Chapter 19: Problem Set A

To address each of these problems, we’ll focus on the differences between absorption costing and variable costing, and how these affect financial reporting. Let’s solve the problems step-by-step. Problem 19-1A: Variable Costing Income Statements Requirements: Prepare income statements under variable costing for each of the two years. 1. Identify Variable Costs: o Direct materials, direct labor, and variable manufacturing overhead are part of product cost under variable costing. o Selling and administrative expenses must be separated into fixed and variable components. 2. Calculate Variable Cost per Unit: Determine the total variable cost per unit by adding direct materials, direct labor, and variable manufacturing overhead per unit. 3. Prepare the Variable Costing Income Statements: o Sales Revenue = Units Sold × Selling Price per Unit o Variable COGS = Units Sold × Variable Product Cost per Unit o Variable Selling & Admin Expenses = Units Sold × Variable Selling/Admin Expense per Unit o Contribution Margin = Sales Revenue − (Variable COGS + Variable Selling & Admin Expenses) o Fixed Costs = Fixed Manufacturing Overhead + Fixed Selling & Admin Expenses o Net Income = Contribution Margin − Fixed Costs Approach: • Prepare two income statements (one for each year) following this structure. Problem 19-2A: Variable Costing Income Statement 1. Identify Components: o The company’s product cost of $30 per unit consists of direct materials, direct labor, variable manufacturing overhead, and fixed overhead. o Selling and administrative expenses consist of $350,000 annual fixed costs and $2.25 per unit variable costs. 2. Calculate Total Variable Costs: o Variable Product Cost per Unit includes direct materials, direct labor, and variable manufacturing overhead. o Total Variable COGS = Units Sold × Variable Product Cost per Unit o Variable Selling/Admin Expenses = Units Sold × $2.25 per unit 3. Prepare the Variable Costing Income Statement: Follow the same structure as in Problem 19-1A, ensuring to account for selling and administrative expenses. Problem 19-3A: Income Reporting and Managerial Ethics 1. Prepare an Absorption Costing Income Statement: Under absorption costing, fixed manufacturing overhead is assigned to each unit produced. The income statement includes: o Sales Revenue = 15,000 tons × Selling Price per Ton o COGS = (15,000 tons × Product Cost per Ton under absorption costing) o Gross Profit = Sales Revenue − COGS o Selling & Admin Expenses (including both variable and fixed expenses) o Net Income = Gross Profit − Selling & Admin Expenses 2. Effect of Increasing Production to 20,000 Tons: o Calculate the increase in net income due to increased production by allocating the fixed manufacturing costs over 20,000 units instead of 15,000 units. o Compare the net income under both scenarios to determine the impact of overproducing and storing additional units. Problem 19-4AA: Converting Variable Costing Income to Absorption Costing Income 1. Prepare a Table Similar to Exhibit 19A.2: This conversion involves adding fixed manufacturing overhead costs deferred in ending inventory to the net income calculated under variable costing. Steps: Identify the amount of fixed manufacturing overhead allocated to ending inventory under absorption costing. o Calculate the difference between the absorption and variable costing net incomes by adding the fixed overhead deferred in ending inventory and subtracting any fixed overhead released from beginning inventory. 2. Prepare a Conversion Table for Both Years: o List the variable costing net income for each year. o Calculate and add the fixed overhead costs deferred in ending inventory. o Determine the absorption costing net income by summing the variable costing income and fixed overhead adjustments. o Summary: • • For each problem, focus on identifying costs correctly and structuring the income statements based on either variable or absorption costing. Understand how fixed costs are treated under both methods to accurately compute net incomes and to make any necessary adjustments when converting from one method to another. Would you like detailed numerical solutions for these problems using specific figures from the textbook?