8-21

1. When absorption costing system is implemented, operating income is affected by both

production and sales. A decrease in production in Q2 eventually lead to under-applied
overhead which was added to COGS in Q2. The result was that this unabsorbed overhead
ended up on the income statement as a charge against the period, thereby reducing
income. The controller was correct, although he had to explain everything especially the
technical aspects.

2.

Sales
Variable
Expenses:
Variable Manufacturing
at $30 per unit
Variable selling and
administrative
at $5 per unit
Total variable expenses
Contribution margin
Fixed expenses:

Q1
Q2
$1,600,00 $2,000,00
0
0

480,000

600,000

80,000
560,000
1,040,000

100,000
700,000
1,300,000

Fixed manufacturing overhead

Fixed selling and administrative
Total fixed expenses
Operating
Income

Selling and administrative expenses,

First Quarter
Less variable portion
16,000*5
Fixed selling and administrative
expenses

800,000
230,000
1,030,000

800,000
230,000
1,030,000

10,000

270,000

310,000

330,000

80,000

100,000
230,00
0

230,000

3. Schedule of inventories, production and sales in units

Beginni
ng
Units
Inventor Produc
y
ed
Q1

3000

Q2

7000

Units

Ending

Sold
Inventory
16,00
20,000
0
7000
20,0
14,000
00
1,000

Variable costing Operating Income

Less:
Fixed manufacturing overhead cost
releas from inventory during the
ed
Q1

Q1
10,000

Q2
270,000

120,00
0

Add:

Add:

(3000*4
0)
Fixed manufacturing overhead cost Q1
to Q2
(7000*4
280,00
0)
0
Fixed overhead manufacturing cost Q1 to future
1000*4

280,
000
40,000

0
Absorption costing operating income

170,0
00

30,000

4. Benefits of using the variable costing method for internal reporting purposes includes:-

As fixed cost are reported in total amount, it has more scope for effective control on these
cost.
Helps in forecasting and reporting income for decision making.
Profit changes directly with sales volume, therefore its not affected by changes in
inventory levels.
Through effective cost volume profit analysis, breakeven point and total profit for the
given volume can be determined.
Disadvantages

Difficulty in determining the nature of cost. (Fixed or variable)

Additional record keeping cost is required because variable costing is not acceptable for
external financial reporting.

9-29
a.Sales Budget

b.

Sales (in units)

Jan
Feb
March
11,000
10,000
13,000

Sales price(units)
Sales
($)

60
660,00
0

60
600,00
0

60
780,000

Production budget
Sales (in units)
Add: Est. Finished good
FG requirement
Less: Beg. Inv. FG
Production
requirement

Jan
Feb
March
11,000
10,000
13,000
2,000
2,600
2,200
13,000
2,200

12,600
2,000

15,200
2,600

10,800

10,600

12,600

c.
Purchase Budget (raw
materials)
Jan
Feb
March
10,800
10,600
12,600
54,000
53,000
63,000

Production(units)
Raw materials(units)
add: Est, ending
inventory
Total requirement
Less: beginning
Inventory
Raw materials to
purchase
Units kg
$

d.

13,250
67,250

15,750
68,750

13,750
76,750

13,500

13,250

15,750

53,750
32,250

55,500
33,300

61,100
36,600

Direct Labour and Overhead

budget
Jan
Units
Direct Labour hours(1.25/unit)
Direct Labour cost
($16/hr)
Manufacturing
overhead:
Variable
Fixed
Total manufacturing overhead
Total cost of direct
labour
and manufacturing overhead

e.

Feb
10,800
10,600
13,500
13,250
216,000

212,000

108,000
85,600
193,600

106,000
85,600
191,600

409,600

403,60
0

Selling and administrative

budget
Sales(units)
Variable:
Shipping

Jan
Feb
11,000
44,000

March
13,000
40,000

52,000

Sales commission

f.

66,000

60,000

78,000

Total
Fixed

110,000
34,100

100,000
34,100

130,000
34,100

Total

144,100

134,100

164,10
0

Budgeted income statement

Jan
Sales
revenue
Less: variable expenses
COGS
S&A
Total variable cost
Contribution margin
Less fixed expenses
Manufacturing overhead
S&A
Total fixed expenses
Operating income (loss)
Less interest expense
Net
Income(loss) $

g.

Feb

March

660,000

600,000

780,000

363,000
110,000
473,000
187,000

330,000
100,000
430,000
170,000

429,000
130,000
559,000
221,000

85,600
34,100
119,700
67,300
4,500

85,600
34,100
119,700
50,300
5,344

85,600
34,100
119,700
101,300
4,872

62,800

44,956

96,428

Cash Budget
Operating cash
receipts:
Cash sales
Previous month sales
2nd month sale
Total

Jan

Feb

March

264,000
216,000
180,000
660,00
0

240,000
198,000
216,000
654,00
0

690,000

12,000

13,320

14,640

312,000
180,000
198,000

Operating Cash
Payment
Raw materials
Current month

Previous month
Direct Labour
Variable overhead
Fixed overhead
Variable S&A
Fixed S&A
Purchase of equipment
Total
Net operating cash
inflow
(outflo
w)
Interest
Beginning balance
Available before
borrowing
/repayment
Borrowing
Repayment
Ending balance $

24,000
216,000
108,000
84,400
110,000
19,100
300,000
874,400
214,400

19,350
212,000
106,000
84,400
100,000
19,100

19,980
252,000
126,000
844,000
130,000
19,100

554,170

646,120

-4,500
80,000

99,830
-5,344
30,000

43,880
-4,872
30,000

138,900
168,900
na
30,000

124,486
na
94,486
30,000

69,008
na
39,008
30,000