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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

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.