WEEK 7 HWM

(1)

Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city's crowded Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city's crowded streets that it

streets that it sells for 500 sells for 500 rupeesrupees. Indian currency is denominated in rupees, denoted by !." . Indian currency is denominated in rupees, denoted by !." SelectSelected data ed data for for the company's operations last year follow#

the company's operations last year follow#

$nits in beginning inventory $nits in beginning inventory $nits produced

$nits produced $nits sold $nits sold

$nits in ending inventory $nits in ending inventory %a

%ariable costs riable costs per unit#per unit#

&ixed costs# &ixed costs#

Requirement 1: Requirement 1: ssume that

ssume that the company the company uses absorption uses absorption costing. (ompute costing. (ompute the unit the unit product cost product cost for one for one bicycle.bicycle. "R" sign in your response.)

"R" sign in your response.) $nit product cost

$nit product cost Requirement 2: Requirement 2: ssume

ssume that the that the company uses company uses variable costing. variable costing. (ompute t(ompute the unit he unit product cost product cost for one for one bicycle.bicycle. (Omit the(Omit the "R" sign in your response.)

"R" sign in your response.) $n

(2)

Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city's crowded Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city's crowded streets that it sells for 500 rupees. Indian currency is denominated in rupees, denoted by !." Selected data streets that it sells for 500 rupees. Indian currency is denominated in rupees, denoted by !." Selected data for the company's operations last year follow#

for the company's operations last year follow#

$

$nniitts s iin n bbeeggiinnnniinng g iinnvveennttoorry y 00 $

$nniitts s pprroodduucceed d *0*0,,000000 $nits

$nits sold sold +,000+,000

$

$nniitts s iin n eennddiinng g iinnvveennttoorry y ,,000000 %

%aarriiaabblle e ccoosstts s ppeer r uunniitt##

--iirreecct t mmaatteerriiaallss !! **00

--iirreeccttllaabboorr !! **00 %

%aarriiaabblle e mmaannuuffaaccttuurriinng g oovveerrhheeaadd !! 5500 %

%aarriiaabblle e sseelllliinng g aannd d aaddmmiinniissttrraattiivvee !! 00 &

&iixxeeddccoossttss## &ixed

&ixed manufacturing manufacturing overhead overhead !! /00,000/00,000 &

&iixxeed d sseelllliinng g aannd d aaddmmiinniissttrraattiivvee !! 0000,,000000

n absorption costing income statement prepared by the com

n absorption costing income statement prepared by the com pany's accountant appears below#pany's accountant appears below#

S

Saallees s ++,,00000 0 uunniitts s   !!55000 0 ppeer r uunniitt" " !! ,000,00,000,00₀₀ (

(oossttooffggooooddssssoolldd## B

Beeggiinnnniinnggiinnvveennttoorryy !! 00 dd cost of goods manufactured

dd cost of goods manufactured *0,00

*0,000 0 units units   ! ! 1 1 per per unit"unit"

2,300,00 2,300,00 0 0 4

4oooodds s aavvaaiillaabblle e ffoor r ssaallee 2,300,002,300,00₀₀ ess ending inventory

ess ending inventory ,000

,000 units units   ! ! 1 1 per per unit"unit" 3300,,000000

,6/0,00 ,6/0,00 0 0 4

4rroossss mmaarrggiinn *,00,00*,00,00₀₀

S

Seelllliinng g aannd d aaddmmiinniissttrraattiivve e eexxppeennsseess## %

%aarriiaabblle e sseelllliinng g aannd d aaddmmiinniissttrraattiivve e **//00,,000000 &

&iixxeed d sseelllliinng g aannd d aaddmmiinniissttrraattiivve e 0000,,00000 0 55//00,,000000 7

7eet t ooppeerraattiinng g iinnccoomme e !! ++00,,000000

Requirement 1: Requirement 1: -etermi

(3)

cost deferred in inventory to the next period.

cost deferred in inventory to the next period. (Omit the "R" sign in your (Omit the "R" sign in your response.)response.) &i

&ixexed md mananufufacactuturiring ong oveverhrheaeadd !! ))))))))))))))))))))))) )

Requirement 2: Requirement 2:

8repare an income statement for the year using the variable costing method.

8repare an income statement for the year using the variable costing method. (Leave no cells blank  be(Leave no cells blank  be certain to enter "!"

certain to enter "!" herever require#. Omit the "R" sign in your herever require#. Omit the "R" sign in your response.)response.)

))))))))))

)))))))))) !! )))))))))))) ))))))))))))

%

%aarriiaabblleeeexxppeennsseess##

Variable cost of goods sold: Variable cost of goods sold:

B

Beeggiinnnniinng g iinnvveennttoorryy ! )!))))))))))))))))))))))) ))))))))))# )))))))))) ))))))))))# )))))))))) )))))))))))))))))))))))) )))))))))) )))))))))) )))))))))))))))))))))))) ))))))))))# )))))))))) ))))))))))# )))))))))) )))))))))))))))))))))))) )))))))))) )))))))))) )))))))))))))))))))))))) )))))))))) )))))))))) )))))))))))) )))))))))))) )))))))))))) )))))))))))) (

(oonnttrriibbuuttiioon n mmaarrggiin n ))))))))))))))))))))))) ) Fixed expenses: Fixed expenses: )))))))))) )))))))))) )))))))))))))))))))))))) )))))))))) )))))))))) )))))))))))) )))))))))))) )))))))))))) )))))))))))) )))))))))) )))))))))) !! )))))))))))) )))))))))))) 9igh :e

9igh :ension :ransformers, Inc., manufactures heavy;nsion :ransformers, Inc., manufactures heavy;duty transformers for electrical duty transformers for electrical switching stations. :he companyswitching stations. :he company uses variable costing for internal management reports and absorption costing for external reports to shareholders, uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. :he company has provided the following data#

creditors, and the government. :he company has provided the following data#

<

<eeaar r ** <<eeaar r  <<eeaar r 22 IInnvveennttoorriieess##

B

Beeggiinnnniinng g uunniittss" " **++0 0 **550 0 **//00 =

=nnddiinng g uunniittss" " *5*50 0 **//0 0 0000 %

%aarriiaabblle ce coossttiinng ng neet ot oppeerraattiinng ig innccoommee >> 66,,0000 >> //66,,0000 >> 55**,,++0000

:he company's fixed manufacturing overhead per unit was constant at >50 for all three years. :he company's fixed manufacturing overhead per unit was constant at >50 for all three years.

(4)

-etermine each year's absorption costing net operating income.

-etermine each year's absorption costing net operating income. (Omit the "$" sign in your (Omit the "$" sign in your response.)response.) <

<eeaar r ** <<eeaar r  <<eeaar r 22 bsorption costing net operating income

bsorption costing net operating income >> )))))))))))))))))))))))) >> )))))))))))))))))))))))) >> )))))))))))) ))))))))))))

In <ear , the company's variable costing net operating income was >0,00 and its absorption costing net In <ear , the company's variable costing net operating income was >0,00 and its absorption costing net operating income was >/3,00.

operating income was >/3,00. (a)

(a) -id inventories increase or decrease during <ear 1-id inventories increase or decrease during <ear 1 (a)

(a) -ecrease-ecrease (b)

(b) IncreaseIncrease

(b)

(b) 9ow much fixed manufacturing 9ow much fixed manufacturing overhead cost was deferred overhead cost was deferred or released from inventory or released from inventory during <eduring <ear 1ar 1 (Omit(Omit the "$" sign in your response.)

the "$" sign in your response.)

)))))))))) fixed manufacturing overhead cost

)))))))))) fixed manufacturing overhead cost >> )))))))))))) ))))))))))))

:he ?uestions below pertain to two different scenarios involving a manufacturing company. In each scenario, the :he ?uestions below pertain to two different scenarios involving a manufacturing company. In each scenario, the cost structure of the company is constant from year to year. Selling prices, unit variable costs, and total fixed cost structure of the company is constant from year to year. Selling prices, unit variable costs, and total fixed costs are the same in every year. 9owever, unit sales and@or unit production levels may vary from year to year. costs are the same in every year. 9owever, unit sales and@or unit production levels may vary from year to year.

(onsider the following data for

(onsider the following data for scenario  and for each year, indicate whether inventories grew or shranA.scenario  and for each year, indicate whether inventories grew or shranA. <

<eeaar r ** <<eeaar r  <<eeaar r 22 %

%aarriiaabblle e ccoossttiinng g nneet t ooppeerraattiinng g iinnccoommee >> **//,,++33 >> **//,,++33 >> **//,,++33 bsorption costing net operating income

bsorption costing net operating income >> */,+3*/,+3 >> 6,23+6,23+ >> /,0*+/,0*+

< <eeaarr** )))))))))))))))))))) < <eeaarr )))))))))))))))))))) < <eeaarr22 ))))))))))))))))))))

(5)

Requirement %: Requirement %:

4iven the patterns of net operating income in scenarios  and B above, which costing method, variable costing 4iven the patterns of net operating income in scenarios  and B above, which costing method, variable costing or absorption costing, do you believe provides a better reflection of economic reality1

or absorption costing, do you believe provides a better reflection of economic reality1

(a)

(a) variable costingvariable costing (b)

(b) absorption costingabsorption costing

axwel

axwell l (ompan(ompany y manufamanufactures and ctures and sells a sells a single producsingle product. t. :he followi:he following ng costs were costs were incurrincurred ed durinduring g thethe company's first year of operations#

company's first year of operations#

%

%aarriiaabblle e ccoosstts s ppeer r uunniitt## 

aannuuffaaccttuurriinngg##

--iirreeccttmmaatteerriiaallss >> **++

--iirreeccttllaabboorr >> 33

%

%aarriiaabblle e mmaannuuffaaccttuurriinng g oovveerrhheeaadd >>  %

%aarriiaabblle e sseelllliinng g aannd d aaddmmiinniissttrraattiivvee >> 55 &

&iixxeed d ccoosstts s ppeer r yyeeaarr## &

&iixxeed d mmaannuuffaaccttuurriinng g oovveerrhheeaadd >> **//00,,000000 &

&iixxeed d sseelllliinng g aannd d aaddmmiinniissttrraattiivve e eexxppeennsseess >> ****00,,000000

-uring the year, the company produced 0,000 units and sold */,000 units. :he selling price of the company's -uring the year, the company produced 0,000 units and sold */,000 units. :he selling price of the company's product is >50 per unit.

product is >50 per unit. Rquirement 1:

Rquirement 1:

ssume that the company uses absorption costing# ssume that the company uses absorption costing#

(a)

(a) (ompute the unit product cost.(ompute the unit product cost. (Omit the "$" sign in (Omit the "$" sign in your response.)your response.)

$

$nniit t pprroodduucct t ccoosstt >> ))))))))))))))))))))))) )

(b)

(b) 8repare an income statement for the year.8repare an income statement for the year. (Omit the "$" sign (Omit the "$" sign in your response.)in your response.)

))))))))))

)))))))))) >> )))))))))))) ))))))))))))

Less variable expenses: Less variable expenses: Variable cost of goods sold Variable cost of goods sold ## ))))))))))

)))))))))) >> ))))))))))))))))))))))))

))))))))))#))))))))))

(6)

))))))))))

)))))))))) ))))))))))))))))))))))))

))))))))))#))))))))))

))))))))))#)))))))))) ))))))))))))))))))))))))

%

%aarriiaabblle e ccoosst t oof f ggoooodds s ssoolld d )))))))))))))))))))))))) ))))))))))

)))))))))) )))))))))))) )))))))))))) )))))))))))) ))))))))))))

))))))))))

)))))))))) )))))))))))) ))))))))))))

Less fixed expenses: Less fixed expenses: )))))))))) )))))))))) )))))))))))))))))))))))) )))))))))) )))))))))) )))))))))))) )))))))))))) )))))))))))) )))))))))))) )))))))))) )))))))))) >> )))))))))))) ))))))))))))

mcor, Inc., incurs the following costs to produce and sell a single product. mcor, Inc., incurs the following costs to produce and sell a single product.

%

%aarriiaabblle e ccoosstts s ppeer r uunniitt##

--iirreeccttmmaatteerriiaallss >> **00

--iirreeccttllaabboorr >> 55

%

%aarriiaabblleemamannuuffaaccttuurriinnggoovveerrhheeaadd >>  %

%aarriiaabblle e sseelllliinng g aannd d aaddmmiinniissttrraattiivve e eexxppeennsseess >>  &

&iixxeeddccoossttssppeerryyeeaarr## &

&iixxeed d mmaannuuffaaccttuurriinng g ovveo errhheeaadd >> 6600,,000000 &

&iixxeed d sseelllliinng g aannd d aaddmmiinniissttrraattiivve e eexxppeennsseess >> 220000,,000000

-uring the last year, 20,000 units were produced and 5,000 units were sold. :he &inished 4oods inventory -uring the last year, 20,000 units were produced and 5,000 units were sold. :he &inished 4oods inventory account at the end of the year shows a balance of >+5,000 for the 5,000 unsold units.

account at the end of the year shows a balance of >+5,000 for the 5,000 unsold units.

(a)

(a) Is the company using absorption costing or variable costing to cost units in the &inished 4oods inventoryIs the company using absorption costing or variable costing to cost units in the &inished 4oods inventory account1

(7)

(a)

(a) %ari%ariable able costingcosting (b)

(b) bsorption costing bsorption costing

ssume that the company wishes to prepare financial statements

ssume that the company wishes to prepare financial statements for the year to issue to its stocA;holders.for the year to issue to its stocA;holders. (a)

(a) Is the >+5,000 figure for &inished 4oods inventory the correct amount to use on these statements forIs the >+5,000 figure for &inished 4oods inventory the correct amount to use on these statements for external reporting purposes1

external reporting purposes1 (a)

(a) <e<ess (b) (b) 7o7o

b)

b) t what dollar amount t what dollar amountshould should the 5,000 units be carried in inventory for external reporting purposes1 the 5,000 units be carried in inventory for external reporting purposes1 (Omit(Omit the "$" sign in your

the "$" sign in your response.)response.) &

&iinniisshheed d ggoooodds s iinnvveennttoorryy >> ))))))))))))))))))))))) )

orey (ompany has Cust completed its first year of operations. :he company's absorption costing income orey (ompany has Cust completed its first year of operations. :he company's absorption costing income statement for the year appears below#

statement for the year appears below#

orey (ompany orey (ompany Income Statement Income Statement S

Saallees s 00,,00000 0 uunniitts s aat t >>2222..335 5 ppeer r uunniitt"" >> **,,225500,,000000 (ost of goods sold#

(ost of goods sold# B

Beeggiinnnniinnggiinnvveennttoorryy >> 00 dd cost of goods manufactured

dd cost of goods manufactured

5500,,00000 0 uunniitts s aat t >>* * ppeer r uunniitt"" **,,005500,,000000 4oods

4oods available available for for sale sale *,050,000*,050,000 

eesss s eennddiinng g iinnvveennttoorry y **00,,00000 0 uunniitts s aat t >>* * ppeer r uunniitt"" **00,,000000 ++00,,000000 4

4rroossssmmaarrggiinn 55**00,,000000

Selling

Selling and and administrative administrative expenses expenses 0,0000,000 (b)

(b) (ompute the total cost of finished goods inventory using variable costing and absorption costing.(ompute the total cost of finished goods inventory using variable costing and absorption costing. (Omit the(Omit the "$" sign in your response.)

"$" sign in your response.) %ariable %ariable (osting

(osting bsorption (osting bsorption (osting :

(8)

7

7eettopopeerraattiinnggiinnccoommee >> 6600,,000000

:he company's selling and administrative expenses consist of >200,000 per year in fixed expenses and >2 per unit :he company's selling and administrative expenses consist of >200,000 per year in fixed expenses and >2 per unit sold in variable expenses. :he company's >* per unit product cost given above is computed as follows#

sold in variable expenses. :he company's >* per unit product cost given above is computed as follows#

--iirreeccttmmaatteerriiaallss >> **00

--iirreeccttllaabboorr 

%a

%ariable riable manufacturing manufacturing overhead overhead  &ixed

&ixed manufacturing manufacturing overhead overhead >50,000 >50,000 D D 50,000 50,000 units" units" 55 $n

$nit it prprododucuct t cocost st >> **

!edo the company's income statement in the contribution format using variable costing.

!edo the company's income statement in the contribution format using variable costing. (Omit the "$" sign in(Omit the "$" sign in your response.) your response.) )))))))))) )))))))))) >> )))))))))))) )))))))))))) Variable expenses: Variable expenses: )))))))))) )))))))))) >> )))))))))))) )))))))))))) )))))))))) )))))))))) )))))))))))))))))))))))) )))))))))))) )))))))))))) (

(oonnttrriibbuuttiioon n mmaarrggiinn ))))))))))))))))))))))) ) Fixed expenses: Fixed expenses: )))))))))) )))))))))) )))))))))))) )))))))))))) )))))))))) )))))))))) )))))))))))))))))))))))) )))))))))))) )))))))))))) )))))))))) )))))))))) >> )))))))))))) )))))))))))) Requirement 2: Requirement 2:

!econcile any difference between the net operating income on your variable costing income statement and the !econcile any difference between the net operating income on your variable costing income statement and the net

net opeoperatirating ng incincome on ome on the the absabsorporptiotion n coscostinting g incincome ome stastatemetement nt aboabove.ve. (Om(Omit the it the "$" sign in "$" sign in yoyour ur response.)

response.)

%

%aarriiaabblle e ccoossttiinng g nneet t ooppeerraattiinng g iinnccoomme e lloossss"" > )> )))))))))))))))))))))) ) ))))))))))# &ixed manufacturing overhead cost deferred

))))))))))# &ixed manufacturing overhead cost deferred )))))))))))) )))))))))))) bsorption costing net operating income loss"