1.

Blueprint Problem: Absorption Costing and Variable Costing

Absorption Costing versus Variable Costing

The cost of manufactured products consists of direct materials, direct labor, and factory overhead. The reporting of all these costs in financial statements is called absorption costing. Absorption costing is required under generally accepted accounting principles for financial statements distributed to external users. However, alternative reports may be prepared for decision-making purposes by managers and other internal users. One such alternative reporting is variable costing or direct costing.

In variable costing, the cost of goods manufactured is composed only of variable costs. Thus, the cost of goods manufactured consists of direct materials, direct labor, and variable factory overhead. In a variable costing income statement, fixed factory overhead costs do not become a part of the cost of goods manufactured. Instead, fixed factory overhead costs are treated as period expenses.

The primary difference between absorption and variable costing is that absorption costing considers fixed overhead a _________________ and variable costing considers fixed overhead a _________________ . The only item that is a period cost for both costing methods is _________________ .

Determining Costs under Absorption and Variable Costing

Yost Company began its operations in the current year. It manufactures and sells only one product. During the year, Yost produced 210,000 units and sold 170,000 units at $425 each.

At the beginning of the year, Yost estimated that it would produce 220,000 units.

Determine the unit cost for Yost under both absorption and variable costing.

Because fixed overhead allocation is based on a predetermined rate, which is set during planning at the beginning of the period, the amount to be allocated per unit will be based on _________________ production, but only in the case of fixed overhead being classified as a _________________ cost.

Variable Costs
Direct materials	$68
Direct labor	51
Variable overhead	17

Fixed Costs
Fixed overhead costs	$7,480,000
Fixed selling and administrative expenses	9,350,000

If an amount is zero, enter "0".

	Absorption- Costing Unit Cost				Variable- Costing Unit Cost
Direct materials	$ _________________				$ _________________
Direct labor	_________________				_________________
Variable overhead	_________________				_________________
Fixed overhead	_________________				_________________
Unit cost	$ _________________				$ _________________

The difference between unit costs under absorption costing and variable costing is the classification of what cost? _________________

Under variable costing, this cost is classified as a _________________ cost.

How many units did Yost have in ending inventory? _________________ units

What is the value of Yost's ending inventory under absorption costing? $ _________________

What is the value of Yost's ending inventory under variable costing? $ _________________

APPLY THE CONCEPTS: Construct the absorption-costing and variable-costing income statements

Using the data from above, complete the following income statements.

Yost Company

Absorption-Costing Income Statement

Sales

$

Gross margin

$

Operating income

$

Yost

Variable-Costing Income Statement

Sales

$

Less variable expenses:

$

Variable selling and administrative expenses

$ 0

Gross margin

$

Less fixed expenses:

$

Operating income

$

2.

Blueprint Problem: Cost Behavior and CVP Analysis - Mixed costs and the high-low method

Mixed Costs

There are several ways to analyze mixed costs. First, you must be able to identify mixed cost and distinguish it from costs that have only fixed cost or variable cost characteristics. In the following table, identify which cost is described by each of the given scenarios.

Scenario
A housekeeper makes $10 dollars per hour to clean hotel rooms.	_________________
A cell phone plan costs $500 plus $0.50 for every minute of usage over 2,000 minutes.	_________________
A widget factory pays $5 per widget on material costs.	_________________
A car lease costs $10,000 plus $5 for every mile driven over 10,000.	_________________
Rent expense for a factory costs $20,000 per month.	_________________
A widget factory buys a new machine with annual depreciation of $8,000.	_________________
A farmer has a contract with a grocery chain that pays $5,000 guaranteed money plus $2 for every bushel of produce above 50,000 bushels.	_________________

The High-Low Method

The high-low method is the most basic method used for analyzing mixed costs. The purpose of this analysis is to estimate the fixed and variable cost components of mixed costs by comparing mixed costs at different levels along the relevant range for the appropriate activity base. Conduct a cost analysis for the following business using the high-low method.

The following table contains data for Magnuson Consulting, a strategic consulting firm.

Month	Billable Hours			Total Cost
April	900			$69,000
May	740			67,400
June	1,200			72,000
July	1,300			73,000
August	1,700			77,000

For this business, the activity base is _________________ , and the _________________ is 740 hours – 1,700 hours.

APPLY THE CONCEPTS: Use the high-low method to conduct a cost analysis

Conduct a cost analysis for Magnuson Consulting, a strategic consulting firm, using the high-low method. First, calculate the difference between the levels of activity and total cost at its highest and lowest levels. Enter all amounts as positive numbers.

	Billable Hours	Total Cost
Highest level	_________________	$ _________________
Lowest level	_________________	$ _________________
Difference	_________________	$ _________________

The total fixed cost for a business _________________ change with changes in activity levels. This means that the difference in total cost between the highest and lowest activity levels in the amount of $ _________________ is the change in _________________ cost.

Calculating the Variable Cost per Unit, Using the High-Low Method

Next, calculate the variable cost per unit, using the high-low values. The variable cost per unit , or in this case, the variable cost per hour, is used to find the fixed cost.

Variable Cost per Hour = ?

Variable Cost per Hour =	$ _________________		=	_________________ per Hour
	_________________ Hours

Calculating Fixed Cost

The fixed cost at any given level of activity can now be estimated. By selecting either the high or the low set of data and using the previously calculated variable cost per unit of billable data in the formula for a straight line — Y = fc + (vc x Units), where fc is fixed costs and vc is variable cost per unit — the total fixed costs can be determined.

Fixed Cost = ?

Highest level (1,700 hours)

Fixed Cost	=	$ _________________	–	( $ _________________ per hour x 1,700)
Fixed Cost	=	$ _________________

Lowest level (740 hours)

Fixed Cost	=	$ _________________	–	( $ _________________ per hour x 740)
Fixed Cost	=	$ _________________

Determining the Total Cost Formula

Now that the fixed and variable cost elements are known, determine the formula that mathematically displays the calculation of total cost with mixed cost elements.

Total Cost	=	?
Total Cost	=	$ _________________ + ( $ _________________ x Activity Level)

After determining the formula for total cost, calculate what the total cost would be if the company were to have an activity level of 1,500 hours.

Total Cost	=	$ _________________ + ($ _________________ x 1,500)
	=	$ _________________

3.

Blueprint Problem: Cost Behavior and CVP Analysis – Product and period costs

Cost Classification

Whether a company produces a product or service, managers need to know the company's cost for each product or service that it offers. For the purpose of determining the cost of each unit, costs are classified as either product costs or period costs.
_________________ costs are all costs connected with the production process and include direct material costs, direct labor costs, and overhead costs. _________________ costs include all costs incurred by a company that are not directly related to production. _________________ costs are further divided into selling expenses and administrative expenses.

See Clearly Co. produces eyeglasses and sunglasses. A partial list of costs follows. Identify each product cost as either direct materials, direct labor, or overhead. Identify the period costs as a selling expense or an administrative expense.

	Product Costs	Period Costs
1. Glass for eyeglasses	_________________	_________________
2. Maintenance supplies for the factory	_________________	_________________
3. Labor cost for opticians	_________________	_________________
4. Labor cost for factory maintenance workers	_________________	_________________
5. Depreciation on factory equipment	_________________	_________________
6. Advertising costs	_________________	_________________
7. Commissions paid to the sales force	_________________	_________________
8. Depreciation on office equipment in the executive offices	_________________	_________________
9. Utilities for the building that houses the administrative offices	_________________	_________________
10. Labor cost for the Accounting department	_________________	_________________

Cost Flows

The cost of goods manufactured is the total of the product costs incurred for the units completed during the current period. It is not an expense, like the cost of goods sold. The cost of goods manufactured is stored in _________________ , which is _________________ account. As units are sold, the cost of the units is then recorded as Cost of Goods Sold. The flow of the product costs is demonstrated in the linked example and summary below.

A cost of goods manufactured schedule is an internal schedule that is used to calculate the cost of producing the completed units during the period. It uses models very similar to the cost of goods sold model and summarizes the flows of the product costs. A separate cost of goods sold schedule which presents the cost of goods sold model) for the period may also be prepared or incorporated directly into the income statement.

example: This example illustrates how costs flow through the inventory accounts.