Q9-20 2015 2016

Sales 52000 52000

Revenue 22360000 22360000
Cost of goods sold
Beginning inventory 0 0
Production 20280000 24336000
Available for sale 20280000 24336000
Ending inventory 0 4056000
Adjustment for P-V variance 0 2600000
COGS 20280000 17680000
Gross Margin 2080000 4680000
S & A expenses (all fixed) 2080000 2080000
Operating costs 0 2600000

2015 2016
Beginning inventory 0 0
Production 52000 62400
Unit sold 52000 52000
Ending inventory 0 10400

Variable manufacturing cost per unit 140 140

Fixed manufacturing O/H costs 13000000 13000000
Fixed manuf. Cost per unit produced 250 250

As it can be seen from above data, in 2016, 62,400 units were produced instead of breakeven volumen of 52,000 un
1 [(62,400-52,000) x 250 per unit]. Then, amount was written off with COGS which increased the gross margin.

2 Breakeven calculation:

2015 2016
Selling price per unit 430 430
Variable price per unit 140 140
Contribution margin per unit 290 290
Fixed S & A expenses 2080000 2080000
Fixed manufacturing O/H costs 13000000 13000000
Total fixed costs 15080000 15080000
Breakeven quantity (FC/CM) 52000 52000

3 Variable costing:
2015 2016
Sales 52000 52000
Revenue 22360000 22360000
Variable cost of goods sold:
Beginning inventory 0 0
Variable manufacturing cost 7280000 8736000
less ending inventory 0 1456000
 Variable cost of goods sold 7280000 7280000
Contribution margin 15080000 15080000
Fixed Costs:
Fixed manufacturing O/H costs 13000000 13000000
Fixed S & A expenses 2080000 2080000
Total fixed cost 15080000 15080000
Operating income 0 0

Explaning variable costing operating income

Contribution margin 15080000 15080000

Total fixed costs 15080000 15080000
Operating income 0 0

4 Aborption costing operating income (1) 0 2600000

Variable costing operating income (2) 0 0
Difference (1)-(2) 0 2600000
Fixed mfg costs in ending inventory (3) 0 2600000
Fixed mfg costs in beginning inventory (4) 0 0
Difference (3)-(4) 0 2600000

As per the above table, difference between the operating income under absorption costing and variable costing for
Similarly, difference between the fixed manufacturing costs in ending inventory and beginning inventory for 2016 an
explains and reconciles the operating income difference between absorption costing and variable costing.
In 2016, 62,400 units were produced instead of breakeven units of 52,000. These 10,400 (62,400-52,000) had each
would remain as assets on the balance sheet until they were sold. In the same year, cost of 52,000 units sold was w
positive operating income. Howere, in 2017, sales were 62,400 unit and 52,000 units were produced. In absorption
COGS in 2017 which also contains the allocated fixed manufacturing costs of the units sold, resulting in drop in ope
volume.
 2017
62400
26832000

4056000
20280000
24336000
0
0
24336000
2496000
2080000
416000

2017
10400
52000
52000
0

140
13000000
250

instead of breakeven volumen of 52,000 units. This resulted in favourable production volume variance of ₹260000
GS which increased the gross margin.

2017
430
140
290
2080000
13000000
15080000
52000

2017
62400
26832000

1456000
7280000
0
 8736000
18096000

13000000
2080000
15080000
3016000

18096000
15080000
3016000

416000
3016000
-2600000
0
2600000
-2600000

absorption costing and variable costing for 2016 and 2017 was ₹26,00,000 and less ₹26,00,000 respectively.
entory and beginning inventory for 2016 and 2017 was ₹260,00,000 and less ₹260,00,000 respectively. This
tion costing and variable costing.
0. These 10,400 (62,400-52,000) had each absorbed ₹250 of fixed costs which was ₹26,00,000 in total and
same year, cost of 52,000 units sold was written of in COGS as production volume variance, resulting in
52,000 units were produced. In absorption costing, all fixed costs related to ending inventory flowing through
s of the units sold, resulting in drop in operating income even thoug sales were greater than breakeven
Q9-23 Selling price per barrel ₹ 470.00

Budgeted fixed
Denominator level capacity Days of production Hours of production
manufacturing
concept per period per day
overhead per period

Theoretical capacity 279000000 358 22

Practical capacity 279000000 348 20
Normal capacity utilization 279000000 348 20
Master budget capacity
utilization for: 20
(a) January - June 2017 139500000 174 20
(b) July- Decemeber 2017 139500000 174 20

Budgeted fixed
Denominator level capacity Days of production Hours of production
1 manufacturing
concept per period per day
overhead per period

Theoretical capacity 279000000 358 22

Practical capacity 279000000 348 20
Normal capacity utilization 279000000 348 20
Master budget capacity
utilization for:
(a) January - June 2017 139500000 174 20
(b) July- Decemeber 2017 139500000 174 20

Budgeted fixed manufacturing overhead per barrel is different for each denominator level capacity concet because
the remaining two concepts emphasize on demand factor and are lower.
Because of seasonal difference in budget production, there are two separate rates for master- budget utilization con

2 Beginning inventory in barrels 0

Production in barrels 2670000
Ending inventory in barrels 210000
Actual variable Mfg costs 806340000
Actual fixed mfg. O/H costs 267000000

Denominator level capacity Budgeted fixed mfg. Budgeted variable Budgeted Total mfg.
concept overhead per barrel mfg. cost rate cost rate

Theoretical capacity 64.9982993277 302 366.9982993277

Practical capacity 78.6004056795 302 380.6004056795
Normal capacity utilization 97.7712363331 302 399.7712363331

Operating Income calculation:

Normal capacity
Theoretical capacity Practical capacity utilization
Revenues 1156200000 1156200000 1156200000
Cost of goods sold:
Beginning inventory 0 0 0
Variable manufacturing costs 806340000 806340000 806340000
Fixed manufacturing O/H costs 173545459.204831 209863083.1643 261049201.009251
Cost of goods available for sale 979885459.204831 1016203083.1643 1067389201.00925
Ending inventory 77069642.8588069 79926085.1926978 83951959.6299411
Adjustment for variances 93454540.7951691 57136916.8356998 5950798.99074853
Cost of goods sold 996270357.141193 993413914.807302 989388040.370059
Gross Margin 159929642.858807 162786085.192698 166811959.629941
Other costs 0 0 0
Operating income 159929642.858807 162786085.192698 166811959.629941
 Barrels per hour

545
510
410

315
505

Budgeted denominator Budgeted fixed manufacturing

Barrels per hour level (barrel) overhead per barrel

545 4292420 64.9982993277

510 3549600 78.6004056795
410 2853600 97.7712363331

315 1096200 127.2577996716

505 1757400 79.3786275179

capacity concet because the theoretical and practical capacity concepts focus on supply factor and are, therefore, highter. However,

ter- budget utilization concept.

Fixed mfg. O/H Fixed mfg. overhead

costs allocated variance

173545459.204831 93454540.7951691
209863083.1643 57136916.8356998
261049201.009251 5950798.99074853
e, highter. However,
Q9-26

1 Variable costing based operating income:

Revenues 7462500
Variable costs:
Beginning inventory 780000
Variable production cost 2925000
Cost of goods available for sale 3705000
Ending inventory 471250
Variable Cost of goods sold 3233750
Variable transportation costs 149250
Total variable costs 3383000
Contribution margin 4079500
Fixed costs:
Fixed production costs 2800000
Other fixed costs 1120000
Total fixed costs 3920000
Operating income 159500

2 Absorption costing based operating income:

Denominator level units 1000

Fixed manufacturing cost 2800000
Fixed manufacturing cost per unit 2800

Revenues 7462500
Cost of goods sold:
Beginning inventory 1452000
Variable production cost 2925000
Allocated fixed mfg. costs 2520000
Cost of goods available for sale 6897000
Less ending inventory 877250
Production- volume variance 280000
Cost of goods sold 6299750
Gross margin 1162750
Operating costs:
Variable transportation costs 149250
Other fixed costs 1120000
Total operating costs 1269250
Operating income -106500

3 a. Variable costing

Contribution margin per unit 4100

 Breakeven point in units (Total
Fixed cost/contribution margin per 956
unit)

b. Absorption costing

Contribution margin per unit 4100

Fixed manufacturing cost rate 2800

Breakeven sales in unit = Total fixed cost + operating income + (Fixed manufacturing cost rate x (Breake
Contribution margin per unit
Q= 2800000 + 1120000 + [2800 x ( Q - 900)]
4100
Q= 1076.9230769231 or 1,077 snowboards

4 Proof of breakeven point:

a. Variable costing:

Revenues ₹ 7,170,731.71
Variable costs ₹ 3,250,731.71
Contribution margin ₹ 3,920,000.00
Fixed costs ₹ 3,920,000.00
Operating Income ₹ -

b. Absorption costing:

Revenues ₹ 8,076,923.08
Cost of goods sold ₹ 6,515,384.62
Production- volume variance ₹ 280,000.00
Gross margin ₹ 1,281,538.46
Variable transportation cost ₹ 161,538.46
Fixed S&A cost ₹ 1,120,000.00
Operating income ₹ -

If ₹2,00,000 of fixed administration costs were reclassified as fixed production costs, then, in case of variable costin
5 because, in variable costing, all fixed costs regardless of their category are treated the same way. However, it is not
classification would affect fixed manufacturing overhead rate which would further either increase or decrease brea

6 Increase in price of ₹300 for each board will lower the contribution margin from ₹4,100 to ₹3,800, which will cause

Contribution margin per unit ₹ 3,800.00

Breakeven point in units (Total
Fixed cost/contribution margin per 1,032
unit)

b. Absorption costing
Contribution margin per unit ₹ 3,800.00
Fixed manufacturing cost rate ₹ 2,800.00

Breakeven sales in unit = Total fixed cost + operating income + (Fixed manufacturing cost rate x (Breake
Contribution margin per unit
Q= 2800000 + 1120000 + [2800 x ( Q - 900)]
3800
Q= 1400 units
ufacturing cost rate x (Breakeven sales in units - Unit produced)
bution margin per unit

en, in case of variable costing, there wouldn't be any change in breakeven point. This is
ame way. However, it is not true in case of absorption costing. Changing costs
er increase or decrease breakeven point.

0 to ₹3,800, which will cause the increase in breakeven poing.

ufacturing cost rate x (Breakeven sales in units - Unit produced)
bution margin per unit
Q9-27 Budgeted production & sales 24,000
Practical capacity 48,000

Variable manufacturing cost per unit:

Direct material 200
Direct manufacturing labor 350
Manufacturing overhead 90
Fixed Mfg. overhead 5760000

1 Fixed mfg. overhead rate 240

Direct material 200
Direct manufacturing labor 350
Manufacturing overhead 90
Total mfg. cost per unit 880
Selling price 1144

2 New Budgeted production & sales 18,000

Fixed mfg. overhead rate 320

Direct material 200
Direct manufacturing labor 350
Manufacturing overhead 90
Total mfg. cost per unit 960
Selling price 1248

The company uses budgeted units producted, not practical capacity, as denominator for calculating it fixed manufac
product with the cost of unused capacity. The competitor might not have done the same and because of higher sell
budgeted production and sales. With this, the company would continually inflate its selling price, which in turn will

3 Fixed mfg. overhead rate 120

Direct material 200
Direct manufacturing labor 350
Manufacturing overhead 90
Total mfg. cost per unit 760
Selling price 988

By using practical capacity,as denominator for calculating it fixed manufacturing overhead rate, its initial selling pric
price. This reduction would result in higher sales but higher unfavourable production- volume variance, which woul
income. However, as the sales and production are likely to increase in future, the amount of unused capacity will be
r for calculating it fixed manufacturing overhead rate. By this, it is burdening its
same and because of higher selling price, its sales decline resulting reduction in
selling price, which in turn will lead to further reduction in sales numbers.

rhead rate, its initial selling price reduced ₹988 with is inline with its competitor
n- volume variance, which would be written off with COGS ad reduce operating
mount of unused capacity will be lower, resulting in future cost saving.
Q9-28 Variable production cost rate 24
Fixed Manufacturing costs 11700000
Variable S&A expenses per unit 2
Fixed S&A expenses 2200000
Selling price 98

Fixed Mfg. Fixed Mfg.

1 Capacity type Capacity level overhead overhead per unit
Theorical 900000 11700000 13
Practical 520000 11700000 22.5
Normal 260000 11700000 45
Master budget 225000 11700000 52

2 Actual production level 300000 bulbs

Fixed Mfg. Fixed Mfg.

Capacity type Capacity level overhead overhead per unit
Theorical 900000 11700000 13
Practical 520000 11700000 22.5
Normal 260000 11700000 45
Master budget 225000 11700000 52

3 Bulbs sold 225000

Theorical Practical Normal

Revenues 22050000 22050000 22050000
Cost of goods sold:
Beginning inventory 0 0 0
cost of goods sold 8325000 10462500 15525000
Production volume variance 7800000 4950000 -1800000
Gross Margin 5925000 6637500 8325000
Variable S&A expenses 450000 450000 450000
Fixed S & A expenses 2200000 2200000 2200000
Operating income 3275000 3987500 5675000
Variable production Inventoriable cost per
cost per unit unit
24 37
24 46.5
24 69
24 76

Actual fixed mfg. Production volume

overhead variance
3900000 7800000
6750000 4950000
13500000 -1800000
15600000 -3900000

Master budget
22050000

0
17100000
-3900000
8850000
450000
2200000
6200000
Q.9-29(1)
Since no beginning inventory is given,so if PLF sells all 3,00,000 bulbs manufactured,therefore operati

Theoretical Practical Normal Master Budget

Revenue 29400000 29400000 29400000 29400000
COGS 11100000 13950000 20700000 22800000
Production Volume Variance 7800000 U 4950000 U 1800000 F3900000 F
Gross Margin 10500000 10500000 10500000 10500000
Variable selling 600000 600000 600000 600000
Fixed Selling 2200000 2200000 2200000 2200000
OI 7700000 7700000 7700000 7700000

Q.9-29(1)
Theoretical Practical Normal Master Budget
Income with sales of 300000 bulbs 7700000 7700000 7700000 7700000
Income with sales of 225000 bulbs 3275000 3987500 5675000 6200000
Decrease in production 4425000 3712500 2025000 1500000

Hence a manager's perofmance will be better when he/she uses a denominator that is low as compared to other option
Here setting the denominator to master budget will minimize the loss to the manager
actured,therefore operating income will be same

ompared to other options.

manager