Chapter 19: Problem Set B

Let’s work through these problems step-by-step, focusing on creating income statements under variable costing and converting variable costing to absorption costing. Problem 19-1B: Variable Costing Income Statement Objective: Prepare income statements under variable costing for both years. Step 1: Identify Costs • • • Variable Costs per Unit: o Direct Materials o Direct Labor o Variable Manufacturing Overhead Fixed Costs: o Fixed Manufacturing Overhead o Fixed Selling & Administrative Expenses Selling & Administrative Expenses: o Separate into variable and fixed components. Step 2: Determine Total Variable Cost per Unit Add up all variable costs per unit, which include direct materials, direct labor, variable manufacturing overhead, and variable selling & administrative expenses per unit. Step 3: Prepare the Variable Costing Income Statement • • • • • • Sales Revenue = Units Sold × Selling Price per Unit Variable Cost of Goods Sold (COGS) = Units Sold × Variable Product Cost per Unit Variable Selling & Administrative Expenses = Units Sold × Variable Selling & Admin Expenses per Unit Contribution Margin = Sales Revenue − (Variable COGS + Variable Selling & Admin Expenses) Fixed Costs: o Fixed Manufacturing Overhead o Fixed Selling & Admin Expenses Net Income = Contribution Margin − Total Fixed Costs Income Statement Structure: 1. Sales Revenue 2. Less: Variable Costs o Variable COGS o Variable Selling & Admin Expenses 3. Contribution Margin 4. Less: Fixed Costs o Fixed Manufacturing Overhead o Fixed Selling & Admin Expenses 5. Net Income Problem 19-2B: Variable Costing Income Statement for Lonte Company Objective: Prepare an income statement under variable costing. Step 1: Determine Variable Costs • • Product Costs: Direct materials, direct labor, and variable manufacturing overhead. Selling & Administrative Expenses: Separate into fixed and variable components. Step 2: Calculate Variable Cost per Unit Add direct materials, direct labor, and variable manufacturing overhead per unit to find the total variable cost per unit. Step 3: Prepare the Variable Costing Income Statement Use the same structure outlined in Problem 19-1B. Problem 19-3B: Income Reporting, Absorption Costing, and Managerial Ethics Objective: Prepare an income statement using absorption costing and analyze the ethical implications. Step 1: Calculate Costs under Absorption Costing • Product Cost per Gallon includes direct materials, direct labor, variable manufacturing overhead, and allocated fixed manufacturing overhead. Step 2: Prepare the Absorption Costing Income Statement • • • • • Sales Revenue = 250,000 gallons × Selling Price per Gallon COGS = (250,000 gallons × Absorption Product Cost per Gallon) Gross Profit = Sales Revenue − COGS Selling & Administrative Expenses (fixed and variable) Net Income = Gross Profit − Total Selling & Administrative Expenses Step 3: Evaluate the Ethical Implications If the company increases production to 300,000 gallons, this leads to spreading fixed costs over more units, thus decreasing the cost per unit. However, this can lead to excess inventory and misrepresent income, raising ethical concerns about the accuracy of financial reporting and whether income manipulation is occurring. Problem 19-4BA: Converting Variable Costing Income to Absorption Costing Income Objective: Prepare a table to convert variable costing income to absorption costing income for both years. Step 1: Gather Information for Both Years • • Ending Inventory Units for both years Fixed Overhead per Unit: Calculate by dividing the total fixed overhead by units produced each year. Step 2: Calculate Fixed Overhead Deferred in Ending Inventory • Fixed Overhead Deferred = Ending Inventory Units × Fixed Overhead per Unit Step 3: Prepare the Table as in Exhibit 19A.2 • • • Variable Costing Income: Start with the net income under variable costing. Adjust for Fixed Overhead: o Add the fixed overhead deferred in ending inventory. o Subtract the fixed overhead released from beginning inventory (if applicable). Absorption Costing Income = Variable Costing Income ± Adjustments for Fixed Overhead Table Structure: 1. 2. 3. 4. Variable Costing Income Add: Fixed Overhead Deferred in Ending Inventory Less: Fixed Overhead Released from Beginning Inventory Absorption Costing Income Summary In each problem, the key is to: • • Separate variable and fixed costs. Prepare income statements under the variable costing method. • Adjust for fixed overhead differences between variable costing and absorption costing. Would you like detailed numerical solutions for these problems with specific figures, or do you want further explanations on specific parts?