1.
Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.
To prepare: absorption costing income statement.
1.

Answer to Problem 4.25P
Income statement is given below.
Explanation of Solution
Year 1 Variable cost of goods sold
Variable selling and administrative expense:
Data | Amount $ | `Amount $ |
Sales | 800,000 | |
Variable Expense | ||
Cost of goods sold | 100,000 | |
Variable administrative | 50,000 | |
Total variable expense | 150,000 | |
Contribution margin | 650,000 | |
Fixed expense : | ||
Fixed manufacturing expense | 480,000 | |
Fixed administrative expense | 140,000 | |
Total fixed expense | 620,000 | |
Net operating income | 30,000 |
Year 2 Variable cost of goods sold
Variable selling and administrative expense:
Data | Amount $ | `Amount $ |
Sales | 640,000 | |
Variable Expense | ||
Cost of goods sold | 80,000 | |
Variable administrative | 40,000 | |
Total variable expense | 120,000 | |
Contribution margin | 520,000 | |
Fixed expense : | ||
Fixed manufacturing expense | 480,000 | |
Fixed administrative expense | 140,000 | |
Total fixed expense | 620,000 | |
Net operating income | (10,000) |
Year 3 Variable cost of goods sold
Variable selling and administrative expense:
Data | Amount $ | `Amount $ |
Sales | 800,000 | |
Variable Expense | ||
Cost of goods sold | 100,000 | |
Variable administrative | 50,000 | |
Total variable expense | 150,000 | |
Contribution margin | 650,000 | |
Fixed expense : | ||
Fixed manufacturing expense | 480,000 | |
Fixed administrative expense | 140,000 | |
Total fixed expense | 620,000 | |
Net operating income | 30,000 |
2.
Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.
To calculate: Unit product cost by using absorption costing for each year.
2.

Answer to Problem 4.25P
Unit product cost by using absorption costing for year 1 is $11.60, year 2 is $10 and year 3 is $14
Explanation of Solution
- Fixed manufacturing
overhead Year 1
- Units in ending inventory:
Unit product cost as follows:
Particular | Per unit costs $ |
Variable manufacturing overhead | 2 |
Add: fixed manufacturing overhead | 9.60 |
Unit product cost by using absorption costing | 11.60 |
Year 2
Unit product cost as follows:
Particular | Per unit costs $ |
Variable manufacturing overhead | 2 |
Add: fixed manufacturing overhead | 8 |
Unit product cost by using absorption costing | 110 |
Year 3
Unit product cost as follows:
Particular | Per unit costs $ |
Variable manufacturing overhead | 2 |
Add: fixed manufacturing overhead | 12 |
Unit product cost by using absorption costing | 14 |
Year 1
Absorption net operating income as:
Particular | Amount $ |
Variable net operating income | 30000 |
Add: fixed manufacturing overhead deferred in inventory | 0 |
Absorption costing net operating income | 30000 |
Absorption costing net operating income for year 1 is $30,000
Year 2
Absorption net operating income as:
Particular | Amount $ |
Variable net operating income | (10,000) |
Add: fixed manufacturing overhead deferred in inventory | 160,000 |
Absorption costing net operating income | 60,000 |
Absorption costing net operating income for year 1 is $60,000 Year 3
Absorption net operating income as:
Particular | Amount $ |
Variable net operating income | 30,000 |
Add: fixed manufacturing overhead deferred in inventory | (40,000) |
Absorption costing net operating income | (10,000) |
Absorption costing net operating income for year 1 is ($10,000) Unit product cost by using absorption costing for year 1 is $11.60, year 2 is $10 and year 3 is $14
3.
Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.
the absorption costing income statement, net operating income was higher in year 2 than it was in Year 1
3.

Answer to Problem 4.25P
The two main reason of increasing net operating income for the year are given below.
Explanation of Solution
The two main reason of increasing net operating income for the year are as follows:
- Reduction in the unit product cost sue to high production in year 2
- Huge amount of fixed manufacturing overhead for the year was deferred in inventory.
4.
Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.
To determine: the reason for loss in year 3
4.

Answer to Problem 4.25P
Reason for loss in year 2 is that the fixed manufacturing overhead deferred in inventory was charged against the operation in year 3
Explanation of Solution
Reason for loss in year 2 is that in year 2 the fixed manufacturing overhead deferred in inventory was charged against the operation in year 3. The included costs charged are higher than the cost deferred to the upcoming years. As a result the company reported loss for the year even though the units sold is same in year.
5.
Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.
To prepare: Net operating income for year 1,2 and 3
5.

Answer to Problem 4.25P
Net operating income for year 1 is $30000, year 2 ($10000) and year 3 is $30000
Explanation of Solution
- By using lean production company’s production will be attached to sales in each year. Hence no finished goods inventory would have developed in the second year or third
- Income statement using absorption costing
Particular | Year 1 | Year 2 | Year 3 |
Sales | 800,000 | 640,000 | 800,000 |
Cost of goods sold | 580,000 | 580,000 | |
Cost of goods manufactured | 464,000 | ||
Add: under applied overhead | 96,000 | ||
Cost of goods sold | 580,000 | 560,000 | 580,000 |
Gross margin | 220,000 | 80,000 | 220,000 |
Less: selling and administrative expense | 190,000 | 180,000 | 190,000 |
Net operating income | 30000 | (100000) | 30,000 |
Under applied overhead:
Net operating income for year 1 is $30000, year 2 ($10000) and year 3 is $30000
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Chapter 4 Solutions
MANAGERIAL ACCOUNTING FOR MANAGERS AC
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