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Jan 29, 2006, 05:31 PM
Big Brick Manufacturing produces basketballs used for indoor or outdoor games. The company has been having significant troubles over the past few years, as the number of competitors in the basketball market has increased dramatically. Recently, the company has been forced to cut back production, in order to decrease its rising inventory level. The following is a list of costs for the company in 2005.
Variable Cost Per Unit
Rubber $2.75
Other materials - indirect $1.40
Ball makers - direct labor $5.60
Factory electricity usage $0.50
Factory water usage $0.15
Other labor - indirect $0.27
Selling and administrative expense $0.40
Fixed Costs Per Year
Factory property taxes $120,000
Factory sewer usage $50,000
Factory electricity usage $40,000
Selling and administrative expense $83,000
Big Brick Manufacturing had ending inventories of 85,000 basketballs in 2004. For these units, fixed manufacturing overhead cost was $4.00 per unit, and variable manufacturing cost per unit was $9.67. In 2005, the company produced 35,000 basketballs; it sold 90,000 basketballs and had an ending inventory of 30,000 units. The basketballs sold for $18 each. Assume that Big Brick uses the FIFO method for computing cost of goods sold.
Answer the following questions:
Compute Big Brick Manufacturing's 2005 manufacturing cost per unit under a variable costing system.
Prepare a variable costing income statement for 2005. (Use the format from Illustration 7-5 on page 267 of your textbook.)
Compute Big Brick Manufacturing's 2005 manufacturing cost per unit under absorption costing.
Prepare and absorption costing income statement for 2005. (Use the format from Illustration 7-4 on page 267 of your textbook.)
Big Brick Manufacturing's chief financial officer, Mr. Swish, is contemplating the benefits of using absorption and variable costing approaches. He has asked you to perform a variety of tasks to help him analyze the difference between the two approaches.
a. Reconcile the differences between the net income values of the two approaches.
b. Mr. Swish has been very impressed with the variable costing techniques that he has seen so far. He has been contemplating doing away with absorption costing for the company. What do you think about this suggestion?
Variable Cost Per Unit
Rubber $2.75
Other materials - indirect $1.40
Ball makers - direct labor $5.60
Factory electricity usage $0.50
Factory water usage $0.15
Other labor - indirect $0.27
Selling and administrative expense $0.40
Fixed Costs Per Year
Factory property taxes $120,000
Factory sewer usage $50,000
Factory electricity usage $40,000
Selling and administrative expense $83,000
Big Brick Manufacturing had ending inventories of 85,000 basketballs in 2004. For these units, fixed manufacturing overhead cost was $4.00 per unit, and variable manufacturing cost per unit was $9.67. In 2005, the company produced 35,000 basketballs; it sold 90,000 basketballs and had an ending inventory of 30,000 units. The basketballs sold for $18 each. Assume that Big Brick uses the FIFO method for computing cost of goods sold.
Answer the following questions:
Compute Big Brick Manufacturing's 2005 manufacturing cost per unit under a variable costing system.
Prepare a variable costing income statement for 2005. (Use the format from Illustration 7-5 on page 267 of your textbook.)
Compute Big Brick Manufacturing's 2005 manufacturing cost per unit under absorption costing.
Prepare and absorption costing income statement for 2005. (Use the format from Illustration 7-4 on page 267 of your textbook.)
Big Brick Manufacturing's chief financial officer, Mr. Swish, is contemplating the benefits of using absorption and variable costing approaches. He has asked you to perform a variety of tasks to help him analyze the difference between the two approaches.
a. Reconcile the differences between the net income values of the two approaches.
b. Mr. Swish has been very impressed with the variable costing techniques that he has seen so far. He has been contemplating doing away with absorption costing for the company. What do you think about this suggestion?