Great Outdoze 8-30

October 7, 2017 Management

Great Outdoze, Inc. manufactures high-quality sleeping bags, which sell for $130 each. The variable costs of production are as follows: Direct material …………………………………………………………………………………… $40 Direct labor …………………………………………………………………………………………. 22 Variable manufacturing overhead …………………………………………………………. 6 Budgeted fixed overhead in 20×4 was $400,000 and budgeted production was 25,000 sleeping bags. The yeara€™s actual production was 25,000 units, of which 22,000 were sold. Variable selling and administrative costs were $2 per unit sold; fixed selling and administrative costs were $60,000. Required: 1. Calculate the product cost per sleeping bag under ( a ) absorption costing and ( b ) variable costing. (a) The cost under absorption costing is Direct material40 Direct labor22 Variable manufacturing overhead16

Fixed manufacturing overhead16(400,000 fixed amount/25,000 production) Total absorption cost$94 (b) In variable costing, the fixed manufacturing overhead is expensed and is not a part of product cost. The unit cost is Direct material40 Direct labor22 Variable manufacturing overhead16 Total variable cost78 2. Prepare income statements for the year using ( a ) absorption costing and ( b ) variable costing. (a) Income statement under absorption costing |Absorption costing income statement | | |Sales (22,000 units X $130) | |$2,860,000 | |Cost of goods sold: | | | |Beginning inventory |$ 0   | | |Add cost of goods manufactured (94X25,000) | 2,350,000 | | |Goods available for sale |2,350,000 | | |Less ending inventory (94X3,000) | 282,000 |2,068,000 | |Gross margin | |792,000 | |Less selling expenses: | | | |Variable selling expenses (2 X 22,000) |44,000 | | |Fixed selling and administrative | 60,000 | 104,000 | |Net operating income | |$ 688,000 | (b) Variable costing income statement | | | |Sales (22,000 units X $130) | |$2,860,000 | |Less variable expenses: | | | |Variable cost of goods sold: | | | |Beginning inventory |$ 0 | | |Add variable manufacturing costs (78X25,000) | 1,950,000 | | |Goods available for sale |1,950,000 | | |Less ending inventory (78X3,000) | 234,000 | | |Variable cost of goods sold |1,716,000 | | |Variable selling and administrative | 44,000 | 1,760,000 | |Contribution margin | |1,100,000 | |Less fixed expenses: | | | |Fixed manufacturing overhead |400,000 | | |Fixed selling and administrative | 60,000 | 460,000 | |Net operating income | |$ 640,000 | 3. Reconcile reported income under the two methods using the shortcut method.

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The difference is due to fixed manufacturing overhead which is deferred in ending inventory under absorption costing. 3,000 units X $16 per unit |Variable costing net operating income |$640,000 | |Add fixed manufacturing overhead costs deferred in inventory under |48,000 | |absorption costing (16 X 3,000) | | |Deduct fixed manufacturing overhead costs released from inventory | 0   | |under absorption costing | | |Absorption costing net operating income |$688,000 | 4. Suppose that Great Outdoze, Inc. mplemented a JIT inventory and production management system at the beginning of 20×4. In addition, the firm installed a flexible manufacturing system. Would you expect reported income under variable and absorption costing to be different by as great a magnitude as you found in requirement (3)? Explain. No. The difference is on account of inventory. With JIT and flexible manufacturing systems, we would expect the ending inventory units to reduce and this would bring closer the income between absorption costing and variable costing. Refer to the information given in the preceding problem for Great Outdoze, Inc. Assume that direct material is the only unit-level manufacturing cost.

The company has committed its spending for direct labor and overhead (variable and fixed). Required: 1. Calculate the product cost per sleeping bag under throughput costing. In through put costing only direct material is taken as the product cost. The unit product cost under throughput costing would be $40 2. Prepare an income statement for the year 20×4 using throughput costing. | Sales revenue (22,000 units X $130 ) |$2,860,000 | | Cost of goods sold (22,000 x $40 ) …………………………….. |880,000 | | Gross margin |$? ,980,000 | | Less: Operating costs: | | | Direct labor (25,000 units X $22) |550,000 | | Variable overhead (25,000 units X16) |400,000 | | Variable selling and administrative costs |??? 44,000 | |? (22,000 X $2 ) | | | Fixed manufacturing overhead |400,000 | | Fixed selling and administrative costs |??? 60,000 | | Net operating income |$? 26,000 | 3. Give an argument for and against throughput costing. An argument for is that it helps eliminate the changes in product cost by changing the output. In absorption costing, the fixed manufacturing overhead per unit can be reduced by increasing the output and so the unit cost can be reduced and gross margin increased. This is not possible in throughput since the fixed manufacturing cost is expensed An argument against is that by expensing the fixed manufacturing overhead we are undercosting the product since the fixed manufacturing cost is also incurred in manufacturing the goods. Under costing may lead to incorrect pricing decisions.

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