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Management Accounting: Concepts,
Techniques & Controversial Issues

Chapter 2 Extra Problem and Solution

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

Chapter 2 | MAAW's Textbook Table of Contents

The following information is given for the Summer Company.

Transactions During the period Beginning and Ending Inventories
Sales.................................................... $2,000
Purchases of Direct Material.................... 490
Direct Labor costs incurred...................... 200
Factory overhead costs incurred:
Variable.................................................... 200
Fixed......................................................... 100
Selling & Adm costs incurred:
Variable..................................................... 125
Fixed.......................................................... 100




Beginning Direct Material........... $50
Ending Direct Material.................. 40
Beginning work in process:
Variable........................................ 40
Fixed............................................. 20
Ending work in process:
Variable........................................ 20
Fixed............................................. 10
Beginning finished goods:
Variable....................................... 100
Fixed.............................................. 50
Ending finished goods:
Variable....................................... 150
Fixed.............................................. 75

Required:
1. Calculate the cost of direct material used.
2. Calculate the cost of goods manufactured assuming absorption costing is used.
3. Calculate cost of goods sold for absorption costing.
4. Calculate gross profit.
5. Calculate net income for absorption costing.
6. Calculate the cost of goods manufactured assuming direct (or variable) costing is used.
7. Calculate cost of goods sold for direct costing.
8. Calculate contribution margin.
9. Calculate net income for direct costing.
10. If net income is different in questions 5 and 9, show why.
11. Prepare an income statement based on absorption costing.
12. Prepare an income statement based on direct costing.

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Chapter 2 Class Problem Solution

1. 490 + 50 - 40 = 500 DM

2. 500 + 200 + 300 + 60 - 30 = 1,030 COGM

3. 1,030 + 150 - 225 = 955 COGS

4. 2,000 - 955 = 1,045 GP

5. 1,045 - 225 = 820 NIA

See Exhibit 2-7.

11. Absorption Costing Income Statement

Sales   $2,000
COGS:    
BFG 150  
COGM* 1,030  
Less EFG 225 955
Gross Profit   1,045
Less Selling & Administrative Expenses   225
Net Income before taxes   $820

* DM = 490 + 50 - 40 = 500
TMC = 500 DM + 200 DL + 300 FO = 1,000 TMC
COGM = 1,000 TMC + 60 BWIP -30 EWIP = 1,030

6. 500 + 200 + 200 + 40 - 20 = 920 COGM

7. 920 + 100 - 150 = 870 COGS

8. 2,000 - 870 - 125 = 1,005 CM

9. 1,005 - 100 -100 = 805 NID

See Exhibit2-15.

12. Direct Costing Income Statement

Sales   $2,000
COGS:    
BFG 100  
COGM* 920  
Less EFG 150 870
Manufacturing Margin   1,130
Less Variable Selling & Adm. Expenses   125
Contribution Margin   1,005
Less Fixed Costs:    
Manufacturing 100  
Selling & Administrative 100 200
Net Income before taxes   $805

*DM = 490 + 50 - 40 = 500
TMC = 500 DM + 200 DL + 200 FO = 900
COGM = 900 TMC + 40 BWIP -20 EWIP = 920

10. The difference between the two net income amounts is caused by the increase in the amount of fixed overhead in the inventory under absorption costing.

Fixed overhead in BWIP $20
Fixed overhead in BFG 50 $70
Fixed overhead in EWIP 10
Fixed overhead in EFG 75 85
Increase $15

The $15 increase in the amount of fixed overhead in the inventory represents an asset that appears on the balance sheet in absorption costing, so the amount of fixed overhead charged to expense is the actual overhead of $100 less the $15 deferred to a subsequent period. But notice under direct costing the entire $100 is charged to expense causing net income before taxes to be $15 less than the amount obtained under absorption costing.