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Solution of Chapter 6

The document contains two problems that calculate income statements using variable and absorption costing methods. Problem 6-7A calculates Jackson Company's income statement for 2019 and 2020 using variable costing. For 2019, net income is $1,950,000 and for 2020 it is $2,700,000. Problem 6-13 calculates contribution margins for basic and deluxe products, determining the basic product results in a higher contribution per machine hour. It then calculates total contribution using various machine hour allocations between the two products.

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Ahmed Raeisi
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46 views7 pages

Solution of Chapter 6

The document contains two problems that calculate income statements using variable and absorption costing methods. Problem 6-7A calculates Jackson Company's income statement for 2019 and 2020 using variable costing. For 2019, net income is $1,950,000 and for 2020 it is $2,700,000. Problem 6-13 calculates contribution margins for basic and deluxe products, determining the basic product results in a higher contribution per machine hour. It then calculates total contribution using various machine hour allocations between the two products.

Uploaded by

Ahmed Raeisi
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

EXERCISE 6-8

(a)
Weighted-
Sales Mix Contribution Average
Percentage Margin Ratio Contribution
Margin Ratio
Mail pouches
and small 80% 20% 0.16
boxes
Non-standard 20% 70% 0.14
boxes .30

Total break-even sales in dollars = $12,000,000 ÷ 0.30 = $40,000,000

Total Break- Sales Dollars


Sales Mix even Sales Needed
Percentage in Dollars Per Product
Mail pouches
and small 80% X $40,000,000 = $32,000,000
boxes
Non-standard 20% X $40,000,000 = 8,000,000
boxes $40,000,000
Total sales

EXERCISE 6-8 (Continued)


(b)
Weighted-
Sales Mix Contribution Average
Percentage Margin Ratio Contribution
Margin Ratio
Mail pouches
and small 40% 20% 0.08
boxes
Non-standard 60% 70% 0.42
boxes 0.50
Total break-even sales in dollars = $12,000,000 ÷ 0.50 = $24,000,000
Total Break-
Sales Mix even Sales Sales Dollars
Percentage in Dollars Per Product
Mail pouches
and small 40% X $24,000,000 = $ 9,600,000
boxes
Non- 60% X $24,000,000 = 14,400,000
standardized $24,000,000
boxes
Total sales
[$12,000,000 ÷ ((40% x 20%) + (60% x 70%)) = $24,000,000]; (FC ÷ Wtd.-ave. CM ratio = Tot. BEP $)
[(40% x $24,000,000 = $9,600,000) + (60% x $24,000,000 = $14,400,000) = $24,000,000]; [(Mail
pouches sales mix % x Tot. BEP $ = Mail pouches sales $ at BEP) + (Non-std. boxes sales mix % x Tot.
BEP $ = Non-std. boxes sales $ at BEP) = Tot. BEP $]
LO2 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision
Analysis

EXERCISE 6-13

(a) Product
Basic Deluxe
Selling price per unit $40 $ 52
Variable costs per unit 22 24
Unit contribution margin (a) $18 $ 28
Machine hours required (b) 0.5 0.8
Contribution margin per
machine hour (a) ÷ (b) $36 $35
[(Basic: ($40 - $22) ÷ .5 = $36); (Deluxe: ($52 - $24) ÷ .8 = $35)]
[(Basic: (USP – UVC) ÷ MH/unit = CM/MH); (Deluxe: (USP – UVC) ÷ MH/unit = CM/MH)]

(b) The Basic product should be manufactured because it results in


the higher contribution margin per machine hour.

(c) 1. Basic Deluxe Total


Machine hours allocated 500 500 1,000
X Contribution margin
per machine hour $36 $35
Contribution margin $18,000 $17,500 $35,500
[(Basic: 500 x $36) + (Deluxe: 500 x $35) = $35,500]
[(Basic: MH alloc. X CM/MH) + (Deluxe: MH alloc. X CM/MH) = Tot. CM]
2. Basic Deluxe Total

Machine hours allocated 1,000 –0– 1,000


X Contribution margin
per machine hour $36 $35
Contribution margin $36,000 –0– $36,000
(Basic: 1,000 x $36 = $36,000)
(Basic: MH alloc. X CM/MH = Tot. CM)
LO3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Decision Modeling IMA:
Decision Analysis

*PROBLEM 6-7A

(a) JACKSON COMPANY


Income Statement
For the Year Ended December 31, 2019
Variable Costing

Sales (3,500 tons X $7,000,000


$2,000)...........................................................
$ –0–
Variable cost of goods sold
Inventory, January 1 ............................. 1,200,000
Variable cost of goods manufactured
[4,000 tons X ($2,000 X 0.15)] ........... 1,200,000
Variable cost of goods available
for sale .............................................. 150,000
Inventory, December 31 1,050,000
[500 tons X ($2,000 X 0.15)] .............
Variable cost of goods sold ................. 700,000 1,750,000
Variable selling expenses 5,250,000
[3,500 tons X ($2,000 X 0.10)] ........... 2,800,000
Contribution margin..................................... 500,000 3,300,000
Fixed manufacturing overhead ................... $1,950,000
Fixed administrative expenses ...................
Net income....................................................
[(3,500 x $2,000) – (($0 + (4,000 x ($2,000 x .15)) – (500 x ($2,000 x .15))) – (3,500 x ($2,000 x .10)) –
($2,800,000 + $500,000) = $1,950,000]
[Sales – (Beg. inv. + Var. COGM – End. inv.) – Var. sell. exp. – (Fix. MOH + Fix. admin. exp.) = Net inc.]

*PROBLEM 6-7A (Continued)


JACKSON COMPANY
Income Statement
For the Year Ended December 31, 2020
Variable Costing

Sales (4,000 tons X $8,000,000


$2,000).............................................................
$ 150,000
Variable cost of goods sold
Inventory, January 1 ............................... 1,050,000
Variable cost of goods manufactured
[3,500 tons X ($2,000 X 0.15)] ............. 1,200,000
Variable cost of goods available –0–
for sale ................................................ 1,200,000
Inventory, December 31 .........................
Variable cost of goods sold ................... 800,000 2,000,000
Variable selling expenses 6,000,000
[4,000 tons X ($2,000 X 0.10)] ............. 2,800,000
Contribution margin....................................... 500,000 3,300,000
Fixed manufacturing overhead ..................... $2,700,000
Fixed administrative expenses .....................
Net income......................................................
[(4,000 x $2,000) – ($150,000 + (3,500 x ($2,000 x .15)) - $0) – (4,000 x ($2,000 x .10)) – ($2,800,000 +
$500,000) = $2,700,000]
[Sales – (Beg. inv. + Var. COGM – End. inv.) – Var. sell. exp. – (Fix. MOH + Fix. admin. exp.) = Net inc.]

(b) JACKSON COMPANY


Income Statement
For the Year Ended December 31, 2019
Absorption Costing

Sales (3,500 tons X $2,000)...................... $7,000,000

Cost of goods sold $ –0–


Inventory, January 1 ......................... 4,000,000 (1)
Cost of goods manufactured ........... 4,000,000
Cost of goods available for sale ...... 500,000 (2)
Inventory, December 31 ................... 3,500,000
Cost of goods sold ........................... 3,500,000
Gross profit ..............................................
Variable selling expenses 700,000
[3,500 tons X ($2,000 X 0.10)] .............. 500,000 1,200,000
Fixed administrative expenses ............... $2,300,000
Net income................................................
*PROBLEM 6-7A (Continued)

(1) 4,000 X [($2,000 X 0.15) + ($2,800,000 ÷ 4,000)]


(2) 500 X [($2,000 X 0.15) + ($2,800,000 ÷ 4,000)]
[(3,500 x $2,000) – ($0 + (4,000 x (($2,000 x .15) + ($2,800,000 ÷ 4,000))) – (500 x (($2,000 x
.15) + ($2,800,000 ÷ 4,000)))) – ((3,500 x ($2,000 x .10)) + $500,000) = $2,300,000]
[Sales – (Beg. inv. + COGM – End. inv.) – (Var. sell. exp. + Fix. admin. exp.) = Net inc.]

JACKSON COMPANY
Income Statement
For the Year Ended December 31, 2020
Absorption Costing

Sales (4,000 tons X $2,000)................... $8,000,000

Cost of goods sold $ 500,000


Inventory, January 1 ...................... 3,850,000 (1)
Cost of goods manufactured ........ 4,350,000
Cost of goods available for sale.... –0–
Inventory, December 31 ................ 4,350,000
Cost of goods sold ........................ 3,650,000
Gross profit ...........................................
Variable selling expenses 800,000
[4,000 tons X ($2,000 X 0.10)] ........... 500,000 1,300,000
Fixed administrative expenses ............ $2,350,000
Net income.............................................
(1) 3,500 X [($2,000 X 0.15) + ($2,800,000 ÷ 3,500)]
[(4,000 x $2,000) – ($500,000 + (3,500 x (($2,000 x .15) + ($2,800,000 ÷ 3,500))) – 0) – ((4,000
x ($2,000 x .10)) + $500,000) = $2,350,000]
[Sales – (Beg. inv. + COGM – End. inv.) – (Var. sell. exp. + Fix. admin. exp.) = Net inc.]

(c) The variable costing and the absorption costing net income can be
reconciled as follows:
2019 2020
Variable costing net income $1,950,000 $2,700,000
Fixed manufacturing overhead
expensed with variable costing $2,800,000 $2,800,000
Less: Fixed manufacturing overhead
expensed with absorption costing (2,450,000)(1) (3,150,000)(2)
Difference 350,000 (350,000)
Absorption costing net income $2,300,000 $2,350,000

*PROBLEM 6-7A (Continued)

 3, 500 units sold 


 $2,800, 000 X 
(1)
In 2019, with absorption costing $2,450,000
 4, 000 units produced 
of the fixed manufacturing overhead is expensed as part of cost of goods sold, and
 500 units in inventory 
$350,000  $2,800, 000 X  is included in the ending
 4, 000 units produced 
inventory.
(2)
In 2020, with absorption costing $3,150,000 of fixed manufacturing overhead is
expensed as part of cost of goods sold. This includes the fixed manufacturing
overhead for 2020 of $2,800,000 plus $350,000 of fixed manufacturing overhead from
2016 that was included in the beginning inventory for 2020.
(d) Income parallels sales under variable costing as seen in the
increase in net income in 2020 when 500 additional units were sold.
In contrast, under absorption costing, income parallels production
as seen in the higher net income in 2019 when production
exceeded sales by 500 tons.
LO5 BT: AP Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement, Reporting
IMA: Cost Management, Reporting

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