Question 1 (30 marks) Ming Kee Company manufactures a coffee machine. The compan

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Question 1 (30 marks) Ming Kee Company manufactures a coffee machine. The company adopts an absorption-costing system based on standard costs. The variable manufacturing cost consists of the following: S3.50 per unit S1.50per unit Direct material cost Other variable manufacturing cost Standard production rate is 20 units per machine-hour. Budgeted and actual fixed manufacturing overhead costs are S960,000. Budgeted capacity utilization is 60,000 machine hours Sales in 2017 are 1,050,000 units at selling price $10.00 per unit. Non-manufacturing variable operating cost is $2.00 per unit sold. Non-manufacturing fixed operating costs are $200,000. Beginning inventory in 2017 is 50,000 units; ending inventory is 80,000 units. The same standard unit costs were applied in 2016 and 2017. There are no price, spending, or efficiency variances. The company writes off production-volume variance to cost of goods sold.

Explanation / Answer

a) Absorption Costing: Ming Kee Company Income Statement For the Year Ended December 31, 2017 Revenues (1,050,000 × $10.00) $10,500,000.00 Cost of good Sold: Beginning inventory (50,000 × $5.80) $290,000.00 Variable manufacturing costs ($3.50 + $1.50 ) x 1080000 $5,400,000.00 Allocated fixed manufacturing costs = 1080000 x ($960,000/60000)/20 $864,000.00 Cost of goods available for sale $6,554,000.00 Deduct ending inventory (80,000 × $5.80) -$464,000.00 Add adjustment for prod.-vol. variance (1,200,000 - 1,080,000) x $.80 $96,000.00 UF Cost of goods sold $6,186,000.00 Gross margin $4,314,000.00 Operating costs: Variable operating costs (1050,000 × $2) $2,100,000.00 Fixed operating costs $200,000.00 Total operating costs $2,300,000.00 Operating Margin $2,014,000.00 Absorption cost per unit = $3.50 + $1.50 + ($960,000/60,000)/20 units MH $5.80 Units Manufactured = $1050000 (Selling )+80,000(EI) - 50,000 (BI) 1,080,000 units $960,000/60000MH/20 units $0.80 Production Volume Variance units = (20 units x 60000 mh 1,200,000 units b) Variable Costing Ming Kee Company Revenues (1,050,000 × $10.00) $10,500,000.00 Variable cost of goods sold: Beginning inventory (50,000 × $3.50 + $1.50) $250,000.00 Variable manufacturing costs ($3.50 + $1.50 ) x 1080000 $5,400,000.00 Cost of goods available for sale $5,650,000.00 Deduct ending inventory (80,000 × $5.00) -$400,000.00 Variable cost of goods sold $5,250,000.00 Variable operating costs (1050,000 × $2) $2,100,000.00 Contribution Margin $3,150,000.00 Fixed costs: Fixed manufacturing overhead costs $960,000.00 Fixed operating costs $200,000.00 Total Fixed Costs $1,160,000.00 Operating income $1,990,000.00 c) The difference in operating income between the two costing methods The Difference between Absorption Operating Income and variable operating Income $24,000.00 is due to Difference between fixed manufacturing cost in ending Inventory and Fixed manufacturing cost in beginning inventory (80000 - 50,000) x $.80 $24,000.00 d) Under Absorption costing there is more possibility to buildups of inventory than does variable costing. Absorption costing enables managers to increase reported operating income by building up inventory which reduces the amount of fixed manufacturing overhead included in the current period’s cost of goods sold. Ways to counteract undesirable impact 1) Change the accounting system to variable costing 2) When evaluating management performance include nonfinancial as well as financial measures.

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