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    Ch8 Additional Practice-Answers

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    tolatiller
    The document provides information about the Miller Company's income statements for Year 1 and Year 2 under absorption costing and variable costing. It shows that while sales remained the same, production increased in Year 2 from 40,000 to 50,000 units. This resulted in a lower unit product cost under absorption costing for Year 2. The reconciliation of the income statements under the two costing methods shows operating income was the same under variable costing but higher in Year 2 under absorption costing due to a deferral of overhead costs to inventory.

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    Ch8 Additional Practice-Answers

    Uploaded by

    tolatiller
    30 views3 pages
    The document provides information about the Miller Company's income statements for Year 1 and Year 2 under absorption costing and variable costing. It shows that while sales remained the same, production increased in Year 2 from 40,000 to 50,000 units. This resulted in a lower unit product cost under absorption costing for Year 2. The reconciliation of the income statements under the two costing methods shows operating income was the same under variable costing but higher in Year 2 under absorption costing due to a deferral of overhead costs to inventory.

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    Ch8 Additional practice-Answers

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    The document provides information about the Miller Company's income statements for Year 1 and Year 2 under absorption costing and variable costing. It shows that while sales remained the same, production increased in Year 2 from 40,000 to 50,000 units. This resulted in a lower unit product cost under absorption costing for Year 2. The reconciliation of the income statements under the two costing methods shows operating income was the same under variable costing but higher in Year 2 under absorption costing due to a deferral of overhead costs to inventory.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    30 views3 pages

    Ch8 Additional Practice-Answers

    Uploaded by

    tolatiller
    The document provides information about the Miller Company's income statements for Year 1 and Year 2 under absorption costing and variable costing. It shows that while sales remained the same, production increased in Year 2 from 40,000 to 50,000 units. This resulted in a lower unit product cost under absorption costing for Year 2. The reconciliation of the income statements under the two costing methods shows operating income was the same under variable costing but higher in Year 2 under absorption costing due to a deferral of overhead costs to inventory.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
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    CH 8 (Answers)

    The Miller Company had the following results for its first two years of operation:
    Year 1 Year 2
    Sales $1,200,000 $1,200,000
    Cost of goods sold 800,000 800,000
    Gross margin 400,000 400,000
    Selling and administrative 300,000 300,000
    expense
    Operating income $100,000 $100,000

    In Year 1, the company produced and sold 40,000 units of its only product; in Year 2, the company again sold
    40,000 units, but increased production to 50,000 units. The company's variable production cost is $5 per unit, and its
    fixed manufacturing overhead cost is $600,000 a year. Fixed manufacturing overhead costs are applied to the
    product on the basis of each year's unit production (i.e., a new fixed overhead rate is computed each year). Variable
    selling and administrative expenses are $2 per unit sold.

    Required:

    a) Compute the unit product cost for each year under absorption costing and under variable costing.
    b) Prepare an income statement for each year, using the contribution format with variable costing.
    c) Reconcile the variable costing and absorption costing income figures for each year.
    d) Explain why the operating income for Year 2 under absorption costing was higher than the operating income for
    Year 1, although the same number of units were sold in each year.

    Answers:

    a) Cost per unit under absorption costing:

    Year 1 Year 2
    Variable production cost per unit $5 $5
    Fixed manufacturing overhead cost:
    ($600,000/40,000) $15
    ($600,000/50,000) $12
    Unit product cost $20 $17

    Cost per unit under variable costing:

    Year 1 Year 2
    Variable production cost per $5 $5
    unit
    b) Income statements for each year under variable costing:
    Year 1 Year 2
    Sales $1,200,000 $1,200,000
    Cost of goods sold ($5 x 200,000 200,000
    40,000)
    Variable selling and 80,000 80,000
    administrative expense ($2 x
    40,000)
    Contribution margin 920,000 920,000
    Fixed expense:
    Fixed manufacturing overhead
    600,000 600,000
    Fixed selling and 150,000 150,000
    administrative expense
    Operating income $100,000 $100,000

    c) Reconciliation of absorption costing and variable costing net incomes

    Year 1 Year 2
    Net income under variable costing $100,000 $100,000
    Fixed manufacturing overhead deferred in
    (released from) inventory:
    Year 1 0
    Year 2 (10,000 units x $12 per unit) 120,000
    Net income under absorption costing $100,000 $220,000

    d. The increase in production in Year 2, in the face of level sales, caused a buildup of inventory and a deferral of a
    portion of the overhead costs of Year 2 to the next year. This deferral of cost relieved Year 2 of $120,000 of fixed
    manufacturing overhead. Income for Year 2 was $120,000 higher than income of Year 1, even though the same
    number of units was sold each year. By increasing production and building up inventory, the company was able to
    increase profits without increasing sales. This is a major criticism of the absorption costing approach.

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