Management And Accounting Web

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

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 EquationsXp = 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 EquationsXp = 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 (6,500)(320) \$2,080,000 Sales (5,500)(320) \$1,760,000 COGS: COGS: BFG 0 BFG4 825,000 COGM1 1,800,000 COGM5 0 EFG2 825,000 975,000 EFG 0 825,000 MM 1,105,000 MM 935,000 Less VS3 65,000 Less VS6 55,000 CM 1,040,000 CM 880,000 Less Fixed 960,000 Less Fixed 960,000 NIBT \$80,000 NIBT -\$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 (6,500)(320) \$2,080,000 Sales (5,500)(320) \$1,760,000 COGS: COGS: BFG 0 BFG5 1,155,000 COGM1 2,520,000 COGM6 0 EFG2 1,155000 1,365,000 EFG 0 1,155,000 GP 715,000 GP 605,000 LessS&A3 305,000 Less S&A7 295,000 Less PVV4 0 Less PVV8 720,000 NIBT \$410,000 NIBT -\$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 (6,500)(320) \$2,080,000 Sales (5,500)(320) \$1,760,000 COGS: COGS: BFG 0 BFG4 550,000 COGM1 1,200,000 COGM5 0 EFG2 550,000 650,000 EFG 0 550,000 Throughput 1,430,000 Throughput 1,210,000 Less exp3 1,625,000 Less exp6 1,015,000 NIBT -\$195,000 NIBT \$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)