Chapter 8 Class Pop Company Problem
James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Chapter 8 | MAAW's Textbook Table of Contents
To demonstrate the difference between absorption costing, direct costing and throughput costing income statements.
The Pop Company produces product Z. The budgeted manufacturing costs for the product are indicated below.
| Type of Input | Unit Cost |
| Direct Material | $20 |
| Direct Labor | 2 |
| Variable Overhead | 10 |
| Fixed Overhead ($150,000 รท 10,000) | 15 |
Year 1: Assume that there were no beginning inventories and the actual costs of production are equal to budgeted costs. During the period, Pop Company purchased $200,000 worth of direct materials, incurred selling and administrative costs of $80,000 ($50,000 variable & $30,000 fixed), produced 10,000 units and sold 9,000 units at a price of $100 per unit. Ending inventories of Direct Materials and Work in Process are zero.
Year 2 : Again assume that the actual costs of production are equal to budgeted costs. During the period, Pop Company purchased $160,000 worth of direct materials, incurred selling and administrative costs of $80,000 ($50,000 variable & $30,000 fixed), produced 8,000 units and sold 9,000 units at a price of $100 per unit. Ending inventories of Direct Materials and Work in Process are zero.
Required:
1. Develop comparative income statements for absorption costing, direct costing and throughput costing for year 1.
2. Develop comparative income statements for absorption costing, direct costing and throughput costing for year 2.
Solution
| Year 1 for Pop Company | ||||||||
| Absorption Costing | Direct Costing | Throughput Costing | ||||||
| Sales | $900,000 | Sales | $900,000 | Sales | $900,000 | |||
| COGS: | COGS: | COGS: | ||||||
| BFG | 0 | BFG | 0 | BFG | 0 | |||
| COGM* | 470,000 | COGM* | 320,000 | COGM* | 200,000 | |||
| Less EFG** | 47,000 | 423,000 | Less EFG** | 32,000 | 288,000 | Less EFG** | 20,000 | 180,000 |
| Gross Profit | 477,000 | Manf Margin | 612,000 | Throughput | 720,000 | |||
| Less S&A | 80,000 | Less Var S&A | 50,000 | Less Opt Expense: | ||||
| Operating Income | $397,000 | Contribution Margin | 562,000 | Manf*** 270,000+ S&A 80,000 |
350,000 | |||
| Less Fixed Cost | 180,000 | Operating Income | $370,000 | |||||
| Operating Income | $382,000 | |||||||
| *150,000 + 32(10,000) ** 47(1,000) |
*
32(10,000) ** 32(1,000) |
*20(10,000) **20(1,000) *** 150,000 + 12(10,000) |
||||||
| Year 2 for Pop Company | ||||||||
| Absorption Costing | Direct Costing | Throughput Costing | ||||||
| Sales | $900,000 | Sales | $900,000 | Sales | $900,000 | |||
| COGS: | COGS: | COGS: | ||||||
| BFG | 47,000 | BFG | 32,000 | BFG | 20,000 | |||
| COGM* | 406,000 | COGM* | 256,000 | COGM* | 160,000 | |||
| Less EFG | 0 | 453,000 | Less EFG | 0 | 288,000 | Less EFG | 0 | 180,000 |
| Gross Profit | 447,000 | Manf Margin | 612,000 | Throughput | 720,000 | |||
| Less S&A | 80,000 | Less Var S&A | 50,000 | Less Opt Expense: | ||||
| Operating Income | $367,000 | Contribution Margin | 562,000 | Manf** 246,000+ S&A 80,000 |
326,000 | |||
| Less Fixed Cost | 180,000 | Operating Income | $394,000 | |||||
| Operating Income | $382,000 | |||||||
| *150,000 + 32(8,000) |
*
32(8,000) |
*20(8,000) ** 150,000 + 12(8,000) |
||||||
* Note: COGM can be calculated as follows in year 1 for absorption costing:
47(10,000) = 470,000 because the overhead rate is based on 10,000 and production
= 10,000.
But this does not work in year 2 because only 8,000 units were produced.
47(8,000) = 376,000. To get to COGM from this number you must add the underapplied fixed overhead
(10,000 - 8,000 units)($15 per unit) = 30,000.
Then 376,000 + 30,000 = 406,000.
Therefore, it is best to use the flexible budget equation to calculate COGM, i.e., in this case Y = 150,000 + (32)(units produced).