Test Bank - Chapter 7 Variable Costing

Chapter 7

Variable Costing: A Tool for Management

True/False

1.TEasy

In the preparation of financial statements using variable costing, fixed manufacturing overhead is treated as a period cost.

2.FHard

Direct labor is always considered to be a product cost under variable costing.

3.FMedium

Under variable costing, the unit product cost contains some fixed manufacturing overhead cost.

4.FMedium

Under variable costing it may be possible to report a profit even if the company sells less than the break-even volume of sales.

5.TEasy

Under variable costing, the impact of fixed cost is emphasized because the total amount of such cost for the period appears in the income statement.

6.FEasy

Absorption costing treats fixed manufacturing overhead as a period cost, rather than as a product cost.

7.FMedium

The unit product cost under absorption costing contains no element of fixed manufacturing overhead cost.

8.TEasy

Absorption costing treats all manufacturing costs as product costs.

9.TEasy

When the number of units in work in process and finished goods inventories increase, absorption costing net income will typically be greater than variable costing net income.

10.FEasy

When sales exceeds production for a period, absorption costing net income will generally be greater than variable costing net income.

Managerial Accounting, 9/e 221

11.FMedium

Absorption costing net income is closer to the net cash flow of a period than is variable costing net income.

12.FMedium

Variable costing is not permitted for income tax purposes, but it is widely accepted for external financial reports.

13.FMedium

Net income is not affected by changes in production when absorption costing is used.

14.TEasy

When JIT methods are introduced, the difference in net income computed under the absorption and variable costing methods is reduced.

15.TEasy

Since variable costing emphasizes costs by behavior, it works well with cost-volume-profit analysis.

Multiple Choice

16.CEasy

A cost that would be included in product costs under both absorption costing and variable costing would be:a. supervisory salaries.b. equipment depreciation.c. variable manufacturing costs.d. variable selling expenses.

17.CEasyCPA adapted

An allocated portion of fixed manufacturing overhead is included in product costs under:

Absorption Variable costing costinga. No Nob. No Yesc. Yes Nod. Yes Yes

18.BMediumCPA adapted

The variable costing method ordinarily includes in product costs the following:a. Direct materials cost, direct labor cost, but no manufacturing overhead cost.b. Direct materials cost, direct labor cost, and variable

manufacturing overhead cost.c. Prime cost but not conversion cost.d. Prime cost and all conversion cost.

19.DEasy

Cay Company's fixed manufacturing overhead costs totaled $100,000, and variable selling costs totaled $80,000. Under variable costing, how should these costs be classified?

Period costs Product costsa. $0 $180,000b. $80,000 $100,000c. $100,000 $80,000d. $180,000 $0

20.AEasy

Which of the following are considered to be product costs under variable costing?

Managerial Accounting, 9/e222

I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses.

a. I. b. I and II.c. I and III.d. I, II, and III.

21.BMediumCPA adapted

What factor is the cause of the difference between net income as computed under absorption costing and net income as computed under variable costing?a. Absorption costing considers all manufacturing costs in the

determination of net income, whereas variable costing considers only prime costs.b. Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and variable costing considers all fixed manufacturing costs as period costs.c. Absorption costing includes all variable manufacturing costs in product costs, but variable costing considers variable

manufacturing costs to be period costs.d. Absorption costing includes all fixed manufacturing costs in

product costs, but variable costing expenses all fixed manufacturing costs.

22.CEasy

Under variable costing, costs which are treated as period costs include:a. only fixed manufacturing costs.b. both variable and fixed manufacturing costs.c. all fixed costs.d. only fixed selling and administrative costs.


23.CMedium

Which of the following statements is true for a firm that uses variable costing?a. The unit product cost changes as a result of changes in the

number of units manufactured.b. Both variable selling costs and variable production costs are included in the unit product cost.c. Net income moves in the same direction as sales.d. Net income is greatest in periods when production is highest.

24.BEasy

Which of the following are considered to be product costs under absorption costing?

I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses.

a. I, II, and III.b. I and II.c. I and III.d. I.

25.CEasy

The term "gross margin" for a manufacturing company refers to the excess of sales overa. cost of goods sold, excluding fixed manufacturing overhead.b. all variable costs, including variable selling and

administrative expenses.c. cost of goods sold, including fixed manufacturing overhead.d. variable costs, excluding variable selling and administrative expenses.

26.AMediumCPA adapted

Net income determined using full absorption costing can be reconciled to net income determined using variable costing by computing the difference between:a. Fixed manufacturing overhead costs deferred in or released from inventories.b. Inventoried discretionary costs in the beginning and ending

inventories.c. Gross margin (absorption costing method) and contribution

margin (variable costing method).d. Sales as recorded under the variable costing method and sales as recorded under the absorption costing method.

27.BMediumCMA adapted

Net income reported under absorption costing will exceed net income reported under variable costing for a given period if:a. production equals sales for that period.b. production exceeds sales for that period.c. sales exceed production for that period.d. the variable manufacturing overhead exceeds the fixed

manufacturing overhead.


28.DMediumCPA adapted

What will be the difference in net income between variable costing and absorption costing if the number of units in work in process and finished goods inventories increase?a. There will be no difference in net income.b. Net income computed using variable costing will be higher.c. The difference in net income cannot be determined from the

information given.d. Net income computed using variable costing will be lower.

29.AEasy

The costing method that can be used most easily with break-even analysis and other cost-volume-profit techniques is:a. variable costing.b. absorption costing.c. process costing.d. job-order costing.

30.CHard

For the most recent year, Atlantic Company's net income computed by the absorption costing method was $7,400, and its net income computed by the variable costing method was $10,100. The company's unit product cost was $17 under variable costing and $22 under absorption costing. If the ending inventory consisted of 1,460 units, the beginning inventory must have been:a. 920 units.b. 1,460 units.c. 2,000 units.d. 12,700 units.

31.BHard

During the most recent year, Evans Company had a net income of $90,000 using absorption costing and $84,000 using variable costing. The fixed overhead application rate was $6 per unit. There were no beginning inventories. If 22,000 units were produced last year, then sales for last year were:a. 15,000 units.b. 21,000 units.c. 23,000 units.d. 28,000 units.

32.DHard

During the year just ended, Roberts Company' income under absorption costing was $3,000 lower than its income under variable costing. The company sold 9,000 units during the year, and its variable costs were $9 per unit, of which $3 was variable selling expense. If production cost is $11 per unit under absorption costing every year, then how many units did the company produce during the year?a. 8,000.b. 10,000.c. 9,600.d. 8,400.


33.CHard

Last year, Silver Company's variable production costs totaled $7,500 and its fixed manufacturing overhead costs totaled $4,500. The company produced 3,000 units during the year and sold 2,400 units. There were no units in the beginning inventory. Which of the following statements is true?a. Under variable costing, the units in the ending inventory will be costed at $4 each.b. The net income under absorption costing for the year will be $900 lower than the net income under variable costing.c. The ending inventory under variable costing will be $900

lower than the ending inventory under absorption costing.d. Under absorption costing, the units in ending inventory will be costed at $2.50 each.

34.DHard

During the last year, Hansen Company had net income under absorption costing that was $5,500 lower than its income under variable costing. The company sold 9,000 units during the year, and its variable costs were $10 per unit, of which $6 was variable selling expense. If fixed production cost is $5 per unit under absorption costing every year, then how many units did the company produce during the year?a. 7,625 units.b. 8,450 units.c. 10,100 units.d. 7,900 units.

35.BMediumCMA adapted

Indiana Corporation produces a single product that it sells for $9 per unit. During the first year of operations, 100,000 units were produced and 90,000 units were sold. Manufacturing costs and selling and administrative expenses for the year were as follows:

Fixed Costs Variable CostsRaw materials ............ -- $1.75 per unit producedDirect labor ............. -- 1.25 per unit producedFactory overhead ......... $100,000 0.50 per unit producedSelling and administrative 70,000 0.60 per unit sold

What was Indiana Corporation's net income for the year using variable costing?a. $181,000.b. $271,000.c. $281,000.d. $371,000.


36.CMedium

Last year, fixed manufacturing overhead was $30,000, variable production costs were $48,000, fixed selling and administration costs were $20,000, and variable selling administrative expenses were $9,600. There was no beginning inventory. During the year, 3,000 units were produced and 2,400 units were sold at a price of $40 per unit. Under variable costing, net income would be:a. a profit of $6,000.b. a profit of $4,000.c. a loss of $2,000.d. a loss of $4,400.

37.DEasyCPA adapted

West Co.'s manufacturing costs are as follows:

Direct materials and direct labor ....... $700,000 Other variable manufacturing costs ...... 100,000 Depreciation of factory building and manufacturing equipment ............. 80,000 Other fixed manufacturing overhead ...... 18,000

What amount should be considered product costs for external reporting purposes?a. $700,000.b. $800,000.c. $880,000.d. $898,000.

38.CHard

At the end of last year, Lee Company had 30,000 units in its ending inventory. Lee's variable production costs are $10 per unit and its fixed manufacturing overhead costs are $5 per unit every year. The company's net income for the year was $12,000 higher under variable costing than under absorption costing. Given these facts, the number of units of product in inventory at the beginning of the year must have been:a. 28,800 units.b. 27,600 units.c. 32,400 units.d. 42,000 units.

39.BMedium

During the last year, Moore Company's variable production costs totaled $10,000 and its fixed manufacturing overhead costs totaled $6,800. The company produced 5,000 units during the year and sold 4,600 units. There were no units in the beginning inventory. Which of the following statements is true?a. The net income under absorption costing for the year will be $800 higher than net income under variable costing.b. The net income under absorption costing for the year will be $544 higher than net income under variable costing.c. The net income under absorption costing for the year will be $544 lower than net income under variable costing.d. The net income under absorption costing for the year will be $800 lower than net income under variable costing.


40.BHard

Last year, Ben Company's income under absorption costing was $4,400 lower than its income under variable costing. The company sold 8,000 units during the year, and its variable costs were $8 per unit, of which $3 was variable selling expense. Fixed manufacturing overhead was $1 per unit in beginning inventory under absorption costing. How many units did the company produce during the year?a. 12,400 units.b. 3,600 units.c. 7,120 units.d. 7,450 units.

41.CHard

Last year, Stephen Company had 20,000 units in its ending inventory. During the year, Stephen's variable production costs were $12 per unit. The fixed manufacturing overhead cost was $8 per unit in the beginning inventory. The company's net income for the year was $9,600 higher under variable costing than it was under absorption costing. Given these facts, the number of units of product in the beginning inventory last year must have been:a. 21,200.b. 19,200.c. 18,800.d. 19,520.

Reference: 7-1Aaker Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $99

Units in beginning inventory ............. 0 Units produced ........................... 6,300 Units sold ............................... 6,000 Units in ending inventory ................ 300

Variable costs per unit: Direct materials ....................... $12 Direct labor ........................... 42 Variable manufacturing overhead ........ 6 Variable selling and administrative .... 6

Fixed costs: Fixed manufacturing overhead ........... $170,100 Fixed selling and administrative ....... 24,000


42.DEasyRefer To: 7-1

What is the unit product cost for the month under variable costing?a. $66b. $93c. $87d. $60

43.AEasyRefer To: 7-1

What is the unit product cost for the month under absorption costing?a. $87b. $60c. $66d. $93

44.DMediumRefer To: 7-1

The total contribution margin for the month under the variable costing approach is:a. $72,000.b. $27,900.c. $234,000.d. $198,000.

45.CMediumRefer To: 7-1

The total gross margin for the month under the absorption costing approach is:a. $98,100.b. $198,000.c. $72,000.d. $12,000.

46.AHardRefer To: 7-1

What is the total period cost for the month under the variable costing approach?a. $230,100b. $194,100c. $170,100d. $60,000

47.BHardRefer To: 7-1

What is the total period cost for the month under the absorption costing approach?a. $170,100b. $60,000c. $230,100d. $24,000

48.BMediumRefer To: 7-1

What is the net income for the month under variable costing?a. $8,100b. $3,900c. $12,000d. ($14,100)



What is the net income for the month under absorption costing?a. $3,900b. ($14,100)c. $12,000d. $8,100

Reference: 7-2Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production costs were as follows:

Direct material .................. $100,000 Direct labor ..................... 75,000 Variable manufacturing overhead .. 50,000 Fixed manufacturing overhead ..... 75,000

Sales totaled $440,000, variable selling and administrative expenses were $110,000, and fixed selling and administrative expenses were $45,000. There was no beginning inventory. Assume that direct labor is a variable cost.

50.BEasyRefer To: 7-2

Under absorption costing, the unit product cost would be:a. $9.00.b. $12.00.c. $13.40.d. $14.00.

51.AMediumRefer To: 7-2

Under absorption costing, the gross margin would be:a. $176,000.b. $242,000.c. $ 66,000.d. $ 21,000.


The contribution margin per unit would be:a. $15.00.b. $11.00.c. $ 8.00.d. $ 6.00.


Under variable costing, the total amount of fixed manufacturing cost in the ending inventory would be:a. $ 0.b. $ 9,000.c. $14,400.d. $27,000.


The net income under variable costing would be:a. $ 2,000.b. $21,000.c. $12,000.d. $ 9,000.



The net income under absorption costing would be:a. $ 9,000.b. $12,000.c. $ 2,000.d. $21,000.

Reference: 7-3Farron Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $92









What is the net income for the month under variable costing?a. $10,600b. ($17,000)c. $16,600d. $6,000



What is the net income for the month under absorption costing?a. ($17,000)b. $16,600c. $6,000d. $10,600

Reference: 7-4Jarvix Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $111



Fixed costs: Fixed manufacturing overhead ........... $ 61,600 Fixed selling and administrative ....... 169,100

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.






What is the net income for the month under variable costing?a. $25,900b. $2,100c. $17,800d. $18,500



What is the net income for the month under absorption costing?a. $2,100b. $25,900c. $18,500d. $17,800

Reference: 7-5Hatfield Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $123




64.CEasyRefer To: 7-5




66.DHardRefer To: 7-5




What is the net income for the month under variable costing?a. $6,600b. $5,600c. ($17,200)d. $12,200

Reference: 7-6Iancu Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $149







What is the net income for the month under variable costing?a. $27,300b. $16,200c. ($7,200)d. $11,100


Reference: 7-7The Pacific Company manufactures a single product. The following data relate to the year just completed:

Variable cost per unit: Production .................... $43 Selling and administrative .... $15

Fixed costs in total: Production .................... $145,000 Selling and administrative .... $ 95,000

During the last year, 5,000 units were produced and 4,800 units were sold. There were no beginning inventories.


Under variable costing, the unit product cost would be:a. $91.00.b. $72.00.c. $58.00.d. $43.00.


The carrying value of finished goods inventory at the end of the year under variable costing would be:a. $8,800 greater than under absorption costing.b. $8,800 less than under absorption costing.c. $5,800 less than under absorption costing.d. The same as absorption costing.


Under absorption costing, the cost of goods sold for the year would be:a. $206,400.b. $345,600.c. $278,400.d. $360,000.


Reference: 7-8Crystal Company's variable costing income statement for the month of May appears below:

Crystal Company Income Statement For the month ended May 31

Sales ($10 per unit) .............. $900,000 Less variable costs: Variable cost of goods sold: Beginning inventory ......... $125,000 Add variable cost of goods manufactured .............. 400,000 Goods available for Sale .... 525,000 Less ending inventory ....... 75,000 Variable cost of goods sold . 450,000 Variable selling expense ..... 90,000 Total variable costs ..... 540,000 Contribution margin ............... 360,000 Fixed costs: Fixed manufacturing overhead ... 240,000 Fixed selling and admin. ....... 90,000 Total fixed costs ........ 330,000 Net income ........................ $ 30,000

The company produces 80,000 units each month. Variable production costs per unit and total fixed costs have remained constant over the past several months.


The dollar value of the company's inventory on May 31 under the absorption costing method would be:a. $120,000.b. $ 90,000.c. $ 75,000.d. $ 60,000.


Under absorption costing, for the month ended May 31, the company would report a:a. $30,000 loss.b. $0 profit.c. $30,000 profit.d. $60,000 profit.


Reference: 7-9The following data were provided by Green Enterprises for the most recent period:

Units in beginning inventory ........ -0- Units produced ...................... 8,000 Units sold .......................... 6,000

Variable costs per unit: Manufacturing ..................... $15 Selling and administrative ........ 5 Fixed costs, in total: Manufacturing ..................... $24,000 Selling and administrative ........ 16,000


Under variable costing, the unit product cost is:a. $20.b. $18.c. $15.d. $22.


Under absorption costing, the unit product cost is:a. $20.b. $18.c. $15.d. $25.


For the period above, one would expect the net income under absorption costing to be:a. higher than the net income under variable costing.b. lower than the net income under variable costing.c. the same as the net income under variable costing.d. The relation between absorption costing net income and variable costing net income cannot be determined.

Reference: 7-10The following data pertain to one month's operations of Whitney, Inc.:

Units in beginning inventory ....... -0- Units produced ..................... 9,000 Units sold ......................... 8,000

Variable costs per unit: Manufacturing .................... $10 Selling and administrative ....... 6 Fixed costs in total: Manufacturing .................... $18,000 Selling and administrative ....... 27,000



The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:a. $16,000.b. $10,000.c. $19,000.d. $12,000.


The carrying value on the balance sheet of the ending finished goods inventory under absorption costing would be:a. $16,000.b. $10,000.c. $12,000.d. $21,000.


For the month referred to above, net income under variable costing will be:a. higher than net income under absorption costing.b. lower than net income under absorption costing.c. the same as net income under absorption costing.d. The relation between variable costing and absorption costing net income cannot be determined.

Reference: 7-11Bateman Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $117








Reference: 7-12During the last year, Snyder Co. produced 10,000 units of Product S. Costs incurred by Snyder during the year were as follows:

Direct materials ................... $11,000


Direct labor ....................... 21,000 Variable manufacturing overhead .... 6,100 Variable selling and general ....... 3,100 Fixed manufacturing overhead ....... 9,000 Fixed selling and general .......... 4,100 Total .............................. $54,300


The unit product cost under absorption costing would have been:a. $5.43.b. $3.81.c. $4.71.d. $4.12.


The unit product cost under variable costing would have been:a. $3.20.b. $3.81.c. $4.12.d. $3.51.

Reference: 7-13During the past year, Carr Company manufactured 25,000 units and sold 20,000 units. Production costs for the year were as follows:

Fixed manufacturing overhead ...... $250,000 Variable manufacturing overhead ... $210,000 Direct labor ...................... $120,000 Direct materials .................. $180,000

Sales totaled $850,000, variable selling expenses totaled $110,000, and fixed selling and administrative expenses totaled $170,000. There were no units in beginning inventory. Assume that direct labor is a variable cost.


The contribution margin per unit would be:a. $12.10.b. $22.10.c. $17.70.d. $16.60.


Under absorption costing, the ending inventory for the year would be valued at:a. $179,500.b. $213,500.c. $222,000.d. $152,000.


The net income for the year under variable costing would be:a. $28,000 lower than under absorption costing.b. $28,000 higher than under absorption costing.c. $50,000 lower than under absorption costing.d. $50,000 higher than under absorption costing.

Reference: 7-14Last year, Harris Company manufactured 17,000 units and sold 13,000 units. Production costs for the year were as follows:

Direct materials...................... $153,000 Direct labor.......................... 110,500 Variable manufacturing overhead....... 204,000 Fixed manufacturing overhead.......... 255,000


Sales were $780,000 for the year, variable selling and administrative expenses were $88,400, and fixed selling and administrative expenses were $170,000. There was no beginning inventory. Assume that direct labor is a variable cost.


The contribution margin per unit was:a. $17.50.b. $32.50.c. $27.30.d. $25.70.


Under absorption costing, the carrying value on the balance sheet of the ending inventory for the year would be:a. $190,800.b. $170,000.c. $230,800.d. $ 0.

90.dHardRefer To: 7-14

Under variable costing, the company's net income for the year would be:a. $60,000 higher than under absorption costing.b. $108,000 higher than under absorption costing.c. $108,000 lower than under absorption costing.d. $60,000 lower than under absorption costing.


Reference: 7-15Fahey Company manufactures a single product which it sells for $25 per unit. The company has the following cost structure:

Variable costs per unit: Manufacturing .................... $9 Selling and Administrative ....... 3 Fixed costs in total: Manufacturing .................... $72,000 Selling and Administrative ....... 54,000

There were no units in beginning inventory. During the year, 18,000 units were produced and 15,000 units were sold.


Under absorption costing, the unit product cost would be:a. $ 9.b. $12.c. $13.d. $16.


The company's net income for the year under variable costing would be:a. $60,000.b. $81,000.c. $57,000.d. $69,000.

Reference: 7-16Erie Company manufactures a single product. Assume the following data for the year just completed:

Fixed costs in total: Selling and Administrative ... $60,000 Production ................... $82,500 Variable costs per unit: Selling and Administrative ... $5 Production ................... $8

There were no units in inventory at the beginning of the year. During the year 30,000 units were produced and 25,000 units were sold. Each unit sells for $35.


Under absorption costing, the unit product cost would be:a. $8.b. $17.75.c. $13.d. $10.75.



The company's net income under variable costing would be:a. $407,500.b. $421,250.c. $431,250.d. $417,500.

Reference: 7-17Chown Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $110









Reference: 7-18Delvin Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $120









Reference: 7-19Gabbert Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $90













Reference: 7-20Gordon Company produces a single product that sells for $10 per unit. Last year there were no beginning inventories, 100,000 units were produced, and 80,000 units were sold. The company has the following cost structure:

Fixed costs Variable costsRaw materials................ -- $2.00 per unit producedDirect labor................. -- 1.25 per unit producedFactory overhead............. $120,000 0.75 per unit producedSelling and administrative... 70,000 1.00 per unit sold


Net income under variable costing would be:a. $114,000.b. $210,000.c. $234,000.d. $330,000.


The carrying value on the balance sheet of the ending finished goods inventory under absorption costing would be:a. $ 80,000.b. $104,000.c. $110,000.d. $124,000.

Reference: 7-21Elliot Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $112





What is the net income for the month under variable costing?a. $18,000b. ($19,600)c. $9,600d. $8,400


What is the net income for the month under absorption costing?a. ($19,600)b. $9,600c. $8,400d. $18,000

Reference: 7-22Khanam Company, which has only one product, has provided the following data concerning its most recent month of operations:


Selling price ............................ $97



Fixed costs: Fixed manufacturing overhead ........... $ 67,200 Fixed selling and administrative ....... 161,500



What is the net income for the month under variable costing?a. $8,500b. $9,300c. $3,200d. $15,100


What is the net income for the month under absorption costing?a. $8,500b. $9,300c. $3,200d. $15,100


Reference: 7-23DeAnne Company's variable costing income statement for August appears below:

DeAnne Company Income Statement For the month ended August 31

Sales ($15 per unit) ................ $600,000Less variable costs: Variable cost of goods sold: Beginning inventory .............. $ 72,000 Add variable cost of goods manufactured ............. 315,000 Goods available for sale ......... 387,000 Less ending inventory ............ 27,000 Variable cost of goods sold ...... 360,000 Variable selling expense ......... 80,000 Total variable costs .......... 440,000Contribution margin ................. 160,000Fixed costs: Fixed manufacturing .............. 105,000 Fixed selling and administrative . 35,000 Total fixed costs ............. 140,000Net income .......................... $ 20,000

The company produces 35,000 units each month. Variable production costs per unit and total fixed costs have remained constant over the past several months.

109.CHardRefer To: 7-23

The dollar value of the company's inventory on August 31 under the absorption costing method would be:a. $27,000.b. $42,000.c. $36,000.d. $47,000.


Under absorption costing, for the month ended August 31, the company would report a:a. $20,000 profit.b. $ 5,000 loss.c. $35,000 profit.d. $ 5,000 profit.


Essay

111.Hard

Lee Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $95





Required:a. What is the unit product cost for the month under variable

costing?b. What is the unit product cost for the month under absorption

costing?c. Prepare an income statement for the month using the contribution format and the variable costing method.d. Prepare an income statement for the month using the absorption costing method.e. Reconcile the variable costing and absorption costing net

incomes for the month.


Answer:a. & b. Unit product costs

Variable costing:

Direct materials ....................... $42 Direct labor ........................... 28 Variable manufacturing overhead ........ 1 Unit product cost ...................... $71

Absorption costing:Direct materials ....................... $42 Direct labor ........................... 28 Variable manufacturing overhead ........ 1 Fixed manufacturing overhead ........... 10 Unit product cost ...................... $81

c. & d. Income statements

Variable costing income statementSales ...................................... $560,500Less variable expenses: Variable cost of goods sold: Beginning inventory .................... $ 7,100 Add variable manufacturing costs ....... 440,200 Goods available for sale ............... 447,300 Less ending inventory .................. 28,400 Variable cost of goods sold ............ 418,900 Variable selling and administrative .... 29,500 448,400Contribution margin ........................ 112,100Less fixed expenses: Fixed manufacturing overhead ........... 62,000 Fixed selling and administrative ....... 35,400 97,400Net income ................................. $ 14,700

Absorption costing income statementSales ...................................... $560,500Cost of goods sold: Beginning inventory ...................... $ 8,100 Add cost of goods manufactured ........... 502,200 Goods available for sale ................. 510,300 Less ending inventory .................... 32,400 477,900

Gross margin ............................... 82,600Less selling and administrative expenses: Variable selling and administrative ...... 29,500 Fixed selling and administrative ......... 35,400 64,900Net income ................................. $ 17,700


e. Reconciliation Variable costing net income ................ $14,700 Add fixed manufacturing overhead costs deferred in inventory under absorption costing .................................. 3,000 Deduct fixed manufacturing overhead costs released from inventory under absorption costing .................................. 0 Absorption costing net income .............. $17,700

112.Medium

Mahugh Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price .............................. $122 Units in beginning inventory ............. 0 Units produced ........................... 8,300 Units sold ............................... 8,200 Units in ending inventory ................ 100



Required:

a. What is the unit product cost for the month under variable costing?

b. What is the unit product cost for the month under absorption costing?

c. Prepare an income statement for the month using the contribution format and the variable costing method.d. Prepare an income statement for the month using the absorption costing method.e. Reconcile the variable costing and absorption costing net

incomes for the month.


Answer:

a. & b. Unit product costs

Variable costing: Direct materials ..................... $27 Direct labor ......................... 46 Variable manufacturing overhead ...... 4 Unit product cost .................... $77

Absorption costing: Direct materials ..................... $ 27 Direct labor ......................... 46 Variable manufacturing overhead ...... 4 Fixed manufacturing overhead ......... 24 Unit product cost .................... $101

c. & d. Income statements

Variable costing income statementSales .................................... $1,000,400Less variable expenses: Variable cost of goods sold: Beginning inventory .................. $ 0 Add variable manufacturing costs ..... 639,100 Goods available for sale ............. 639,100 Less ending inventory ................ 7,700 Variable cost of goods sold .......... 631,400 Variable selling and administrative .. 57,400 688,800Contribution margin ...................... 311,600Less fixed expenses: Fixed manufacturing overhead ......... 199,200 Fixed selling and administrative ..... 106,600 305,800Net income ............................... $ 5,800

Absorption costing income statementSales .................................... $1,000,400Cost of goods sold: Beginning inventory .................... $ 0 Add cost of goods manufactured ......... 838,300 Goods available for sale ............... 838,300 Less ending inventory .................. 10,100 828,200Gross margin ............................. 172,200Less selling and administrative expenses: Variable selling and administrative .... 57,400 Fixed selling and administrative ....... 106,600 164,000Net income ............................... $ 8,200

e. Reconciliation Variable costing net income ................ $5,800 Add fixed manufacturing overhead costs deferred in inventory under absorption costing .................................. 2,400 Deduct fixed manufacturing overhead costs released from inventory under absorption costing .................................. 0 Absorption costing net income .............. $8,200


113.Medium

The EG Company produces and sells one product--a microwave oven. The following data refer to the year just completed:

Beginning inventory ....................... $0Units produced ............................ 25,000Units sold ................................ 20,000Sales price per unit ...................... $400Selling and administrative expenses: Variable per unit ...................... $15 Fixed (total) .......................... $275,000Manufacturing costs: Direct materials cost per unit ......... $200 Direct labor cost per unit ............. $50 Variable overhead cost per unit ........ $30 Fixed overhead (total) ................. $300,000

Assume that direct labor is a variable cost.

Required:

a. Compute the cost of a single unit of product under both the absorption costing and variable costing approaches.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.d. Reconcile the absorption costing and variable costing net

income figures in (b) and (c) above.

Answer:

a. Cost per unit under absorption costing: Direct materials.................... $200 Direct labor........................ 50 Variable overhead................... 30 Fixed overhead ($300,000 25,000).. 12 Total cost per unit................. $292

Cost per unit under variable costing: Direct materials.................... $200 Direct labor........................ 50 Variable overhead................... 30 Total cost per unit................. $280

b. Absorption costing income statement:

Sales............................... $8,000,000 Cost of goods sold: Beginning inventory................. $ 0 Cost of goods manufactured (25,000 @ $292) 7,300,000 Cost of goods available............. 7,300,000 Less ending inventory (5,000 units @ $292) ............. 1,460,000 5,840,000 Gross profit........................ 2,160,000 Less selling and administrative expenses: [($15 x 20,000) + $275,000]....... 575,000 Net income.......................... $1,585,000


c. Variable costing income statement:

Sales............................... $8,000,000 Cost of goods sold: Beginning inventory................. $ 0 Cost of goods manufactured (25,000 @ $280) 7,000,000 Cost of goods available............. 7,000,000 Less ending inventory (5,000 units @ $280) 1,400,000 Variable cost of goods sold......... 5,600,000 Variable selling and admin. expenses: (20,000 x $15)................. 300,000 5,900,000 Contribution margin................. 2,100,000 Less fixed expenses: Manufacturing overhead.............. 300,000 Selling and administrative.......... 275,000 575,000 Net income.......................... $1,525,000

d. Net income under variable costing... $1,525,000 Add fixed manufacturing overhead costs deferred in inventory under absorption costing (5,000 units X $12) .............. 60,000 Net income under absorption costing $1,585,000

114.Medium

The Dean Company produces and sells a single product--a microwave oven. The following data refer to the year just completed:

Beginning inventory .................... $0Units produced ......................... 20,000Units sold ............................. 19,000Sales price per unit ................... $350Selling and administrative expenses: Variable per unit .................... $10 Fixed (total) ........................ $225,000Manufacturing costs: Direct materials cost per unit ....... $190 Direct labor cost per unit ........... $40 Variable overhead cost per unit ...... $25 Fixed overhead (total) ............... $250,000

Assume that direct labor is a variable cost.

Required:

a. Compute the cost of a single unit of product under both the absorption costing and variable costing approaches.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.d. Reconcile the absorption costing and variable costing net

income figures in (b) and (c) above.


Answer:

a. Cost per unit under absorption costing:

Direct materials.................... $190.00 Direct labor........................ 40.00 Variable overhead................... 25.00 Fixed overhead ($250,000 20,000).. 12.50 Total cost per unit................. $267.50

Cost per unit under variable costing: Direct materials.................... $190.00 Direct labor........................ 40.00 Variable overhead................... 25.00 Total cost per unit................. $255.00

b. Absorption costing income statement:

Sales................................. $6,650,000 Cost of goods sold: Beginning inventory................... $ 0 Cost of goods manufactured (20,000 @ $267.50) ................. 5,350,000 Cost of goods available............... 5,350,000 Less ending inventory (1,000 units @ $267.50) ............ 267,500 5,082,500 Gross profit.......................... 1,567,500 Less selling and administrative expenses: [($10 x 19,000) + $225,000]......... 415,000 Net income............................ $1,152,500

c. Variable costing income statement:

Sales................................. $6,650,000 Cost of goods sold: Beginning inventory................... $ 0 Cost of goods manufactured (20,000 @ $255) .................... 5,100,000 Cost of goods available............... 5,100,000 Less ending inventory (1,000 units @ $255) ............... 255,000 Variable cost of goods sold........... 4,845,000 Variable selling and administrative expenses: (19,000 x $10)............ 190,000 5,035,000 Contribution margin................... 1,615,000 Less fixed expenses: Manufacturing overhead................ $ 250,000 Selling and administrative............ 225,000 475,000 Net income............................ $1,140,000

d. Net income under variable costing..... $1,140,000 Add fixed manufacturing overhead costs deferred in inventory under absorption costing (5,000 units X $12) ......... 12,500 Net income under absorption costing... $1,152,500


115.Medium

Operating data for Fowler Company and its absorption costing income statements for the last two years are presented below:

Year 1 Year 2 Units in beginning inventory ... -0- 3,000 Units produced ................. 18,000 18,000 Units sold ..................... 15,000 20,000

Year 1 Year 2 Sales ............................ $240,000 $320,000 Cost of goods sold: Beginning inventory ............ -0- 30,000 Add cost of goods manufactured . 180,000 180,000 Goods available for sale ....... 180,000 210,000 Less ending inventory .......... 30,000 10,000 Cost of goods sold ........... 150,000 200,000 Gross margin ..................... 90,000 120,000 Selling & admin. expenses ........ 80,000 90,000 Net income ....................... $ 10,000 $ 30,000

Variable manufacturing costs are $6 per unit. Fixed manufacturing overhead totals $72,000 in each year. This overhead is applied at the rate of $4 per unit. Variable selling and administrative expenses were $2 per unit sold.

Required:

a. What was the unit product cost in each year under variable costing?

b. Prepare new income statements for each year using variable costing.

c. Reconcile the absorption costing and variable costing net income for each year.

Answer:

a. The manufacturing cost of $6 per unit is the unit product cost under variable costing in both years.

b. Year 1 Year 2 Sales ................................... $240,000 $320,000 Less variable expenses: Variable cost of goods sold: Beginning inventory ................. -0- 18,000 Add variable manufacturing costs @ $6 108,000 108,000 Goods available for sale ............ 108,000 126,000 Less ending inventory @ $6 .......... 18,000 6,000 Variable cost of goods sold ......... 90,000 120,000 Variable selling and administrative @ $2 30,000 40,000 Total variable expenses ............... 120,000 160,000 Contribution margin ..................... 120,000 160,000 Less fixed expenses: Fixed manufacturing overhead .......... 72,000 72,000 Fixed selling and administrative* ..... 50,000 50,000 Total ................................ 122,000 122,000 Net income .............................. $( 2,000) $ 38,000

Year 1: $80,000 - $2 x 15,000 = $50,000


c. Year 1 Year 2 Variable costing net income ............. $( 2,000) $38,000 Add fixed factory overhead deferred in inventory under absorption costing (3,000 units x $4 per unit) ... 12,000 Less fixed factory overhead released from inventory under absorption costing (2,000 units x $4 per unit) ... (8,000) Absorption costing net income ........... $10,000 $30,000

116.Hard

Pabbatti Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $112





Required:

a. What is the unit product cost for the month under variable costing?

b. Prepare an income statement for the month using the contribution format and the variable costing method.c. Without preparing an income statement, determine the absorption costing net income for the month.

(Hint: Use the reconciliation method.)

Answer:

a. Variable costing unit product cost Direct materials ...................... $37 Direct labor .......................... 19 Variable manufacturing overhead ....... 7 Unit product cost ..................... $63


b. Variable costing income statement Sales ................................... $324,800 Less variable expenses: Variable cost of goods sold: Beginning inventory ................. $ 31,500 Add variable manufacturing costs .... 176,400 Goods available for sale ............ 207,900 Less ending inventory ............... 25,200 Variable cost of goods sold ......... 182,700 Variable selling and administrative . 14,500 197,200 Contribution margin ..................... 127,600 Less fixed expenses: Fixed manufacturing overhead ........ 109,200 Fixed selling and administrative .... 5,800 115,000 Net income .............................. $ 12,600

c. Computation of absorption costing net income

Fixed manufacturing overhead per unit .... $39.00 Change in inventories (units) ............ (100)

Variable costing net income .............. $12,600 Add fixed manufacturing overhead costs deferred in inventory under absorption costing ................................ 0 Deduct fixed manufacturing overhead costs released from inventory under absorption costing ................................ (3,900) Absorption costing net income ............ $8,700

117.Medium

Qabar Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $110




Required:

a. What is the unit product cost for the month undervariable costing?

b. Prepare an income statement for the month using the contribution format and the variable costing method.c. Without preparing an income statement, determine the absorption costing net income for the month.

(Hint: Use the reconciliation method.)


Answer:a. Variable costing unit product cost Direct materials ....................... $46 Direct labor ........................... 28 Variable manufacturing overhead ........ 5 Unit product cost ...................... $79

b. Variable costing income statement Sales .................................... $462,000 Less variable expenses: Variable cost of goods sold: Beginning inventory .................. $ 0 Add variable manufacturing costs ..... 363,400 Goods available for sale ............. 363,400 Less ending inventory ................ 31,600 Variable cost of goods sold .......... 331,800 Variable selling and administrative .. 42,000 373,800 Contribution margin ...................... 88,200 Less fixed expenses: Fixed manufacturing overhead ........... 55,200 Fixed selling and administrative ....... 25,200 80,400 Net income ............................... $ 7,800

c. Computation of absorption costing net income

Fixed manufacturing overhead per unit .... $12.00 Change in inventories (units) ............ 400

Variable costing net income .............. $7,800 Add fixed manufacturing overhead costs deferred in inventory under absorption costing ................................ 4,800 Deduct fixed manufacturing overhead costs released from inventory under absorption costing ................................ 0 Absorption costing net income ............ $12,600

118.Medium

UHF Antennas, Inc., produces and sells a unique television antenna. The company has just opened a new plant to manufacture the antenna, and the following cost and revenue data have been reported for the first month of the new plant's operation:

Beginning inventory .................... -0- Units produced ......................... 35,000 Units sold ............................. 30,000 Selling price per unit ................. $50 Selling and administrative expenses: Variable per unit ................... $2 Fixed (total) ....................... $360,000 Manufacturing costs: Direct material cost per unit ....... $9 Direct labor cost per unit .......... $8 Variable overhead cost per unit ..... $3 Fixed overhead cost (total) ......... $350,000

Management is anxious to see how profitable the new antenna will be and has asked that an income statement be prepared for the month. Assume that direct labor is a variable cost.


Required:

a. Assuming that the company uses absorption costing, compute the unit product cost and prepare an income statement.b. Assuming that the company uses variable costing, compute the unit product cost and prepare an income statement.c. Explain the reason for any difference in the ending inventories under the two costing methods and the impact of this difference on reported net income.

Answer:

a. Unit product cost under absorption costing: Direct materials cost per unit............... $ 9 Direct labor cost per unit................... $ 8 Variable overhead cost per unit.............. $ 3 Fixed overhead cost per unit: $350,000/35,000 units...................... $10 Total cost per unit under absorption costing. $30

Income statement under absorption costing:

Sales ($50 x 30,000)................... $1,500,000 Cost of goods sold: Beginning inventory....................$ -0- Cost of goods manufactured............. 1,050,000 Cost of goods available................ 1,050,000 Ending inventory (5,000 x $30)......... 150,000 900,000 Gross margin........................... 600,000 Selling and administrative expense: [360,000 + ($2 x 30,000)............. 420,000 Net income............................. $ 180,000

Cost of goods manufactured: $30 x 35,000 = $1,050,000.

b. Unit product cost under variable costing: Direct materials cost per unit............... $ 9 Direct labor cost per unit................... $ 8 Variable overhead cost per unit.............. $ 3 Total cost per unit under variable costing... $20

Income statement under variable costing:

Sales ($50 x 30,000).................... $1,500,000 Cost of goods sold: Beginning inventory..................... $ -0- Cost of goods manufactured ($20 x 35,000 units) ................. 700,000 Cost of goods available................. 700,000 Ending inventory (5,000 x $20).......... 100,000 Variable cost of goods sold............. 600,000 Variable selling and administrative expenses: ($2 x 30,000)............... 60,000 660,000 Contribution margin..................... 840,000 Fixed expenses: Fixed overhead........................ $350,000 Fixed selling and administrative...... 360,000 710,000 Net income.............................. $ 130,000


c. Net income under variable costing....... $130,000 Add fixed manufacturing overhead costs deferred in inventory under absorption costing (5,000 units X $10) ........... 50,000 Net income under absorption costing..... $180,000

119.Medium

Data concerning Sonderegger Company’s operations last year appear below:

Units in beginning inventory ............ -0- Units produced .......................... 70,000 Units sold .............................. 60,000

Selling price per unit .................. $12.00

Variable costs per unit: Direct materials ...................... $2.00 Direct labor .......................... 1.00 Variable manufacturing overhead ....... 1.00 Variable selling and administrative ... 1.50 Fixed costs in total: Fixed manufacturing overhead .......... $140,000 Fixed selling and administrative ...... 150,000

Required:a. Prepare an income statement for the year using absorption

costing.b. Prepare an income statement for the year using variable costing.c. Prepare a report reconciling the difference in net income

between absorption and variable costing for the year.

Answer:a. Sales .................................... $720,000 Cost of goods sold: Beginning inventory ....................$ -0- Add cost of goods manufactured @ $6* ... 420,000 Goods available for sale ............... 420,000 Less ending inventory @ $6* ............ 60,000 360,000 Gross margin ............................. 360,000 Selling and administrative expenses* ..... 240,000 Net income ............................... $120,000

* $6 = $2.00 + $1.00 + $1.00 + $140,000/70,000 ** 60,000 units x $1.50 per unit variable plus $150,000 fixed.

b. Sales ..................................... $720,000 Less variable expenses: Variable cost of goods sold: Beginning inventory ................... -0- Add variable manuf. costs @ $4 ........ 280,000 Goods available for sale .............. 280,000 Less ending inventory @ $4 ............ 40,000 Variable cost of goods sold ........... 240,000 Variable selling & admin. @ $1.50 ....... 90,000 330,000 Contribution margin ....................... 390,000 Less fixed expenses: Fixed manufacturing overhead ............ 140,000 Fixed selling & admin. .................. 150,000 290,000 Net income ................................ $100,000


c. Variable costing net income ............... $100,000 Add fixed factory overhead deferred in inventory under absorption costing (10,000 units x $2 per unit) ............ 20,000 Absorption costing net income ............. $120,000

120.Hard

Nelson Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $84






Required:

a. Prepare an income statement for the month using the contribution format and the variable costing method.b. Prepare an income statement for the month using the absorption costing method.

Answer:a. Variable costing income statement Sales ................................... $176,400 Less variable expenses: Variable cost of goods sold: Beginning inventory ................. $ 21,000 Add variable manufacturing costs .... 79,800 Goods available for sale ............ 100,800 Less ending inventory ............... 12,600 Variable cost of goods sold ......... 88,200 Variable selling and administrative . 21,000 109,200 Contribution margin ..................... 67,200 Less fixed expenses: Fixed manufacturing overhead .......... 38,000 Fixed selling and administrative ...... 21,000 59,000 Net income .............................. $ 8,200

b. Absorption costing income statement Sales ................................... $176,400 Cost of goods sold: Beginning inventory ................... $ 31,000 Add cost of goods manufactured ........ 117,800 Goods available for sale .............. 148,800 Less ending inventory ................. 18,600 130,200 Gross margin ............................ 46,200 Less selling and administrative expenses: Variable selling and administrative ... 21,000 Fixed selling and administrative ...... 21,000 42,000 Net income .............................. $ 4,200

121.Medium

Oakes Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ............................ $108

Units in beginning inventory ............. 0 Units produced ........................... 1,100 Units sold ............................... 900 Units in ending inventory ................ 200




Required:

a. Prepare an income statement for the month using the contribution format and the variable costing method.b. Prepare an income statement for the month using the absorption costing method.

Answer:a. Variable costing income statement Sales .................................... $97,200 Less variable expenses: Variable cost of goods sold: Beginning inventory .................. $ 0 Add variable manufacturing costs ..... 71,500 Goods available for sale ............. 71,500 Less ending inventory ................ 13,000 Variable cost of goods sold .......... 58,500 Variable selling and administrative .. 9,900 68,400 Contribution margin ...................... 28,800 Less fixed expenses: Fixed manufacturing overhead ........... 14,300 Fixed selling and administrative ....... 1,800 16,100 Net income ............................... $12,700

b. Absorption costing income statement Sales .................................... $97,200 Cost of goods sold: Beginning inventory .................... $ 0 Add cost of goods manufactured ......... 85,800 Goods available for sale ............... 85,800 Less ending inventory .................. 15,600 70,200 Gross margin ............................. 27,000 Less selling and administrative expenses: Variable selling and administrative .... 9,900 Fixed selling and administrative ....... 1,800 11,700 Net income ............................... $15,300

122.Medium

The Miller Company had the following results for its first two years of operation:

Year 1 Year 2 Sales ................................ $1,200,000 $1,200,000 Cost of goods sold ................... 800,000 680,000 Gross margin ......................... 400,000 520,000 Selling and administrative expense ... 300,000 300,000 Net income ........................... $ 100,000 $ 220,000

In Year 1, the company produced and sold 40,000 units of its only product; in Year 2, the company again sold 40,000 units, but increased production to 50,000 units. The company’s variable production cost is $5 per unit and its fixed manufacturing overhead cost is $600,000 a year. Fixed manufacturing overhead costs are applied to the product on the basis of each year's unit production (i.e., a new fixed overhead rate is computed each year). Variable selling and administrative expenses are $2 per unit sold.


Required:

a. Compute the unit product cost for each year under absorption costing and under variable costing.

b. Prepare an income statement for each year, using the contribution approach with variable costing.c. Reconcile the variable costing and absorption costing income

figures for each year.d. Explain why the net income for Year 2 under absorption costing was higher than the net income for Year 1, although the same number of units were sold in each year.

Answer:

a. Cost per unit under absorption costing: Year 1 Year 2 Variable production cost per unit ..... $ 5 $ 5 Fixed manufacturing overhead cost: ($600,000/40,000) ................ $15 ($600,000/50,000) ................ ___ $12 Unit product cost ..................... $20 $17

Cost per unit under variable costing: Year 1 Year 2 Variable production cost per unit...... $5 $5

b. Income statements for each year under variable costing:

Year 1 Year 2 Sales................................. $1,200,000 $1,200,000 Cost of goods sold ($5 x 40,000)...... 200,000 200,000 Variable selling and administrative expense ($2 x 40,000)............... 80,000 80,000 Contribution margin................... 920,000 920,000 Fixed expenses: Fixed manufacturing overhead........ 600,000 600,000 Fixed selling and administrative expense ......................... 220,000 220,000 Net income............................ $ 100,000 $ 100,000

c. Reconciliation of absorption costing and variable costing net incomes:

Year 1 Year 2 Net income under variable costing....... $100,000 $100,000 Fixed manufacturing overhead deferred in (released from) inventory: Year 1 ............................. -0- Year 2 (10,000 units x $12 per unit) ________ 120,000 Net income under absorption costing..... $100,000 $220,000

d. The increase in production in Year 2, in the face of level sales, caused a buildup of inventory and a deferral of a portion of the overhead costs of Year 2 to the next year. This

deferral of cost relieved Year 2 of $120,000 of fixed manufacturing overhead. Income for Year 2 was $120,000 higher than

income of Year 1, even though the same number of units was sold each year. By increasing production and building up inventory, the company was able to increase profits without increasing sales. This is major criticism of the absorption costing approach.


123.Hard

The Hadfield Company manufactures and sells a unique electronic part. The company's plant is highly automated with low variable and high fixed manufacturing costs. Operating results on an absorption costing basis for the first three years of activity were as follows:

Year 1 Year 2 Year 3Sales ........................ $704,000 $528,000 $704,000Cost of goods sold:Beginning inventory .......... -0- -0- 220,000Cost of goods manufactured ... 520,000 550,000 496,000Goods available for sale ..... 520,000 550,000 716,000Less ending inventory ........ -0- 220,000 186,000Cost of goods sold ........... 520,000 330,000 530,000Gross margin ................. 184,000 198,000 174,000Less selling and administrative expense ..... 180,000 160,000 180,000Net income (loss) ............ $ 4,000 $ 38,000 $ (6,000)

Additional information about the company is as follows:

- Variable manufacturing costs (direct labor, direct materials, and variable manufacturing overhead) total $3 per unit, and fixed manufacturing overhead costs total $400,000.

- Fixed manufacturing costs are applied to units of product on the basis of the number of units produced each year (i.e., a new fixed overhead rate is computed each year).

- The company uses a FIFO inventory flow assumption.- Variable selling and administrative expenses are $2 per unit sold.

Fixed selling and administrative expenses total $100,000.- Production and sales information for the three years is as follows:

Year 1 Year 2 Year 3Production in units .... 40,000 50,000 32,000Sales in units ......... 40,000 30,000 40,000


Required:

a. Compute net income for each year under the variable costing approach.

b. Referring to the absorption costing income statements above, explain why net income was higher in Year 2 than in Year 1 under

absorption costing, in light of the fact that fewer units were sold in Year 2 than in Year 1.c. Referring again to the absorption costing income statements,

explain why the company suffered a loss in Year 3 but reported a profit in Year 1, although the same number of units was sold in each year.d. If the company had used JIT during Year 2 and Year 3 and

produced only what could be sold, what would the company's net income (loss) have been each year under absorption costing.

Answer:

a. Year 1 Year 2 Year 3Sales .......................... $704,000 $528,000 $704,000Less variable expenses: Variable cost of goods sold: Beginning inventory .......... -0- -0- 60,000 Variable manufacturing costs . 120,000 150,000 96,000 Goods available for sale ..... 120,000 150,000 156,000 Less ending inventory ........ -0- 60,000 36,000 Variable cost of goods sold .. 120,000 90,000 120,000 Variable selling expense ...... 80,000 60,000 80,000 Total variable expenses ..... 200,000 150,000 200,000Contribution margin ............ 504,000 378,000 504,000Less fixed expenses: Fixed manufacturing overhead .. 400,000 400,000 400,000 Fixed sellling and admin. ..... 100,000 100,000 100,000 Total fixed expenses ........ 500,000 500,000 500,000Net income (loss) .............. $ 4,000 $(122,000) $ 4,000

b. Production increased sharply in Year 2 even though unit sales declined. The increase in production resulted in a lower unit product cost in Year 2 than in Year 1. Furthermore, because production exceeded sales, fixed manufacturing overhead costs were

deferred in inventories. These effects more than offset the loss of revenue due to lower sales. The company's income thus rose even though sales were down.

c. Production decreased sharply in Year 3. This resulted in an increase in the unit product cost. In addition, inventories decreased and as a result fixed manufacturing overhead deferred in

inventories in Year 2 were released to the income statement in Year 3.

d. If JIT had been in use, the net income under absorption costing would have been the same as under variable costing in all three years. With production geared to sales, there would have been no ending inventory, and therefore, there would have been no fixed overhead costs deferred in inventory to other years.


Test Bank - Chapter 7 Variable Costing

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Transcript of Test Bank - Chapter 7 Variable Costing