Author Question: Variable and absorption costing, actual costing. The Iron City Company started business on ... (Read 82 times)

P68T · **on:** Jul 6, 2018

Variable and absorption costing, actual costing.

The Iron City Company started business on January 1, 2014. Iron City manufactures a specialty honey beer, which it sells directly to state-owned distributors in Pennsylvania.

Honey beer is produced and sold in six-packs, and in 2014, Iron City produced more six-packs than it was able to sell. In addition to variable and fixed manufacturing overhead, Iron City incurred direct materials costs of 880,000, direct manufacturing labor costs of 400,000, and fixed marketing and administrative costs of 295,000. For the year, Iron City sold a total of 180,000 six-packs for a sales revenue of 2,250,000.
Iron City's CFO is convinced that the firm should use an actual costing system but is debating whether to follow variable or absorption costing. The controller notes that Iron City's operating income for the year would be 438,000 under variable costing and 461,000 under absorption costing. Moreover, the ending finished goods inventory would be valued at 7.15 under variable costing and 8.30 under absorption costing.
Iron City incurs no variable nonmanufacturing expenses.

Required:
1. What is Iron City's total contribution margin for 2014?
2. Iron City incurs fixed manufacturing costs in addition to its fixed marketing and administrative costs. How much did Iron City incur in fixed manufacturing costs in 2014?
3. How many six-packs did Iron City produce in 2014?
4. How much in variable manufacturing overhead did Iron City incur in 2014?
5. For 2014, how much in total manufacturing overhead is expensed under variable costing, either through Cost of Goods Sold or as a period expense?

Question 2

E. Elijah, owner, withdrew 3,000 for personal use. The accountant would record the following journal entry:
a. Cash 3,000
E. Elijah, Capital 3,000
b. Income from Services 3,000
Cash 3,000
c. E. Elijah, Drawing 3,000
Cash 3,000
d. Wages Expense 3,000
Cash 3,000

aliotak · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1. Because no beginning inventories exist, the cost of the ending inventory must be the same as the cost of goods sold for the period. So, the unit cost of goods sold under variable costing is 7.15.

Variable cost of goods sold = Units sold Unit variable cost of goods sold
= 180,000 7.15
= 1,287,000
Variable nonmanufacturing expenses = 0
Sales Revenues = 2,250,000
Contribution Margin = 2,250,000 () 1,287,000 () 0
= 963,000

2. The profit under variable costing is given as 438,000. We just calculated the contribution margin of Iron City as 963,000. The difference, 525,000 (963,000 438,000) must represent the total fixed costs incurred by Iron City in 2014.

Fixed marketing and administrative costs are given as 295,000. The remainder, 230,000 (525,000 295,000) is therefore the fixed manufacturing costs for 2014.

3. The unit cost of ending inventory, as well as the unit cost of goods produced and sold, is 7.15 under variable costing and 8.30 under absorption costing. The difference, 1.15 (8.30 7.15) is the unit fixed manufacturing cost of goods produced during the period.

In requirement 2, we calculated that the total fixed manufacturing costs are 230,000.

So, Units produced = Total manufacturing costs/Unit fixed manufacturing cost of production
= 230,000/1.15
= 200,000 six-packs.

4. In 2014, Iron City incurred a total of 200,000 7.15 = 1,430,000 in variable manufacturing costs. This includes 880,000 in direct materials costs (given), 400,000 in direct manufacturing labor costs (given), and the rest in variable manufacturing overhead.

So, variable manufacturing overhead = 1,430,000 () 880,000 () 400,000
= 150,000.

5. Under variable costing, the proportion of variable manufacturing overhead corresponding to the units sold, relative to units produced, is expensed as variable cost of goods sold. This equals:
150,000 (180,000 units produced)/(200,000 units sold) = 135,000.
Moreover, the entire amount of fixed manufacturing overhead, totaling 230,000, is expensed.

So, total manufacturing overhead expensed = 135,000 (+) 230,000 = 365,000.

Answer to Question 2

c