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Chapter 7
Variable Costing: A Tool for Management
True/False
1. In the preparation of financial statements using variable costing,
T fixed manufacturing overhead is treated as a period cost.
Easy
2. Direct labor is always considered to be a product cost under variable
F costing.
Hard
3. Under variable costing, the unit product cost contains some fixed
F manufacturing overhead cost.
Medium
4. Under variable costing it may be possible to report a profit even if
F the company sells less than the breakeven volume of sales.
Medium
5. Under variable costing, the impact of fixed cost is emphasized because
T the total amount of such cost for the period appears in the income
Easy statement.
6. Absorption costing treats fixed manufacturing overhead as a period
F cost, rather than as a product cost.
Easy
7. The unit product cost under absorption costing contains no element of
F fixed manufacturing overhead cost.
Medium
8. Absorption costing treats all manufacturing costs as product costs.
T
Easy
9. When the number of units in work in process and finished goods
T inventories increase, absorption costing net income will typically be
Easy greater than variable costing net income.
10. When sales exceeds production for a period, absorption costing net
F income will generally be greater than variable costing net income.
Easy
Managerial Accounting, 9/e 221
11. Absorption costing net income is closer to the net cash flow of a
F period than is variable costing net income.
Medium
12. Variable costing is not permitted for income tax purposes, but it is
F widely accepted for external financial reports.
Medium
13. Net income is not affected by changes in production when absorption
F costing is used.
Medium
14. When JIT methods are introduced, the difference in net income computed
T under the absorption and variable costing methods is reduced.
Easy
15. Since variable costing emphasizes costs by behavior, it works well
T with costvolumeprofit analysis.
Easy
Multiple Choice
16. A cost that would be included in product costs under both absorption
C costing and variable costing would be:
Easy a. supervisory salaries.
b. equipment depreciation.
c. variable manufacturing costs.
d. variable selling expenses.
17. An allocated portion of fixed manufacturing overhead is included in
C product costs under:
Easy
CPA Absorption Variable
costing costing
adapted
a. No No
b. No Yes
c. Yes No
d. Yes Yes
18. The variable costing method ordinarily includes in product costs the
B following:
Medium a. Direct materials cost, direct labor cost, but no manufacturing
CPA overhead cost.
b. Direct materials cost, direct labor cost, and variable
adapted
manufacturing overhead cost.
c. Prime cost but not conversion cost.
d. Prime cost and all conversion cost.
222Managerial Accounting, 9/e
19. Cay Company's fixed manufacturing overhead costs totaled $100,000, and
D variable selling costs totaled $80,000. Under variable costing, how
Easy should these costs be classified?
Period costs Product costs
a. $0 $180,000
b. $80,000 $100,000
c. $100,000 $80,000
d. $180,000 $0
20. Which of the following are considered to be product costs under
A variable costing?
Easy
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. What factor is the cause of the difference between net income as
B computed under absorption costing and net income as computed under
Medium variable costing?
CPA a. Absorption costing considers all manufacturing costs in the
adapted 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. Under variable costing, costs which are treated as period costs
C include:
Easy a. only fixed manufacturing costs.
b. both variable and fixed manufacturing costs.
c. all fixed costs.
d. only fixed selling and administrative costs.
23. Which of the following statements is true for a firm that uses
C variable costing?
Medium 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. Which of the following are considered to be product costs under
B absorption costing?
Easy
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. The term "gross margin" for a manufacturing company refers to the
C excess of sales over
Easy a. 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. Net income determined using full absorption costing can be reconciled
A to net income determined using variable costing by computing the
Medium difference between:
CPA a. Fixed manufacturing overhead costs deferred in or released from
adapted 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. Net income reported under absorption costing will exceed net income
B reported under variable costing for a given period if:
Medium a. production equals sales for that period.
CMA b. production exceeds sales for that period.
adapted c. sales exceed production for that period.
d. the variable manufacturing overhead exceeds the fixed
manufacturing overhead.
28. What will be the difference in net income between variable costing and
D absorption costing if the number of units in work in process and
Medium finished goods inventories increase?
CPA a. There will be no difference in net income.
adapted 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. The costing method that can be used most easily with breakeven
A analysis and other costvolumeprofit techniques is:
Easy a. variable costing.
b. absorption costing.
c. process costing.
d. joborder costing.
30. For the most recent year, Atlantic Company's net income computed by
C the absorption costing method was $7,400, and its net income computed
Hard 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. During the most recent year, Evans Company had a net income of $90,000
B using absorption costing and $84,000 using variable costing. The fixed
Hard 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. During the year just ended, Roberts Company' income under absorption
D costing was $3,000 lower than its income under variable costing. The
Hard 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. Last year, Silver Company's variable production costs totaled $7,500
C and its fixed manufacturing overhead costs totaled $4,500. The company
Hard 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. During the last year, Hansen Company had net income under absorption
D costing that was $5,500 lower than its income under variable costing.
Hard 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. Indiana Corporation produces a single product that it sells for $9 per
B unit. During the first year of operations, 100,000 units were produced
Medium and 90,000 units were sold. Manufacturing costs and selling and
CMA administrative expenses for the year were as follows:
adapted
Fixed Costs Variable Costs
Raw materials ............ $1.75 per unit produced
Direct labor ............. 1.25 per unit produced
Factory overhead ......... $100,000 0.50 per unit produced
Selling 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. Last year, fixed manufacturing overhead was $30,000, variable
C production costs were $48,000, fixed selling and administration costs
Medium 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. West Co.'s manufacturing costs are as follows:
D
Easy Direct materials and direct labor ....... $700,000
CPA Other variable manufacturing costs ...... 100,000
adapted 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. At the end of last year, Lee Company had 30,000 units in its ending
C inventory. Lee's variable production costs are $10 per unit and its
Hard 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. During the last year, Moore Company's variable production costs
B totaled $10,000 and its fixed manufacturing overhead costs totaled
Medium $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. Last year, Ben Company's income under absorption costing was $4,400
B lower than its income under variable costing. The company sold 8,000
Hard 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. Last year, Stephen Company had 20,000 units in its ending inventory.
C During the year, Stephen's variable production costs were $12 per
Hard 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: 71
Aaker 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. What is the unit product cost for the month under variable costing?
D a. $66
Easy b. $93
Refer To: c. $87
71 d. $60
43. What is the unit product cost for the month under absorption costing?
A a. $87
Easy b. $60
Refer To: c. $66
71 d. $93
44. The total contribution margin for the month under the variable costing
D approach is:
Medium a. $72,000.
Refer To: b. $27,900.
71 c. $234,000.
d. $198,000.
45. The total gross margin for the month under the absorption costing
C approach is:
Medium a. $98,100.
Refer To: b. $198,000.
71 c. $72,000.
d. $12,000.
46. What is the total period cost for the month under the variable costing
A approach?
Hard a. $230,100
Refer To: b. $194,100
71 c. $170,100
d. $60,000
47. What is the total period cost for the month under the absorption
B costing approach?
Hard a. $170,100
Refer To: b. $60,000
71 c. $230,100
d. $24,000
48. What is the net income for the month under variable costing?
B a. $8,100
Medium b. $3,900
Refer To: c. $12,000
71 d. ($14,100)
49. What is the net income for the month under absorption costing?
C a. $3,900
Medium b. ($14,100)
71 d. $8,100
Reference: 72
Last 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. Under absorption costing, the unit product cost would be:
B a. $9.00.
Easy b. $12.00.
Refer To: c. $13.40.
72 d. $14.00.
51. Under absorption costing, the gross margin would be:
A a. $176,000.
Medium b. $242,000.
Refer To: c. $ 66,000.
72 d. $ 21,000.
52. The contribution margin per unit would be:
D a. $15.00.
Medium b. $11.00.
Refer To: c. $ 8.00.
72 d. $ 6.00.
53. Under variable costing, the total amount of fixed manufacturing cost
A in the ending inventory would be:
Easy a. $ 0.
Refer To: b. $ 9,000.
72 c. $14,400.
d. $27,000.
54. The net income under variable costing would be:
C a. $ 2,000.
Medium b. $21,000.
Refer To: c. $12,000.
72 d. $ 9,000.
55. The net income under absorption costing would be:
D a. $ 9,000.
Medium b. $12,000.
Refer To: c. $ 2,000.
72 d. $21,000.
Reference: 73
Farron Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ............................ $92
Units produced ........................... 8,700
Units sold ............................... 8,300
Direct labor ........................... 55
Fixed costs:
A a. $69
Easy b. $84
Refer To: c. $89
73 d. $74
D a. $74
Easy b. $89
Refer To: c. $69
73 d. $84
A a. $10,600
Medium b. ($17,000)
73 d. $6,000
B a. ($17,000)
Medium b. $16,600
Refer To: c. $6,000
73 d. $10,600
Reference: 74
Jarvix Company, which has only one product, has provided the following data
Selling price ............................ $111
Units produced ........................... 8,800
Units sold ............................... 8,900
Direct labor ........................... 37
Fixed costs:
Fixed manufacturing overhead ........... $ 61,600
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.
B a. $83
Medium b. $74
Refer To: c. $90
74 d. $81
C a. $90
Medium b. $74
Refer To: c. $81
74 d. $83
D a. $25,900
Medium b. $2,100
74 d. $18,500
D a. $2,100
Medium b. $25,900
74 d. $17,800
Reference: 75
Hatfield Company, which has only one product, has provided the following data
Selling price ............................ $123
Units produced ........................... 6,400
Units sold ............................... 6,100
Direct labor ........................... 30
Fixed costs:
C a. $98
Easy b. $84
Refer To: c. $76
75 d. $106
A approach is:
Medium a. $237,900.
Refer To: b. $97,100.
75 c. $152,500.
d. $286,700.
D approach?
Hard a. $140,300
Refer To: b. $140,800
75 c. $232,300
d. $281,100
B a. $6,600
Medium b. $5,600
Refer To: c. ($17,200)
75 d. $12,200
Reference: 76
Iancu Company, which has only one product, has provided the following data concerning
Selling price ............................ $149
Units produced ........................... 4,200
Units sold ............................... 3,900
Direct labor ........................... 46
Fixed costs:
C a. $124
Easy b. $115
Refer To: c. $78
76 d. $87
B a. $27,300
Medium b. $16,200
Refer To: c. ($7,200)
76 d. $11,100
Reference: 77
The 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.
70. Under variable costing, the unit product cost would be:
D a. $91.00.
Easy b. $72.00.
77 d. $43.00.
71. The carrying value of finished goods inventory at the end of the year
C under variable costing would be:
Medium a. $8,800 greater than under absorption costing.
Refer To: b. $8,800 less than under absorption costing.
77 c. $5,800 less than under absorption costing.
d. The same as absorption costing.
72. Under absorption costing, the cost of goods sold for the year would
B be:
Medium a. $206,400.
Refer To: b. $345,600.
77 c. $278,400.
d. $360,000.
Reference: 78
Crystal 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.
73. The dollar value of the company's inventory on May 31 under the
A absorption costing method would be:
Hard a. $120,000.
Refer To: b. $ 90,000.
78 c. $ 75,000.
d. $ 60,000.
74. Under absorption costing, for the month ended May 31, the company
B would report a:
Hard a. $30,000 loss.
Refer To: b. $0 profit.
78 c. $30,000 profit.
d. $60,000 profit.
Reference: 79
The 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
Manufacturing ..................... $15
Selling and administrative ........ 5
Fixed costs, in total:
Manufacturing ..................... $24,000
Selling and administrative ........ 16,000
75. Under variable costing, the unit product cost is:
C a. $20.
Easy b. $18.
Refer To: c. $15.
79 d. $22.
76. Under absorption costing, the unit product cost is:
B a. $20.
Easy b. $18.
Refer To: c. $15.
79 d. $25.
77. For the period above, one would expect the net income under absorption
A costing to be:
Easy a. higher than the net income under variable costing.
Refer To: b. lower than the net income under variable costing.
79 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: 710
The following data pertain to one month's operations of Whitney, Inc.:
Units in beginning inventory ....... 0
Units produced ..................... 9,000
Units sold ......................... 8,000
Manufacturing .................... $10
Selling and administrative ....... 6
Manufacturing .................... $18,000
Selling and administrative ....... 27,000
78. The carrying value on the balance sheet of the ending finished goods
B inventory under variable costing would be:
Easy a. $16,000.
Refer To: b. $10,000.
710 c. $19,000.
d. $12,000.
C inventory under absorption costing would be:
Easy a. $16,000.
Refer To: b. $10,000.
710 c. $12,000.
d. $21,000.
80. For the month referred to above, net income under variable costing
B will be:
Medium a. higher than net income under absorption costing.
Refer To: b. lower than net income under absorption costing.
710 c. the same as net income under absorption costing.
d. The relation between variable costing and absorption costing net
income cannot be determined.
Reference: 711
Bateman Company, which has only one product, has provided the following data
Selling price ............................ $117
Units produced ........................... 4,700
Units sold ............................... 4,400
Direct labor ........................... 38
Fixed costs:
D a. $89
Easy b. $97
Refer To: c. $108
711 d. $78
A a. $97
Easy b. $108
Refer To: c. $78
711 d. $89
Reference: 712
During 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
83. The unit product cost under absorption costing would have been:
C a. $5.43.
Medium b. $3.81.
Refer To: c. $4.71.
712 d. $4.12.
84. The unit product cost under variable costing would have been:
B a. $3.20.
Medium b. $3.81.
Refer To: c. $4.12.
712 d. $3.51.
Reference: 713
During 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.
85. The contribution margin per unit would be:
D a. $12.10.
Medium b. $22.10.
713 d. $16.60.
86. Under absorption costing, the ending inventory for the year would be
D valued at:
Medium a. $179,500.
Refer To: b. $213,500.
713 c. $222,000.
d. $152,000.
87. The net income for the year under variable costing would be:
C a. $28,000 lower than under absorption costing.
Medium b. $28,000 higher than under absorption costing.
Refer To: c. $50,000 lower than under absorption costing.
713 d. $50,000 higher than under absorption costing.
Reference: 714
Last 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.
88. The contribution margin per unit was:
D a. $17.50.
Medium b. $32.50.
714 d. $25.70.
89. Under absorption costing, the carrying value on the balance sheet of
B the ending inventory for the year would be:
Medium a. $190,800.
Refer To: b. $170,000.
714 c. $230,800.
d. $ 0.
90. Under variable costing, the company's net income for the year would
d be:
Hard a. $60,000 higher than under absorption costing.
Refer To: b. $108,000 higher than under absorption costing.
714 c. $108,000 lower than under absorption costing.
d. $60,000 lower than under absorption costing.
Reference: 715
Fahey Company manufactures a single product which it sells for $25 per unit. The
company has the following cost structure:
Manufacturing .................... $9
Selling and Administrative ....... 3
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.
C a. $ 9.
Easy b. $12.
Refer To: c. $13.
715 d. $16.
92. The company's net income for the year under variable costing would be:
D a. $60,000.
Medium b. $81,000.
Refer To: c. $57,000.
715 d. $69,000.
Reference: 716
Erie Company manufactures a single product. Assume the following data for the year
just completed:
Selling and Administrative ... $60,000
Production ................... $82,500

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.
D a. $8.
Easy b. $17.75.
Refer To: c. $13.
716 d. $10.75.
94. The company's net income under variable costing would be:
A a. $407,500.
Medium b. $421,250.
Refer To: c. $431,250.
716 d. $417,500.
Reference: 717
Chown Company, which has only one product, has provided the following data concerning
Selling price ............................ $110
Units produced ........................... 8,000
Units sold ............................... 7,800
Direct labor ........................... 31
Fixed costs:
B approach is:
Medium a. $179,400.
Refer To: b. $390,000.
717 c. $421,200.
d. $142,000.
B approach is:
Medium a. $196,800.
Refer To: b. $179,400.
717 c. $390,000.
d. $7,800.
Reference: 718
Delvin Company, which has only one product, has provided the following data
Selling price ............................ $120
Units produced ........................... 1,800
Units sold ............................... 1,500
Direct labor ........................... 42
Fixed costs:
B approach?
Hard a. $42,000
Refer To: b. $49,200
718 c. $35,700
d. $7,200
A costing approach?
Hard a. $42,000
Refer To: b. $7,200
718 c. $49,200
d. $28,500
Reference: 719
Gabbert Company, which has only one product, has provided the following data
Selling price ............................ $90
Units produced ........................... 3,600
Units sold ............................... 3,400
Direct labor ........................... 11
Fixed costs:
D approach is:
Medium a. $62,800.
Refer To: b. $95,200.
719 c. $183,600.
d. $156,400.
A approach is:
Medium a. $95,200.
Refer To: b. $156,400.
719 c. $6,800.
d. $107,600.
D approach?
Hard a. $93,600
Refer To: b. $154,800
719 c. $88,400
d. $182,000
A costing approach?
Hard a. $88,400
Refer To: b. $182,000
719 c. $61,200
d. $93,600
Reference: 720
Gordon 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 costs
Raw materials................ $2.00 per unit produced
Direct labor................. 1.25 per unit produced
Factory overhead............. $120,000 0.75 per unit produced
Selling and administrative... 70,000 1.00 per unit sold
103. Net income under variable costing would be:
B a. $114,000.
Medium b. $210,000.
Refer To: c. $234,000.
720 d. $330,000.
B inventory under absorption costing would be:
Medium a. $ 80,000.
Refer To: b. $104,000.
720 c. $110,000.
d. $124,000.
Reference: 721
Elliot Company, which has only one product, has provided the following data
Selling price ............................ $112
Units produced ........................... 4,900
Units sold ............................... 4,500
Direct labor ........................... 45
Fixed costs:
D a. $18,000
Medium b. ($19,600)
Refer To: c. $9,600
721 d. $8,400
D a. ($19,600)
Medium b. $9,600
Refer To: c. $8,400
721 d. $18,000
Reference: 722
Khanam Company, which has only one product, has provided the following data
Selling price ............................ $97
Units produced ........................... 8,400
Units sold ............................... 8,500
Direct labor ........................... 37
Fixed costs:
Fixed manufacturing overhead ........... $ 67,200
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.
B a. $8,500
Medium b. $9,300
Refer To: c. $3,200
722 d. $15,100
A a. $8,500
Medium b. $9,300
Refer To: c. $3,200
722 d. $15,100
Reference: 723
DeAnne Company's variable costing income statement for August appears below:
DeAnne Company
Income Statement
For the month ended August 31
Sales ($15 per unit) ................ $600,000
Less variable costs:
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 .......... 440,000
Contribution margin ................. 160,000
Fixed costs:
Fixed manufacturing .............. 105,000
Fixed selling and administrative . 35,000
Total fixed costs ............. 140,000
Net 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. The dollar value of the company's inventory on August 31 under the
C absorption costing method would be:
Hard a. $27,000.
Refer To: b. $42,000.
723 c. $36,000.
d. $47,000.
110. Under absorption costing, for the month ended August 31, the company
D would report a:
Hard a. $20,000 profit.
Refer To: b. $ 5,000 loss.
723 c. $35,000 profit.
d. $ 5,000 profit.
Essay
111. Lee Company, which has only one product, has provided the following data
Hard concerning its most recent month of operations:
Selling price ............................ $95
Units produced ........................... 6,200
Units sold ............................... 5,900
Direct labor ........................... 28
Fixed costs:
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.
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 labor ........................... 28
Unit product cost ...................... $71
Absorption costing:
Direct labor ........................... 28
Fixed manufacturing overhead ........... 10
c. & d. Income statements
Variable costing income statement
Sales ...................................... $560,500
Less variable expenses:
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 .... 29,500 448,400
Contribution margin ........................ 112,100
Less fixed expenses:
Fixed manufacturing overhead ........... 62,000
Fixed selling and administrative ....... 35,400 97,400
Net income ................................. $ 14,700
Absorption costing income statement
Sales ...................................... $560,500
Cost 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 ............................... 82,600
Less selling and administrative expenses:
Variable selling and administrative ...... 29,500
Fixed selling and administrative ......... 35,400 64,900
Net 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. Mahugh Company, which has only one product, has provided the following
Medium data concerning its most recent month of operations:
Selling price .............................. $122
Units produced ........................... 8,300
Units sold ............................... 8,200
Direct labor ........................... 46
Fixed costs:
Required:
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
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 statement
Sales .................................... $1,000,400
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 .. 57,400 688,800
Contribution margin ...................... 311,600
Fixed manufacturing overhead ......... 199,200
Fixed selling and administrative ..... 106,600 305,800
Net income ............................... $ 5,800
Absorption costing income statement
Sales .................................... $1,000,400
Cost of goods sold:
Beginning inventory .................... $ 0
Add cost of goods manufactured ......... 838,300
Less ending inventory .................. 10,100 828,200
Gross margin ............................. 172,200
Variable selling and administrative .... 57,400
Net income ............................... $ 8,200
e. Reconciliation
Variable costing net income ................ $5,800
costing .................................. 2,400
costing .................................. 0

Absorption costing net income .............. $8,200
113. The EG Company produces and sells one producta microwave oven. The
Medium following data refer to the year just completed:
Beginning inventory ....................... $0
Units produced ............................ 25,000
Units sold ................................ 20,000
Sales price per unit ...................... $400
Selling and administrative expenses:
Variable per unit ...................... $15
Fixed (total) .......................... $275,000
Manufacturing 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
[($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
(25,000 @ $280) 7,000,000
Cost of goods available............. 7,000,000
(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
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. The Dean Company produces and sells a single producta microwave oven.
Medium The following data refer to the year just completed:
Beginning inventory .................... $0
Units produced ......................... 20,000
Units sold ............................. 19,000
Sales price per unit ................... $350
Variable per unit .................... $10
Fixed (total) ........................ $225,000
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:
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
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
(20,000 @ $267.50) ................. 5,350,000
Cost of goods available............... 5,350,000
(1,000 units @ $267.50) ............ 267,500 5,082,500
Gross profit.......................... 1,567,500
[($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
(20,000 @ $255) .................... 5,100,000
Cost of goods available............... 5,100,000
(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
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
costing (5,000 units X $12) ......... 12,500
Net income under absorption costing... $1,152,500
115. Operating data for Fowler Company and its absorption costing income
Medium 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
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
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. Pabbatti Company, which has only one product, has provided the following
Hard data concerning its most recent month of operations:
Selling price ............................ $112
Units produced ........................... 2,800
Units sold ............................... 2,900
Direct labor ........................... 19
Fixed costs:
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.
Required:
costing?
b. Prepare an income statement for the month using the contribution
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
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
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
costing ................................ 0
costing ................................ (3,900)
Absorption costing net income ............ $8,700
117. Qabar Company, which has only one product, has provided the following
Selling price ............................ $110
Units produced ........................... 4,600
Units sold ............................... 4,200
Direct labor ........................... 28
Fixed costs:
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
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 labor ........................... 28
b. Variable costing income statement
Sales .................................... $462,000
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
costing ................................ 4,800
costing ................................ 0

Absorption costing net income ............ $12,600
118. UHF Antennas, Inc., produces and sells a unique television antenna. The
Medium 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
Variable per unit ................... $2
Fixed (total) ....................... $360,000
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
($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
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
costing (5,000 units X $10) ........... 50,000
Net income under absorption costing..... $180,000
119. Data concerning Sonderegger Company’s operations last year appear below:
Medium
Units in beginning inventory ............ 0
Units produced .......................... 70,000
Units sold .............................. 60,000
Selling price per unit .................. $12.00
Direct materials ...................... $2.00
Direct labor .......................... 1.00
Variable manufacturing overhead ....... 1.00
Variable selling and administrative ... 1.50
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
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
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
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. Nelson Company, which has only one product, has provided the following
Hard data concerning its most recent month of operations:
Selling price ............................ $84
Units produced ........................... 1,900
Units sold ............................... 2,100
Direct labor ........................... 10
Fixed costs:
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.
Required:
a. Prepare an income statement for the month using the contribution
b. Prepare an income statement for the month using the absorption
costing method.
Answer:
a. Variable costing income statement
Sales ................................... $176,400
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
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
Variable selling and administrative ... 21,000
Fixed selling and administrative ...... 21,000 42,000
Net income .............................. $ 4,200
121. Oakes Company, which has only one product, has provided the following
Selling price ............................ $108
Units produced ........................... 1,100
Units sold ............................... 900
Direct labor ........................... 30
Fixed costs:
Required:
a. Prepare an income statement for the month using the contribution
b. Prepare an income statement for the month using the absorption
costing method.
Answer:
a. Variable costing income statement
Sales .................................... $97,200
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
Less ending inventory .................. 15,600 70,200
Gross margin ............................. 27,000
Variable selling and administrative .... 9,900
Net income ............................... $15,300
122. The Miller Company had the following results for its first two years of
Medium 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:
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
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
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. The Hadfield Company manufactures and sells a unique electronic part.
Hard 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 3
Sales ........................ $704,000 $528,000 $704,000
Cost of goods sold:
Beginning inventory .......... 0 0 220,000
Cost of goods manufactured ... 520,000 550,000 496,000
Goods available for sale ..... 520,000 550,000 716,000
Less ending inventory ........ 0 220,000 186,000
Cost of goods sold ........... 520,000 330,000 530,000
Gross margin ................. 184,000 198,000 174,000
Less selling and
administrative expense ..... 180,000 160,000 180,000
Net 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:
Production in units .... 40,000 50,000 32,000
Sales 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.

Sales .......................... $704,000 $528,000 $704,000
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 ..... 200,000 150,000 200,000
Contribution margin ............ 504,000 378,000 504,000
Fixed manufacturing overhead .. 400,000 400,000 400,000
Fixed sellling and admin. ..... 100,000 100,000 100,000
Total fixed expenses ........ 500,000 500,000 500,000
Net 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.

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Chapter 7

Variable Costing: A Tool for Management

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