Skinny Dippers, Inc and Breakfasttime Cereal Company

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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 20×1, the company’s 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 c osting.
2. Prepare income statements for 20×1 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.

Breakfasttime 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 company’s joint production cost between
Yummies and Crummies.

Refer to the data given in the preceding exercise.
Required: Use the relative-sales-value method to allocate Breakfasttime Cereal Company’s joint production
cost between Yummies and Crummies.

Refer to the data given in Exercise 17–20 . Breakfasttime 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 Breakfasttime’s 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.

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