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    Variable and absorption cost

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    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
    Variable Manufacturing overhead 5
    Fixed Manufacturing overhead $110,200
    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
    Variable overhead
    Fixed overhead
    Total per unit cost

    3. ABC Company Inc.
    Absorption Costing Income statement

    Sales revenue
    Less: Cost of goods sold
    Gross Margin
    Less: Selling and administrative expenses
    Variable
    Fixed
    Net income

    4. ABC Company Inc.
    Variable Costing Income statement

    Sales Revenue
    Less: Variable Expenses:
    Variable manufacturing costs
    Variable Selling and administrative costs
    Contribution margin
    Less: Fixed Expenses:
    Fixed manufacturing overhead
    Fixed selling and Administrative 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
    Fixed overhead rate
    Difference in fixed overhead expensed

    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.

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    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
    Variable Manufacturing overhead 5
    Fixed Manufacturing overhead $110,200
    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

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