Lynch company manufactures and sells a single product

Noreen, E., Brewer, P., & Garrison, R. (2016). Managerial accounting for managers. (4th ed.). McGraw-Hill ISBN: 9781308886718

Review

· Chapters 5 and 5a slides

· Video: Absorption Costing vs. Variable Costing

· Variable Costing

· Absorption Costing

EXERCISE 5–2 Variable Costing Income Statement; Explanation of Difference in Net Operating Income [LO 5–2]

Refer to the data in Exercise 5–1 for Ida Sidha Karya Company. The absorption costing income statement prepared by the company’s accountant for last year appears below:

Sales. . . . . . . . . . . . . . . . . . . . . . .

$191,250

Cost of goods sold. . . . . . . . . . . . .

157,500

Gross margin. . . . . . . . . . . . . . . . .

33,750

Selling and administrative expense. . .

24,500

Net operating income. . . . . . . . . . . .

$ 9,250

Required:

1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.

2. Prepare an income statement for the year using variable costing. Explain the difference in net operating income between the two costing methods.

EXERCISE 5–3 Reconciliation of Absorption and Variable Costing Net Operating Incomes [LO 5–3]

Jorgansen Lighting, Inc., manufactures heavy-duty street lighting systems for municipalities. The company uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. The company has provided the following data:

Year 1

Year 2

Year 3

Inventories:

Beginning (units). . . . . . . . . . . . . . . . .

200

170

180

Ending (units). . . . . . . . . . . . . . . . . . .

170

180

220

Variable costing net operating income. . . . .

$1,080,400

$1,032,400

$996,400

The company’s fixed manufacturing overhead per unit was constant at $560 for all three years.

Required:

1. Determine each year’s absorption costing net operating income. Present your answer in the form of a reconciliation report.

2. In Year 4, the company’s variable costing net operating income was $984,400 and its absorption costing net operating income was $1,012,400. Did inventories increase or decrease during Year 4? How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?

EXERCISE 5–4 Basic Segmented Income Statement [LO 5–4]

Royal Lawncare Company produces and sells two packaged products, Weedban and Greengrow. Revenue and cost information relating to the products follow:

Product

Weedban

Greengrow

Selling price per unit. . . . . . . . . . . . . . . . .

$6.00

$7.50

Variable expenses per unit. . . . . . . . . . . . .

$2.40

$5.25

Traceable fixed expenses per year. . . . . . . .

$45,000

$21,000

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Common fixed expenses in the company total $33,000 annually. Last year the company produced and sold 15,000 units of Weedban and 28,000 units of Greengrow.

Required:

Prepare a contribution format income statement segmented by product lines.

EXERCISE 5–6 Variable and Absorption Costing Unit Product Costs and Income Statements [LO 5–1, LO 5–2]

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:

Manufacturing:

Direct materials. . . . . . . . . . . . . . . . .

$6

Direct labor. . . . . . . . . . . . . . . . . . . .

$9

Variable manufacturing overhead. . . . .

$3

Variable selling and administrative. . . . . . . .

$4

Fixed costs per year:

Fixed manufacturing overhead. . . . . . . . .

$300,000

Fixed selling and administrative. . . . . . . .

$190,000

During the year, the company produced 25,000 units and sold 20,000 units. The selling price of the company’s product is $50 per unit.

Required:

1. Assume that the company uses absorption costing:

· a. Compute the unit product cost.

· b. Prepare an income statement for the year.

2. Assume that the company uses variable costing:

· a. Compute the unit product cost.

· b. Prepare an income statement for the year