Problem One
Absorption and Variable Costing; CVP Analysis
Hawkesbury Company began operations on January 1 to produce a single product. It used an absorption costing system with a planned production volume of 100,000 units. During its first year of operations, there were no fixed selling or administrative expenses. Inventory on December 31 was 20,000 units, and net income for the year was $480,000.
Required:
1. If Hawkesbury Company had used variable costing, its net income would have been $440,000. Compute the break-even point in units under variable costing.
Variable costing: ONLY include direct materials, direct labour, and variable manufacturing overhead, in the cost of a unit of product
Net Income = 440,000
2. Draw a profit-volume graph for Hawkesbury Company. (Use variable costing.)
Problem Two
Straightforward Problem on Absorption versus Variable Costing (LO 2, 3, 4, 6)
Cow Dippers, Inc. produces non-fat frozen yogurt. The product is sold at wholesale in 10-litre commercial containers, which have the following price and variable costs.
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Sales price
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$30
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Direct material
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10
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Direct labour
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4
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Variable overhead
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6
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Budgeted fixed overhead in 20x4, the company's first year of operations, was $600,000. Actual production was 150,000 10-litre containers, of which 125,000 were sold. Cow Dippers, Inc. incurred the following selling and administrative expenses.
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Fixed
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$100,000 for the year
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Variable
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$2 per container sold
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Required:
1. Compute the product cost per container of frozen yogurt under (a) variable costing and (b) absorption costing.
2. Prepare income statements for 20x4 using (a) absorption costing and (b) variable costing.
3. Reconcile the income reported under the two methods by listing the two key places where the income statements differ.
4. Reconcile the income reported under the two methods using the shortcut method.
Problem Three
Variable and Absorption Costing (LO 4, 6)
Bright Lighting Company had net income for the first 10 months of the current year of $300,000. One hundred thousand units were manufactured during this period, and 100,000 units were sold. Fixed manufacturing overhead was $3,000,000 over the 10-month period (i.e., $300,000 per month). There are no selling and administrative expenses for Bright Lighting Company. Both variable and fixed costs are expected to continue at the same rates for the balance of the year (i.e., fixed costs at $300,000 per month and variable costs at the same variable cost per unit). There were 10,000 units in inventory on October 31. Twenty thousand units are to be produced and 19,000 units are to be sold in total over the last two months of the current year. Assume the unit variable cost is the same in the current year as in the previous year. (Hint: You cannot calculate revenue or cost of goods sold; you must work directly with contribution margin or gross margin.)
Required:
1. If operations proceed as described, will net income be higher under variable or absorption costing for the current year in total? Why?
2. If operations proceed as described, what will net income for the year in total be under (a) variable costing and (b) absorption costing? (Ignore income taxes.)
3. Discuss the advantages and disadvantages of absorption and variable costing.