Share
Explore BrainMass

# Variable and absorption cost

DATA
ABC, Inc. is a newly organized manufacturing business this year.
The following company's costs and expenses are:

Sales price per unit \$75
Manufacturing costs: Fixed Costs Variable Costs
Direct materials \$8
Direct labor 10
Period expenses:
Variable Selling and administrative expenses 6
Fixed Selling and Administrative expenses 10,000
Totals \$120,200 \$29
Units produced 5,800 units
Units sold 5,600 units

Required: Use the information in the DATA field above using cell referencing to answer the following requirements.
1. Calculate the unit cost for variable costing.
2. Calculate the unit cost for absorption costing.
3. Prepare an absorption-costing income statement.
4. Prepare a variable-costing income statement.
5. Reconcile the differences in income that you calculated in #3 and #4
6. Calculate the breakeven point in units.
7. Calculate the breakeven point in sales dollars.
8. Calculate the safety margin and explain what the margin of safety means for this ABC Inc.
9. Calculate the operating leverage.
10. What if sales volume increases by 4% how much will income increase in percentage terms? Make sure you have read over the DOL discussion and
understand the multiplier impact of changes in sales volume that occurs based on DOL.
11. What if the direct material cost per unit decreases from \$8 a unit to \$7, what will be the new breakeven in units? Explain why it changed.
You should only have to change the direct material cost in the data area and actually all your answers should be updated. Please put the direct material cost back to the original number once you have answered the question.
12. What if the manufacturing overhead cost decreases from 110,200 to 116,000, what will be the new breakeven in units? Explain why it changed.
You should only have to change the fixed MOH in the data area and actually all your answers should be updated. Please put the fixed MOH cost back to the original number once you have answered the question.

Solution:
1. 2.
Variable costing Absorption Costing
Direct materials
Direct labor
Total per unit cost

3. ABC Company Inc.
Absorption Costing Income statement

Sales revenue
Less: Cost of goods sold
Gross Margin
Variable
Fixed
Net income

4. ABC Company Inc.
Variable Costing Income statement

Sales Revenue
Less: Variable Expenses:
Variable manufacturing costs
Contribution margin
Less: Fixed Expenses:
Net income
5. I am using a modification of the short cut method on page 331 as my model.
Change in inventory:
Units produced
Units sold
Increase in inventory

Net income:
Absorption costing
Variable costing
Difference

6. Break even in units
Units

7. Break even in sales \$

8. Calculate the safety margin and explain what the margin of safety means for this ABC Inc.
I realize the author uses budgeted sales revenue in the safety margin calculation, but if you are
given the actual sales revenue you can replace budgeted sales with actual sales, which you should do for #8.

9. Calculate the operating leverage. Reference page 296.

10. What if sales volume increases by 4% how much will income increase in percentage terms? Make sure you have read over the DOL discussion and
understand the multiplier impact of changes in sales volume that occurs based on DOL.

11. What if the direct material cost per unit decreases from \$8 a unit to \$7, what will be the new breakeven in units? Explain why it changed.
You should only have to change the direct material cost in the data area and actually all your answers should be updated. Please put the direct material cost back to the original number once you have answered the question.

12. What if the manufacturing overhead cost decreases from 110,200 to 116,000, what will be the new breakeven in units? Explain why it changed.
You should only have to change the fixed MOH in the data area and actually all your answers should be updated. Please put the fixed MOH cost back to the original number once you have answered the question.

#### Solution Preview

Please see the attached file(s) for the complete tutorial.

=====================

DATA
ABC, Inc. is a newly organized manufacturing business this year.
The following company's costs and expenses are:

Sales price per unit \$75
Manufacturing costs: Fixed Costs Variable Costs
Direct materials \$8
Direct labor 10
Period expenses:
Variable Selling and administrative expenses 6
Fixed Selling and Administrative expenses 10,000
Totals \$120,200 \$29
Units produced 5,800 units
Units sold 5,600 units

Required: Use the information in the DATA field above using cell referencing to answer the following requirements.
1. Calculate the unit cost for variable costing.
2. Calculate the unit cost for absorption costing.
3. Prepare an absorption-costing income statement.
4. Prepare a variable-costing income statement.
5. Reconcile the differences in income that you calculated in #3 and #4
6. Calculate the breakeven point in units.
7. Calculate the breakeven point in sales dollars.
8. Calculate the safety margin and explain what ...

#### Solution Summary

Variable and absorption costs are examined. The variable manufacturing overhead is determined.

\$2.19