Income Statements under Absorption Costing and Variable Costing

Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began operations on January 1 and operated at 100% of capacity (39,600 units) during the first month, creating an ending inventory of 3,600 units. During February, the company produced 36,000 units during the month but sold 39,600 units at $125 per unit. The February manufacturing costs and selling and administrative expenses were as follows:

a. Prepare an income statement according to the absorption costing concept for the month ending February 28.

b. Prepare an income statement according to the variable costing concept for the month ending February 28.

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $36 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: * 1/3 supervisory salaries; 2/3 depreciation (no resale value) Per Unit 20,000 Units Per Year Direct materials $ 13 $ 260,000 Direct labor 11 220,000 Variable manufacturing overhead 4 80,000 Fixed manufacturing overhead, traceable 6* 120,000 Fixed manufacturing overhead, allocated 9 180,000 Total cost $ 43 $ 860,000 1. Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, compute the total cost of making and buying 20,000 carburetors from the outside supplier. 2. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $200,000 per year. Compute the total cost of making and buying 20,000 carburetors.

Imtiaz Super Store sells Blue Band Margarines. Its annual demand is 108,500 units. The shop incurs ordering cost of Rs 650/= order, irrespective of the order size. They buy it at Rs 150 per unit. The carrying cost is 12% on average inventory investment plus rent, insurance, property tax, and supervision for each unit is Rs 3. The maximum sale per day is 360 units. It takes 5 days to receive these items from supplier after placement of order quantities. The annual working days of Store are 350 days.
Required:                                                                                                            
i). Determine the Economic order quantities (EOQ)
                                                                                                                                                                  Marks: 2
ii). Determine Safety stock maximum.
                                                                                                                                                                  Marks: 1

iii). Determine Reorder point levels
                                                                                                                                                                  Marks: 2
iv). Total annual inventory cost (Total annual ordering cost and total annual carrying cost)
                                                                                                                                                                  Marks: 2
v). A Supplier offers 1% discount to Imtiaz Supper Store, if they purchase the goods at least at 10,000 units at a time instead of above EOQ level (Part-i). Should they accept this offer? Please advice to management with relevant comparative workings.
                                                                                                                                                                  Marks: 2
vi). Why Economic order quantities may be wrong some time for any particular item to purchase in a given situation?

Wilma Company must decide whether to make or buy some of its components. The costs of producing 60,200 switches for its generators are as follows. Direct materials $29,900 Variable overhead $45,700 Direct labor $25,990 Fixed overhead $76,000 Instead of making the switches at an average cost of $2.95 ($177,590 ÷ 60,200), the company has an opportunity to buy the switches at $2.67 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated. Prepare an incremental analysis showing whether the company should buy the switches. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Direct materials $ $ $ Direct labor Variable manufacturing costs Fixed manufacturing costs Purchase price Total cost $ $ $ Wilma Company will incur $ of additional costs if it the switches. Would your answer be different if the released productive capacity will generate additional income of $44,024? (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Total Cost $ $ $ Opportunity cost Total cost $ $ $ , the answer is . The analysis shows that net income will be by $ .

1. Assume that a monopolist has T C(Q) = 22Q and the market demand is P(Q) = 50 − 2Q.

(a) What is the firm’s marginal cost?

(b) What is the profit-maximizing price and quantity (P ∗ , Q∗ )?

(c) What is the total revenue at (P ∗ , Q∗ )?

(d) What is the total cost at (P ∗ , Q∗ )?

(e) What is the profit at (P ∗ , Q∗ )?

(f) What is the consumer surplus at (P ∗ , Q∗ )?

(g) What is the deadweight loss at (P ∗ , Q∗ )?

2. Assume that a monopolists sells a product in the shortrun with a total cost function

STC(Q) =

{125 + 44Q + Q² Q > 0

{108 Q = 0

The market demand curve is given by the equation P(Q) = 80 − 2Q.

(a) Find the marginal cost for the firm.

(b) Find the profit-maximizing output and price (P ∗ , Q∗ ).

(c) What are the monopolists profits?

(d) Does the monopolist want to stay in business?

3. Assume that a monopolist has TC = 13 + 28Q + Q² and the market demand is P(Q) = 100 − 2Q.

(a) What is the profit-maximizing price and quantity (P ∗ , Q∗ )?

(b) What is the marginal cost at Q∗ ?

(c) Calculate the price elasticity of demand at (P ∗ , Q∗ ) (use the equation for elasticity, not IEPR).

(d) Verify that the IEPR holds

Mexpal Corporation manufactures two models of power drills, a standard and a deluxe model. The following activity and overhead cost information has been compiled: Number of Number of Number of Product Setups Components Direct Labor Hours Standard 15 10 800 Deluxe 35 15 400 Set-up activity Inspection Activity Overhead costs $40,000 $32,000

1. Assume a traditional costing system applies the total overhead costs (sum of set-up activity and inspection activity costs) based on direct labor hours. What is the total amount of overhead cost assigned to the Standard and Deluxe model, respectively?

2. Number of setups and number of components are identified as activity-cost drivers for the set-up activity and inspection activity, respectively. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the Standard and Deluxe model, respectively?

3. Mexpal hopes to reduce the overhead costs associated with the setups in the long-run keeping the production at current levels: i) By reducing the cost of performing each set up by 10% and ii) By reducing the setups for standard from 15 to 10 and for deluxe from 35 to 30. What are the expected savings in overhead costs related to setups assuming an activity-based costing system is used?

Activity-Based And Department Rate Product Costing and Product Cost Distortions

Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as follows:

The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:

The activity-base usage quantities and units produced for the two products follow:

Required:

1. Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is $315,000 and $540,000 for the Cutting and Finishing departments, respectively. Round per unit amounts to the nearest whole cent.

2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1). Round per unit amounts to the nearest whole cent.

3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. Round per unit amounts to the nearest whole cent.

4. Determine the total and per-unit cost assigned to each product under activity-based costing. Round the per unit amounts to the nearest whole cent.

Cost Estimation, Interpretation, and Analysis (Requires Computer Spreadsheet) L03
Brady Table Company produces two styles of modern dining room and kitchen tables. Presented is
monthly information on production volume and manufacturing costs:
Total Dining Room Kitchen--- Please show formulas thanks

Required
a. Use the high-low method to develop a cost-estimating equation for total manufacturing costs.Interpret the meaning of the “fixed” costs and comment on the results.

b. Use the chart feature of a spreadsheet to develop a scatter graph of total manufacturing costs and
total units produced. Use the graph to identify any unusual observations.
c. Excluding any unusual observations, use the high-low method to develop a cost-estimating equation
for total manufacturing costs. Comment on the results, comparing them with the results in requirement (a).
d. Use simple regression analysis to develop a cost-estimating equation for total manufacturing costs.
What advantages does simple regression analysis have in comparison with the high-low method of
cost estimation? Why must analysts carefully evaluate the data used in simple regression analysis?
e. A customer has offered to purchase 50 dining room tables for $220 per table. Management has asked
your advice regarding the desirability of accepting the offer. What advice do you have for management? Additional analysis is required.

1. Net Present Value (NPV) and Internal Rate of Return (IRR) (question)

The City and County of Denver is completing a $45 million renovation of City Park Golf Course. To complete the renovation, the course has been closed to the public for 2.5 years (planned re-opening is Spring 2020). The project updated the course, built a new clubhouse that can accommodate golf and community events, resulted in a “net gain of 500 trees”, and reduced flood risk “for thousands of homes”.[1] All of these updates are expected to provide either increased revenue or reduced costs. Assume the $45 million cost was paid upfront by Denver and the following are the estimated cash receipts and disbursements associated with the project.[1] If the cost of capital is 6%, does the project make sense based on NPV and IRR over a 30-year useful life? Does your finding change if the cost of capital is actually 4%?

[

Appliance Apps has the following costs associated with its production and sale of devices that allow appliances to receive commands from cell phones.

Prepare an income statement under the absorption method. If an amount box does not require an entry, leave it blank.

Prepare an income statement under the variable costing method. If an amount box does not require an entry, leave it blank.

Feedback

Absorption costing includes all costs necessary for production. Conversely, variable costing only uses the variable costs that relate directly to the production process. Keep this in mind when calculating net income under each assumption. Depending on the cost method chosen, there will be differences due to the way fixed costs are treated under each method (absorption and variable).

Prepare a reconciliation between the two statements.

Feedback

Absorption costing includes all costs necessary for production. Conversely, variable costing only uses the variable costs that relate directly to the production process. Keep this in mind when calculating net income under each assumption. Depending on the cost method chosen, there will be differences due to the way fixed costs are treated under each method (absorption and variable).