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Bob’s Boats Solution   

Introduction

Year 1 Equations 

Year 2 Equations

Direct Costing Statements

Absorption Costing Statements 

Throughput Costing Statements

Equations for Break-even calculations

  

Introduction

To facilitate easy comparisons, net income for each inventory valuation method is stated in relation to direct costing net income in the illustrations below. Using this approach allows us to start with direct costing net income and then adjust for the inventory change effect to arrive at the net income amounts for absorption costing and throughput costing. As noted below, the income change effects provide rewards and penalties that reveal a key element in the controversy over income measurements.

Year 1 Equations
Xp = 12,000, Xs = 6,500

Questions

Type of Costing

Direct costing equation

Inventory Change Effect

Net Income
24. & 25. Direct Costing NI =

-TFC + (P-V)(Xs)

-960,000 + (320-160)(6,500)

= $80,000

 No effect $80,000

 
26. & 27.

Absorption Costing  NI =

-TFC + (P-V)(Xs)

-960,000 + (320-160)(6,500)

= $80,000

+ (F)(Xp-Xs)

+ (60)(5,500)

+ $330,000 Reward

 $410,000
28. & 29.

Throughput Costing  NI =

-TFC + (P-V)Xs)

-960,000 + (320-160)(6,500)

= $80,000

- (Vm-DM)(Xp-Xs)

-(150-100)(5,500)

- $275,000 Penalty

 $-195,000

 

Year 2 Equations
Xp = 0, Xs = 5,500

Question

Type of Costing

Direct costing equation

Inventory Change Effect

Net Income
31. Direct NI = -TFC + (P-V)(Xs)

-960,000 + (320-160)(5,500) =

 -$80,000

 No effect -$80,000
33.

Absorption NI =

-TFC + (P-V)(Xs)

-960,000 + (320-160)(5,500) =(320-160)(5,500) =

 -$80,000

+ (F)(Xp-Xs)

(60)(-5,500) =

-$330,000 Penalty

-$410,000

 
35.

Throughput NI =

-TFC + (P-V)Xs)

-960,000 + (320-160)(5,500) =

 -$80,000

- (Vm-DM)(Xp-Xs)

-(150-100)(5,500) =

+$275,000 Reward

$195,000

 

 

Direct Costing Statements

Year 1

Year 2

Sales

COGS:




MM
LessVS3
CM

Less Fixed

NIBT

(6,500)(320)


BFG
COGM1
EFG2




0
1,800,000
825,000

 

 

$2,080,000




975,000

1,105,000
       65,000
1,040,000

960,000

$80,000

Sales

COGS:




MM
Less VS6
CM

Less Fixed

NIBT

(5,500)(320)


BFG4
COGM5
EFG




825,000
0
            0

$1,760,000




825,000

935,000
55,000
880,000

960,000

-$80,000

1 COGM year 1 = (12,000 Xp)($150) = 1,800,000
2 EFG year 1 = (5,500)($150) = 825,000
3 S&A year 1 = (6,500 Xs)($10) 65,000
4 BFG year 2 = EFG year 1.
5 COGM year 2 = (0  Xp)($150) = 0
6 S&A year 2 = (5,500Xs)($10) = 55,000

 

Absorption Costing Statements

Year 1

Year 2

Sales

COGS:




GP

Less S&A3

Less PVV4

NIBT

(6,500)(320)


BFG
COGM1
EFG2




0
2,520,000
1,155,000

 

 

$2,080,000




1,365,000

715,000

305,000

            0

$410,000

Sales

COGS:




GP

Less S&A7

Less PVV8

NIBT

(5,500)(320)

BFG5
COGM6
EFG

 


1,155,000
0
             0

$1,760,000




1,155,000

605,000

295,000

720,000

-410,000

1 COGM year 1 = (12,000 Xp)($210) = 2,520,000
2 EFG year 1 = (5,500)($210) = 1,155,000
3 S&A year 1 = (6,500 Xs)($10) + 240,000 = 305,000
4 Production volume variance year 1 = (12,000 - 12,000)($60) = 0
5 BFG year 2 = EFG year 1.
6 COGM year 2 = 0, but since there is no production, all the fixed manufacturing cost is charged to expense. See note 8 below.
7 S&A year 2 = (5,500Xs)($10) + 240,000 = 295,000
8 Production volume variance year 2 = (12,000-0)($60) = 720,000 unfavorable, i.e., under-applied.

 

 

Throughput Costing Statements

Year 1

Year 2

Sales

COGS:




Throughput

Less exp3

NIBT

(6,500)(320)


 BFG
COGM1
EFG2




0
1,200,000   550,000

 

 

 

$2,080,000




 650,000

1,430,000

1,625,000

-$195,000

Sales

COGS:




Throughput

Less exp6

NIBT

(5,500)(320)
BFG4
COGM5
EFG




550,000
0
           0

$1,760,000




 550,000

1,210,000

1,015,000

$195,000

1 COGM year 1 = (12,000 Xp)($100) = 1,200,000
2 EFG year 1 = (5,500)($100) = 550,000
3 Operating expenses = ($50)(12,000) for variable conversion + ($10)(6,500) variable selling + 960,000 fixed
    = 600,000 + 65,000 +960,000 = 1,625,000.
4 BFG year 2 = EFG year 1.
5 COGM year 2 = (0 Xp)($100) = 0.
6 Operating expenses = ($50)(0) + ($10)(5,500) + 960,000 = 0 + 55,000 + 960,000 = 1,015,000.

 

Questions 32, 34 and 36.
The equations needed for break-even calculations are as follows:

32. Direct NI = -TFC + (P-V)(Xs)
                0  = -960,000 + 160(Xs)

34. Absorption NI = -TFC + (P-V)(Xs) + F(Xp-Xs)
                        0  = -960,000 + 160(Xs) + 60(Xp-Xs)

36. Throughput NI = -TFC + (P-V)(Xs) - (Vm-DM)(Xp-Xs)
                         0  = -960,000 + 160(Xs) - (150-100)(Xp-Xs)

 

MAAW's Chapter 8 Contribution Margin Questions

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