# Principles of Cost Accounting: Week 10 (P10-2, P10-10, CRP)

Principles of Cost Accounting
Week 10 (P10-2, P10-10, CRP)

P10-2 Absorption costing versus direct costing
Haille Corporation has determined the following selling price and manufacturing cost per unit based on normal production of 72,000 units per year:
Selling price per unit 22
Variable cost per unit:
Direct materials 4
Direct labor 　　　　　 4
Variable cost per unit: 10
Fixed cost per unit:
Fixed factory overhead per year 324,000
Fixed selling and administrative expense per year 48,000
Normal unit production per year 72,000
Month Units Produced Units Sold
October 6,000 3,000
November 1,000 4,000
December 8,000 6,000
October has no beginning inventories.

Required:
Prepare comparative income statements for each month under each of the following:
1. Absorption costing (include under- or overapplied overhead)
2. Variable costing

P10-10 Effect of taxes on break-even and target volume
McDormand Products Inc. desires an after-tax income of \$500,000. It has fixed costs of \$2,500,000, a unit sales price of \$300, and unit variable costs of \$150; it is in the 40% tax bracket.

Required:
1. What amount of pre-tax income is needed to earn an after-tax income of \$500,000?
2. What target volume sales revenue must be reached to earn the \$500,000 after-tax income?
3. Assuming that this is a single-product firm, how many units must be sold to earn the after-tax income of \$500,000?
4. What target volume sales revenue would have been needed to achieve the \$500,000 of income had no income tax existed?

Comprehensive Review Problem:
Break-even point; absorption, and variable cost analysis (Similar to Self-Study Problem 1)
Tarbell Manufacturing Company has a maximum productive capacity of 210,000 units per year. Normal capacity is 180,000 units per year. Standard variable manufacturing costs are \$10 per unit. Fixed factory overhead is \$360,000 per year,
Variable selling expense is \$5 per unit and fixed selling expenses is \$252,000 per year. The unit sales price is \$20.
The operating results for the year are as follows: sales, 150,000 units; production 160,000 units; beginning inventory, 10,000 units. All variances are written off as additions to (or deductions from) the standard cost of sales.

Required:
1. What is the break-even point expressed in dollar sales?
2. How many units must be sold to earn a net income of \$100,000 per year?
3. Prepare a formal income statement for the year under the following:
a. Absorption costing (Hint: Don't forget to compute the volume variance.)
b. Variable costing.