or marginal costing because in substance it is the inventory costing method which applies only variable production costs to product; fixed factory overhead is not assigned to product. 4. Marketing and administrative costs are treated as period costs under both variable costing and absorption costing methods of product costing. 5. Under absorption costing, as a company manufactures units of product, the fixed manufacturing overhead costs of the period are added to the units, along with direct materials, direct labor, and variable manufacturing overhead. If some of these units are not sold by the end of the period, then they are carried into the next period as inventory. The fixed manufacturing overhead cost attached to the units in ending inventory follow the units into the next period as part of their inventory cost. When the units carried over as inventory are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period’s cost of goods sold. 6. Many accountants and managers believe absorption costing does a better job of matching costs with revenues than variable costing. They argue that all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues from the units when they are sold. They believe that the fixed costs of depreciation, taxes, insurance, supervisory salaries, and so on, are just as essential to manufacturing products as are the variable costs. 7. If fixed manufacturing overhead cost is released from inventory, then inventory levels must have decreased and therefore production must have been less than sales. 8. Under absorption costing it is possible to increase net operating income without increasing sales by increasing the level of production. If production exceeds sales, units of product are added to inventory. These units carry a portion of the current period’s fixed manufacturing overhead costs into the inventory account, thereby reducing the current period’s reported expenses and causing net operating income to rise. 9. Generally speaking, variable costing cannot be used externally for financial reporting purposes nor can it be used for tax purposes. 10. If production exceeds sales, absorption costing will show higher net operating income than variable costing. The reason is that inventories will increase and therefore part of the fixed manufacturing overhead cost of the current period will be deferred in inventory to the next period under absorption costing. By contrast, all of the fixed manufacturing overhead cost of the current period will be charged immediately against revenues as a period cost under variable costing.

10-1

Exercises Exercise 1 (Variable and Absorption Costing Unit Product Costs and Income Statements) Requirement 1 a. The unit product cost under absorption costing would be: Di r e c t ma t e r i a l s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Di r e c t l a b o r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Va r i a b l ema n u f a c t u r i n go v e r h e a d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T o t a l v a r i a b l ema n u f a c t u r i n gc o s t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fi x e dma n u f a c t u r i n go v e r h e a d( P1 6 0 , 0 0 0÷2 0 , 0 0 0u n i t s ) . . . . . . . . . . . . . . . . . . . . Un i t p r o d u c t c o s t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1 8 7 2 2 7 8 P3 5

b. The absorption costing income statement: Sa l e s( 1 6 , 0 0 0u n i t s×P5 0p e ru n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s sc o s t o f g o o d ss o l d : Be g i n n i n gi n v e n t o r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ad dc o s t o f g o o d sma n u f a c t u r e d ( 2 0 , 0 0 0u n i t s×P3 5p e ru n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Go o d sa v a i l a b l ef o r s a l e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s se n d i n gi n v e n t o r y ( 4 , 0 0 0u n i t s×P3 5p e r u n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gr o s sma r g i n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s ss e l l i n ga n da d mi n i s t r a t i v ee x p e n s e s . . . . . . . . . . . . . . . . . . . . . . . Ne t o p e r a t i n gi n c o me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P8 0 0 , 0 0 0 P

0

7 0 0 , 0 0 0 7 0 0 , 0 0 0 1 4 0 , 0 0 0 5 6 0 , 0 0 0 2 4 0 , 0 0 0 1 9 0 , 0 0 0 * P5 0 , 0 0 0

*(16,000 units × P5 per unit) + P110,000 = P190,000. Requirement 2 a. The unit product cost under variable costing would be: Di r e c t ma t e r i a l s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1 8 Di r e c t l a b o r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Va r i a b l ema n u f a c t u r i n go v e r h e a d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Un i t p r o d u c t c o s t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2 7 b. The variable costing income statement: Sa l e s( 1 6 , 0 0 0u n i t s×P5 0p e ru n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s sv a r i a b l ee x p e n s e s : Va r i a b l ec o s t o f g o o d ss o l d : Be g i n n i n gi n v e n t o r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ad dv a r i a b l ema n u f a c t u r i n gc o s t s ( 2 0 , 0 0 0u n i t s×P2 7p e ru n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Go o d sa v a i l a b l ef o r s a l e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s se n d i n gi n v e n t o r y ( 4 , 0 0 0u n i t s×P2 7p e r u n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10-2

P8 0 0 , 0 0 0

P

0

5 4 0 , 0 0 0 5 4 0 , 0 0 0 1 0 8 , 0 0 0

Va r i a b l ec o s t o f g o o d ss o l d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Va r i a b l es e l l i n ge x p e n s e ( 1 6 , 0 0 0u n i t s×P5p e r u n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Co n t r i b u t i o nma r g i n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s sfi x e de x p e n s e s : Fi x e dma n u f a c t u r i n go v e r h e a d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fi x e ds e l l i n ga n da d mi n i s t r a t i v e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ne t o p e r a t i n gi n c o me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 3 2 , 0 0 0* 8 0 , 0 0 0

1 6 0 , 0 0 0 1 1 0 , 0 0 0

5 1 2 , 0 0 0 2 8 8 , 0 0 0

2 7 0 , 0 0 0 P1 8 , 0 0 0

* The variable cost of goods sold could be computed more simply as: 16,000 units × P27 per unit = P432,000. Exercise 2 (Variable and Absorption Costing Unit Product Costs) Requirement 1 Sa l e s( 4 0 , 0 0 0u n i t s×P3 3 . 7 5p e r u n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s sv a r i a b l ee x p e n s e s : Va r i a b l ec o s t o f g o o d ss o l d ( 4 0 , 0 0 0u n i t s×P1 6p e ru n i t * ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Va r i a b l es e l l i n ga n da d mi n i s t r a t i v ee x p e n s e s ( 4 0 , 0 0 0u n i t s×P3p e r u n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Co n t r i b u t i o nma r g i n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s sfi x e de x p e n s e s : Fi x e dma n u f a c t u r i n go v e r h e a d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fi x e ds e l l i n ga n da d mi n i s t r a t i v ee x p e n s e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ne t o p e r a t i n gi n c o me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * Di r e c t ma t e r i a l s Di r e c t l a b o r Va r i a b l ema n u f a c t u r i n go v e r h e a d T o t a l v a r i a b l ema n u f a c t u r i n gc o s t

P1 , 3 5 0 , 0 0 0

P6 4 0 , 0 0 0 1 2 0 , 0 0 0

2 5 0 , 0 0 0 3 0 0 , 0 0 0

7 6 0 , 0 0 0 5 9 0 , 0 0 0

5 5 0 , 0 0 0 P 4 0 , 0 0 0

P1 0 4 2 P1 6

Requirement 2 The difference in net operating income can be explained by the P50,000 in fixed manufacturing overhead deferred in inventory under the absorption costing method: Va r i a b l ec o s t i n gn e t o p e r a t i n gi n c o me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ad d : Fi x e dma n u f a c t u r i n go v e r h e a dc o s t d e f e r r e di ni n v e n t o r yu n d e ra b s o r p t i o n c o s t i n g: 1 0 , 0 0 0u n i t s×P5p e ru n i t i nfi x e d ma n u f a c t u r i n go v e r h e a dc o s t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ab s o r p t i o nc o s t i n gn e t o p e r a t i n gi n c o me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10-3

P4 0 , 0 0 0

5 0 , 0 0 0 P9 0 , 0 0 0

Exercise 3 (Variable Costing Unit Product Cost and Income Statement; Break-even) Requirement 1 Under variable costing, only the variable manufacturing costs are included in product costs. Di r e c t ma t e r i a l s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Di r e c t l a b o r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Va r i a b l ema n u f a c t u r i n go v e r h e a d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Un i t p r o d u c t c o s t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P  6 0 0 3 0 0 1 0 0 P1 , 0 0 0

Note that selling and administrative expenses are not treated as product costs; that is, they are not included in the costs that are inventoried. These expenses are always treated as period costs and are charged against the current period’s revenue. Requirement 2 The variable costing income statement appears below: Sa l e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s sv a r i a b l ee x p e n s e s : Va r i a b l ec o s t o f g o o d ss o l d : Be g i n n i n gi n v e n t o r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ad dv a r i a b l ema n u f a c t u r i n gc o s t s ( 1 0 , 0 0 0u n i t s×P1 , 0 0 0p e ru n i t ) . . . . . . . . . . . . . . . . . . . . . . . . Go o d sa v a i l a b l ef o r s a l e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s se n d i n gi n v e n t o r y( 1 , 0 0 0u n i t s×P1 , 0 0 0 p e r u n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Va r i a b l ec o s t o f g o o d ss o l d * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Va r i a b l es e l l i n ga n da d mi n i s t r a t i v e( 9 , 0 0 0u n i t s× P2 0 0p e ru n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Co n t r i b u t i o nma r g i n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s sfi x e de x p e n s e s : Fi x e dma n u f a c t u r i n go v e r h e a d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fi x e ds e l l i n ga n da d mi n i s t r a t i v e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ne t o p e r a t i n gl o s s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1 8 , 0 0 0 , 0 0 0

P

0

1 0 , 0 0 0 , 0 0 0 1 0 , 0 0 0 , 0 0 0 1 , 0 0 0 , 0 0 0 9 , 0 0 0 , 0 0 0 1 , 8 0 0 , 0 0 0 1 0 , 8 0 0 , 0 0 0 7 , 2 0 0 , 0 0 0 3 , 0 0 0 , 0 0 0 4 , 5 0 0 , 0 0 0

7 , 5 0 0 , 0 0 0 P( 3 0 0 , 0 0 0 )

* The variable cost of goods sold could be computed more simply as: 9,000 units sold × P1,000 per unit = P9,000,000.

Requirement 3 The break-even point in units sold can be computed using the contribution margin per unit as follows: Se l l i n gp r i c ep e ru n i t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P . . 2 . . , . 0 . . 0 . . 0 . . . . . . . . Va r i a b l ec o s t p e ru n i t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 . . , . 2 . . 0 . . 0 . . . . . . . . Co n t r i b u t i o nma r g i np e ru n i t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P . .   . . 8 . . 0 . . 0 . . . . . . . . Break-even unit sales

=

Fixed expenses Unit contribution margin

=

P7,500,000 P800 per unit

=

9,375 units 10-4

Exercise 4 (Absorption Costing Unit Product Cost and Income Statement) Requirement 1 Under absorption costing, all manufacturing costs (variable and fixed) are included in product costs. Di r e c t ma t e r i a l s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Di r e c t l a b o r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Va r i a b l ema n u f a c t u r i n go v e r h e a d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fi x e dma n u f a c t u r i n go v e r h e a d( P3 , 0 0 0 , 0 0 0÷1 0 , 0 0 0u n i t s ) . . . . . . . Un i t p r o d u c t c o s t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P  6 0 0 3 0 0 1 0 0 3 0 0 P1 , 3 0 0

Requirement 2 The absorption costing income statement appears below: Sa l e s( 9 , 0 0 0u n i t s×P2 , 0 0 0p e r u n i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Co s t o f g o o d ss o l d : Be g i n n i n gi n v e n t o r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ad dc o s t o f g o o d sma n u f a c t u r e d( 1 0 , 0 0 0u n i t s×P1 , 3 0 0p e r u n i t ) Go o d sa v a i l a b l ef o r s a l e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s se n d i n gi n v e n t o r y( 1 , 0 0 0u n i t s×P1 , 3 0 0p e r u n i t ) . . . . . . . . . . . . . . . Gr o s sma r g i n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Se l l i n ga n da d mi n i s t r a t i v ee x p e n s e s : Va r i a b l es e l l i n ga n da d mi n i s t r a t i v e( 9 , 0 0 0u n i t s×P2 0 0p e r u n i t ) Fi x e ds e l l i n ga n da d mi n i s t r a t i v e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ne t o p e r a t i n gi n c o me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1 8 , 0 0 0 , 0 0 0 P 0 1 3 , 0 0 0 , 0 0 0 1 3 , 0 0 0 , 0 0 0 1 , 3 0 0 , 0 0 0

1 , 8 0 0 , 0 0 0 4 , 5 0 0 , 0 0 0

1 1 , 7 0 0 , 0 0 0 6 , 3 0 0 , 0 0 0

6 , 3 0 0 , 0 0 0 P 0

Note: The company apparently has exactly zero net operating income even though its sales are below the break-even point computed in Exercise 3. This occurs because P300,000 of fixed manufacturing overhead has been deferred in inventory and does not appear on the income statement prepared using absorption costing. Exercise 5 (Variable Costing Income Statement; Explanation of Difference in Net Operating Income) Requirement 1 2,000 units × P60 per unit fixed manufacturing overhead = P120,000

Requirement 2

10-5

The variable costing income statement appears below: Sa l e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Va r i a b l ee x p e n s e s : Va r i a b l ec o s t o f g o o d ss o l d : Be g i n n i n gi n v e n t o r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ad dv a r i a b l ema n u f a c t u r i n gc o s t s( 1 0 , 0 0 0u n i t s×P3 1 0p e r u n i t ) Go o d sa v a i l a b l ef o r s a l e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L e s se n d i n gi n v e n t o r y...