Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
MAAW's Chapter 8 | Contribution Margin Questions
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 |
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| 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 | (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 (TP) 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 | ||
| TP | 1,430,000 | TP | 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)
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