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### BA 510 Week 3 Assignment Problem Complete Solution

Question Details:
BA 510 Week 3 Assignment Problem Complete Solution

Week 3   ABSORPTION COST

PROBLEMS 5-17  Nickelson Company

Variable and Absorption Costing Unit Product Costs and Income Statements

Nickleson Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operation:

Variable costs per unit:

Manufacturing:

Direct materials …………………………………….   \$ 25

Direct labor ……………………………………………    \$16

Fixed costs per year:

Fixed manufacturing overhead……………………..   \$ 300, 000

Fixed selling and administrative expenses…….   \$ 180, 000

During its first year of operations Nickelson produced 60, 000 units and sold 60,000 units.

During its second year of operations it produced 75, 000 units and sold 50,000 units.

In its third year, Nickelson produced 40, 000 units and sold 65, 000 units. The selling price of the company’s product is \$ 56 per unit.

REQUIRED:

1. Compute the company’s break-even-point in units sold.
2.  Assume the company uses variable costing:
1. Compute the unit product cost for year 1, year 2, and year 3.
2. Prepare an Income statement for year 1, year,  2, and year 3.
1. Assume the company uses absorption costing:
1. Compute the unit product cost for year 1, year 2, and year 3.
2. Prepare an income statement for year 1, year 2, and year 3.
1. Compare the net operating income figures that you computed in requirements 2 and 3 to the break-even point that you computed in requirement 1 . Which net operating income figure seem counterintuitive? Why?

PROBLEM 5-21 Prepare and Reconcile Variable Costing Statements

(LO 5-1, LO 5-2, LO 5-3)

Linden Company manufactures and sells a single product. Cost data for the product follow:

Variable costs per unit:

Direct materials……………………………………………. \$  6

Direct labor ………………………………………………….   12

Total variable costs per unit……………………………………. \$ 25

Fixed costs per month :

Fixed manufacturing overhead ……………………..  \$ 240, 000

Fixed selling and administrative ……………………. \$ 180, 000

Total fixed cost per month ………………………………………. \$ 420, 000

The product sells for \$40 per unit. Production and sales data for May and June, the first two months of operation, are as follows:

Units                     Units

Produced                   Sold

May………………………      30, 000                     26, 000

June……………………..      30, 000                  34, 000

Income statements prepared by the accounting department, using absorption costing, are presented below:

May                            June

Sales………………………………………………………. \$ 1, 040, 000      \$ 1, 360, 000

Cost of goods sold…………………………………..           780, 000         1, 020, 000

Gross margin………………………………………….         260, 000             340,  000

Selling and administrative expense……….          260, 000             282,  000

Net operating income……………………………  \$          2, 000      \$      58,  000

REQUIRED:

1. Determine the unit product cost under:
1. Absorption costing
2. Variable costing
1. Prepare contribution formal variable costing income statements for May and June.
2. Reconcile the variable costing and absorption costing net operating incomes.
3. The company’s Accounting Department has determined the break-even point to be 28,000 units per month, computed as follows:

Fixed cost per month   =   \$ 420,000        =  28,000 units

Unit contribution margin       \$ 15 per unit

Upon receiving this figure, the president commented. “There’s something peculiar here. The controller says that the break-even point is 28,000 units per month.  Yet we sold only 26, 000 units in May, and the income statement we received showed a \$ 2, 000 profit.

Which figure do we believe?”   Prepare a brief explanation of what happened on the May income statement.

PROBLEM 5-22 SANDI SCOTT

Absorption and Variable Costing: Production Constant, Sales Fluctuate (LO 5-1, LO 5-2, LO 5-3)

Sandi Scott obtained a patent on a small electronic device and organized Scott Products, Inc. to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to healthy profit. For this reason, she was surprised to see a loss for the month on her income statement.

This statement was prepared by her accounting service which takes great pride in providing its timely financial data. The statement follows:

Scott Products, Inc.

Income Statement

Sales (40,000 units)…………………………………………………                                    \$200, 000

Variable expenses

Variable cost of goods sold……………………………….   \$ 80,000

Variable selling and administrative expenses …         30,000                    110,  000

Contribution margin................................................                                           90,  000

Fixed expenses

Fixed  manufacturing overhead ……………………….       75, 000

Fixed selling and administrative expenses……….        20, 000                     95,  000

Net operating loss …………………………………………………                                     \$   (5, 000)

Ms. Scott is discouraged over the loss for the month because she had planned to use the statement to encourage investors to purchase stock in the new company. A friend who is a CPA, insists that the company should be using absorption costing rather than variable costing.  He argues that if absorption costing had been used, the company would have reported a profit for the month.

Selected cost data relating to the product and to the first month of operation follow:

Units produced ……………………………………………………………………... 50, 000

Units sold ………………………………………………………………………………. 40, 000

Variable cost per unit:

Direct materials………………………………………………………… \$     1.00

Direct labor …………………………………………………………..…. \$     0.80

Variable manufacturing overhead ……………………...……  \$     0.20

Variable selling and administrative expenses…………..  \$      0.75

REQUIRED: also does realistic computer animation for special effect in movies.

1. Complete the following:
1. Complete the product cost under absorption cost.
2. Redo the company’s income for the month using the absorption costing.
3. Reconcile the variable and absorption costing net operating income (loss) figures.
1. Was the CPA correct in suggesting that the company really earned a “profit” for the month?

Explain?

1. During the second month of operations, the company again produced 50,000 units but sold

60,000 units (Assume no change in total fixed costs).

1. Prepare a contribution format income statement for the month using variable costing.
2. Prepare an income statement for the month using the absorption costing.
3. Reconcile the variable costing net operating incomes.

PROBLEM 6-16 Second – Stage Allocation and Product Margins (LO 6-4, LO 6-5)

AnimPix, Inc.  is a small company that creates computer-generated animation for films and television. Much of the company’s work consists of short commercials for television, but the company

The young founders of the company have become increasingly concerned with the economics of the business-particularly because many competitors have sprung up recently in the local area.

To help understand the company’s cost-structure, an activity-based costing system has been designed.

Three major activities carried out in the company; animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company bids on the projects. This is an intensive activity that involves individuals from all parts of the company in creating storyboards and prototype stills to be shown to the prospective client. After the client has accepted a project, the animation goes into production and contract administration begins.

Technical staff do almost all the work involved in animation production, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measure and rates are listed below:

Activity Cost Pool                     Activity Measure                      Activity Rate

Animation concept………………… Number of proposals           \$ 6, 000 per proposal

Animation production……………. Minutes of animation          \$ 7, 700 per minute of animation

Contract administration…………  Number of contracts            \$ 6, 600 per contract

These activity rates include all of the costs of the company, except for the costs of idle capacity and re-organization-sustaining costs. There are no direct labor or indirect materials costs.

Preliminary analysis using these activity rates has indicated that the local commercials segment of the market maybe unprofitable. This segment is higly competitive. Producers of local commercials may ask several companies like Anim Pix to bid which results in an unusually low ratio of accepted contracts to bids.

Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Because animation work is billed at standard rates according to the running time of the completed animation, the revenues from these short projects tend to be below average. Data concerning activity in the local commercials market appear below:

Local

Activity  Measure                                Commercials

Number of proposals ……………………..        20

Minutes of animation …………………….        12

Number of contracts ………………………          8

The total sales for local commercials amounted to \$240,000.

REQUIRED:

1. Determined the cost of serving the local commercial market.
2. Prepare a report showing the margin earned serving the local commercial market. (Remember, this company has no direct materials or direct labor costs.)
3. What would you recommend to management concerning the local commercial market?

PROBLEM 6-17  Precision Manufacturing , Inc.

Comparing Traditional and Activity – Based Product Margins (LO 6-1, LO 6-3)

Precision Manufacturing Inc. (PMI)  makes two type of industrial component parts – the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below:

Precision Manufacturing Inc.

Income Statement

Sales ………………………………………………………..  \$ 1, 700, 000

Cost of goods sold……………………………………      1, 200, 000

Gross margin……………………………………………          500, 000

Selling and administrative expenses…………          550, 000

Net operating loss …………………………………..  \$      ( 50, 000)

PMI produced and sold 60,000 units of EX300 at a price of \$20 per unit and 12, 500 units of TX500 at a price of \$40 per unit. The company’s traditional cost system allocated manufacturing overhead to products using a plantwide overhead rate and direct labor dollar as the allocation base. Additional information relating to the company’s two product lines is shown below:

EX300                          TX500              Total

Direct materials………………… \$ 366, 325                      \$ 162, 550         \$ 528, 875

Direct labor………………………. \$ 120, 000                      \$    42, 500            162, 500

Cost of goods sold……………..                                                                      \$ 1, 200, 000

The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that \$50,000 and \$100,000 of the company’s advertising expenses could directly traced to EX300 and TX500, respectively. The remainder of the selling and administrative expenses was organization – sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

Manufacturing                                           Activity

Activity cost Pool (and activity measure)           Overhead           EX 300    TX 500   Total

Machining (machine-hours)…………………       \$198, 250                  90,000  62,500     152,500

Setups (setup hours)…………………………….         150, 000                         75        300             375

Product-sustaining costs………………………          100, 000                        1            1                   2

Other ( organization-sustaining costs)                60, 375                        NA          NA               NA

Total manufacturing overhead cost……..     \$ 508,   625

REQUIRED:

1. Using Exhibit 6-12 as a guide, compute the product margins for the EX300 and TX500 under the company’s traditional costing system.
2. Using  Exhibit 6-10 as a guide, compute the product margins for EX300 and TX500 under the activity-based costing system.
3. Using Exhibit 6-13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity – based cost assignments differ.

PROBLEM 6-18  Comparing Traditional and Activity-Based Product Margin (LO 6-1, LO 6-3,

LO 6-4, LO 6-5).

Rocky mountain corporation makes two types of hiking boots – Xactive and the Pathbreaker . Data concerning these two product lines appear below:

Xactive                        Pathbreaker

Selling price per unit……………………………………………  \$ 127. 00                         \$ 89. 00

Direct materials per unit……………………………………..       64. 80                              51.00

Direct labor per unit ……………………………………………       18. 20                              13.00

Direct labor hours per unit …………………………………          1. 4 DLHs                             1.0 DLHs

Estimated annual production and sales………………        25, 000 units                  75, 000 units

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Estimated total manufacturing overhead……………………….. \$2, 200, 000

Estimated total direct labor-hours ………………………………….        110, 000 DLHs

REQUIRED:

1. Using Exhibit 6-12 as a guide, compute the product margins for the Xactive and the Path breaker products under the company’s traditional costing system.

1. The company I considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (Other cost pool includes organization-sustaining costs and idle capacity costs):

Estimated                   Expected Activity

Activities and Activity Measures                  Overhead cost       Xactive   Pathbreaker     Total

Supporting direct labor (direct labor-hours)       \$ 797, 500       35,000        75,000          110, 000

Batch setups (setups)………………………………..           680, 000            250              150                   400

Batch setups……………………………………………..            650, 000                1                  1                        2

Other………………………………………………………..               72, 500             NA               NA                      NA

Total manufacturing overhead cost…………..     \$2, 200, 000

Using Exhibit 6-10 as a guide, compute the product margins for the Xactive and the Path-breaker products under the activity-based costing system.

1. Using Exhibit 6-13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignment. Explain why the traditional and activity-based cost assignments differ,
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Solution Details:
BA 510 Week 3 Assignment Problem Complete Solution

Selling price per unit        \$56
Variable cost per unit         48
Contribution margin per unit        \$ 8

Break-even unit sales = Fixed expenses ÷ Unit contribution margin
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