Print Assignment: Topic Focus 03 Homework Assignment ::false. Total Variable Fixed

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1 Description / Instructions: Topic Focus 03 Homework Assignment Exercise T3-7 (Part Level Submission) The following data was prepared by the Waco Wagon Company. Total Variable Fixed Sales price 24/unit Direct materials used 83,150 Direct labor 99,000 Manufacturing overhead 85,000 9,000 76,000 Selling and administrative expense 22,400 13,400 9,000 Units manufactured 18,100 units Beginning Finished Goods Inventory 20,500 units Ending Finished Goods Inventory 25,000 units Under absorption costing, what is the unit product cost? (Round answer to 2 decimal places, e.g ) Unit product cost Under variable costing, what is the unit product cost? (Round answer to 2 decimal places, e.g ) Unit product cost Under absorption costing, what is the cost of goods sold? Cost of goods sold (d) Under variable costing, what is the cost of goods sold? Cost of goods sold (e) Under absorption costing, what is the operating income? Page 1 of 5

2 Operating income (f) Under variable costing, what is the operating income? Operating income (g) Calculate the difference in operating income under absorption costing versus variable costing. Difference between absorption and variable costing income Problem T3-8 (Part Level Submission) Ruth Dennis, CEO of Prescott Industries, is concerned about the recent volatility in the company s operating income. She believes that since the number of units sold has been fairly stable over the past three years that operating income also should have been stable. Ruth asked Jim Randall, Prescott s inventory manager, to help her understand the issue. Jim reviewed the company s records and compiled the following changes to Finished Goods Inventory (in units) for the years 2013, 2014, and Year Beginning inventory 1, Production 40,100 39,230 40,100 Sales (40,400) (39,515) (39,515) Ending inventory ,170 Jim also gathered the 2013 income statements prepared using absorption costing and variable costing, which follow. Income Statement - Absorption Costing Sales 4,605,600 Cost of goods sold Units in beginning inventory (86,000) Units sold from current year production (2,883,573) Total cost of goods sold (2,969,573) Gross margin 1,636,027 Selling expense (642,000) Operating Income 994,027 Income Statement - Variable Costing Sales 4,605,600 Variable production expenses (1,384,681) Variable selling expenses (201,000) Page 2 of 5

3 Contribution margin 3,019,919 Fixed manufacturing expenses (1,573,123) Fixed selling expenses (441,000) Operating income 1,005,796 Compute the unit product cost for 2013, 2014, and 2015 for variable and absorption costing. Assume unit variable costs and total fixed costs do not change from one year to the next.. (Round answers to 2 decimal places, e.g ) Unit product cost using variable costing Unit product cost using absorption costing Prepare variable and absorption costing income statements for 2014 and (Round answers to 0 decimal places, e.g. 5,275.) Income Statement Absorption Costing Income Statement Variable Costing Page 3 of 5

4 What do you notice about the trend in operating income from 2013 to 2015 under absorption costing? Compare this trend to the trend in unit sales. Income from 2013 to 2014 and then from 2014 to The trend in income statement match the trend in unit sales. (d) Add the operating incomes across the three years for variable costing and absorption costing. What do you notice about the two totals? Why did this happen? Over the 3 years income because units produced and units sold are. Problem T3-10 (Part Level Submission) Bob Jones owns a catering company that prepares banquets and parties for individual and corporate functions throughout the year. Jones s business is seasonal, with a heavy schedule during the summer and on year-end holidays and a light schedule the rest of the year. Fixed operating costs are incurred evenly throughout the year. One of Jones s most requested functions is a cocktail party. Bob has developed the following costs per person for a standard cocktail party: Food and beverages 14 Direct labor 6 Variable overhead 3 Fixed overhead 4 Based on absorption costing, what is Jones s cost per person? Based on variable costing, what is his cost per person? Absorption Costing Variable Costing Cost per person Jones prices his cocktail parties by adding a 12% markup to his costs. What price will Jones charge per person if he uses absorption costing? If he uses variable costing? (Round answers to 2 decimal places, e.g ) Absorption Costing Variable Costing Page 4 of 5

5 Cost per person Jones has been asked to bid on a 200-person cocktail party to be given next month. What is the minimum price he should bid for the party? Minimum price Jones should bid for the party Page 5 of 5