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:
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 and Ending Inventories:
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.