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Problem 821

Straightforward Problem on

Absorption versus Variable

Costing

(LO 2, 3, 4)

2(a). Net income: $200,000

3. Cost of goods sold

under absorption costing:

$1,500,000

Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in five-gallon containers, which

have the following price and variable costs.

Sales price ................................................................................................................ $15

Direct material ........................................................................................................... 5

Direct labor ................................................................................................................ 2

Variable overhead ...................................................................................................... 3

Budgeted fixed overhead in 20x1, the companys first year of operations, was $300,000. Planned and

actual production was 150,000 five-gallon containers, of which 125,000 were sold. Skinny Dippers, Inc.

incurred the following selling and administrative expenses.

Fixed ................................................................................................ $50,000 for the year

Variable ............................................................................................ $1 per container sold

Required:

1. Compute the product cost per container of frozen yogurt under ( a ) variable costing and

( b ) absorption costing.

2. Prepare income statements for 20x1 using ( a ) absorption costing and ( b ) variable costing.

3. Reconcile the income reported under the two methods by listing the two key places where the

income statements differ.

4. Reconcile the income reported under the two methods using the shortcut method.

Exercise 1720 Physical-Units Method; Joint Cost Allocation (LO 4)

Breakfast time Cereal Company manufactures two breakfast cereals in a joint process. Cost and quantity information is as follows:

Joint Cost Cereal Quantity at Split-Off Point Sales Price per Kilogram

$30,000 Yummies ............. 12,000 kilograms .....................................$2.00

Crummies .................... 8,000 kilograms .....................................2.50

Required: Use the physical-units method to allocate the companys joint production cost between Yummies and Crummies.

Exercise 1721 Relative-Sales-Value Method; Joint Cost Allocation (LO 4)

Refer to the data given in the preceding exercise.

Required: Use the relative-sales-value method to allocate Breakfasttime Cereal Companys joint production cost between Yummies and Crummies.

Exercise 1722 Net-Realizable-Value Method; Joint Cost Allocation (LO 4)

Refer to the data given in Exercise 1720

Breakfast time Cereal Company has an opportunity to process its Crummies further into a mulch for ornamental shrubs. The additional processing operation costs $.50 per kilogram, and the mulch will sell for $3.50 per kilogram.

Required: 1. Should Breakfasttimes management decide to process Crummies into the mulch? Why? 2. Suppose the company does process Crummies into the mulch. Use the net-realizable-value method to allocate the joint production cost between the mulch and the Yummies.