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Variable Costing Practice Problems
Variable Costing Practice Problems
Intermediate Accounting 1 (Pontifical and Royal University of Santo Tomas, The Catholic
University of the Philippines)
Chapt
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Var
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True/False
3. Under variable costing, the unit product cost contains some fixed
F manufacturing overhead cost.
Medium
10. When sales exceeds production for a period, absorption costing net
F income will generally be greater than variable costing net income.
Easy
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
14. When JIT methods are introduced, the difference in net income computed
T under the absorption and variable costing methods is reduced.
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.
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.
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?
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.
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 break-even
A analysis and other cost-volume-profit techniques is:
Easy a. variable costing.
b. absorption costing.
c. process costing.
d. job-order 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.
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: 7-1
Aaker Company, which has only one product, has provided the following data concerning
its most recent month of operations:
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
7-1 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
7-1 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.
7-1 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.
7-1 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
7-1 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
7-1 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
7-1 d. ($14,100)
49. What is the net income for the month under absorption costing?
C a. $3,900
Medium b. ($14,100)
Refer To: c. $12,000
7-1 d. $8,100
Reference: 7-2
Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production
costs were as follows:
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.
7-2 d. $14.00.
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.
7-2 c. $14,400.
d. $27,000.
Reference: 7-3
Farron Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $130,500
Fixed selling and administrative ....... 8,300
56. What is the unit product cost for the month under variable costing?
A a. $69
Easy b. $84
Refer To: c. $89
7-3 d. $74
57. What is the unit product cost for the month under absorption costing?
D a. $74
Easy b. $89
Refer To: c. $69
7-3 d. $84
58. What is the net income for the month under variable costing?
A a. $10,600
Medium b. ($17,000)
Refer To: c. $16,600
7-3 d. $6,000
59. What is the net income for the month under absorption costing?
B a. ($17,000)
Medium b. $16,600
Refer To: c. $6,000
7-3 d. $10,600
Reference: 7-4
Jarvix Company, which has only one product, has provided the following data
concerning its most recent month of operations:
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.
60. What is the unit product cost for the month under variable costing?
B a. $83
Medium b. $74
Refer To: c. $90
7-4 d. $81
61. What is the unit product cost for the month under absorption costing?
C a. $90
Medium b. $74
Refer To: c. $81
7-4 d. $83
62. What is the net income for the month under variable costing?
D a. $25,900
Medium b. $2,100
Refer To: c. $17,800
7-4 d. $18,500
63. What is the net income for the month under absorption costing?
D a. $2,100
Medium b. $25,900
Refer To: c. $18,500
7-4 d. $17,800
Reference: 7-5
Hatfield Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $140,800
Fixed selling and administrative ....... 91,500
64. What is the unit product cost for the month under variable costing?
C a. $98
Easy b. $84
Refer To: c. $76
7-5 d. $106
65. The total contribution margin for the month under the variable costing
A approach is:
Medium a. $237,900.
Refer To: b. $97,100.
7-5 c. $152,500.
d. $286,700.
66. What is the total period cost for the month under the variable costing
D approach?
Hard a. $140,300
Refer To: b. $140,800
7-5 c. $232,300
d. $281,100
67. What is the net income for the month under variable costing?
B a. $6,600
Medium b. $5,600
Refer To: c. ($17,200)
7-5 d. $12,200
Reference: 7-6
Iancu Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $155,400
Fixed selling and administrative ....... 70,200
68. What is the unit product cost for the month under variable costing?
C a. $124
Easy b. $115
Refer To: c. $78
7-6 d. $87
69. What is the net income for the month under variable costing?
B a. $27,300
Medium b. $16,200
Refer To: c. ($7,200)
7-6 d. $11,100
Reference: 7-7
The Pacific Company manufactures a single product. The following data relate to the
year just completed:
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.
Refer To: c. $58.00.
7-7 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.
7-7 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.
7-7 c. $278,400.
d. $360,000.
Reference: 7-8
Crystal Company's variable costing income statement for the month of May appears
below:
Crystal Company
Income Statement
For the month ended May 31
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.
7-8 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.
7-8 c. $30,000 profit.
d. $60,000 profit.
Reference: 7-9
The following data were provided by Green Enterprises for the most recent period:
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.
7-9 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: 7-10
The following data pertain to one month's operations of Whitney, Inc.:
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.
7-10 c. $19,000.
d. $12,000.
79. The carrying value on the balance sheet of the ending finished goods
C inventory under absorption costing would be:
Easy a. $16,000.
Refer To: b. $10,000.
7-10 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.
7-10 c. the same as net income under absorption costing.
d. The relation between variable costing and absorption costing net
income cannot be determined.
Reference: 7-11
Bateman Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $89,300
Fixed selling and administrative ....... 26,400
81. What is the unit product cost for the month under variable costing?
D a. $89
Easy b. $97
Refer To: c. $108
7-11 d. $78
82. What is the unit product cost for the month under absorption costing?
A a. $97
Easy b. $108
Refer To: c. $78
7-11 d. $89
Reference: 7-12
During the last year, Snyder Co. produced 10,000 units of Product S. Costs incurred
by Snyder during the year were as follows:
83. The unit product cost under absorption costing would have been:
C a. $5.43.
Medium b. $3.81.
Refer To: c. $4.71.
7-12 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.
7-12 d. $3.51.
Reference: 7-13
During the past year, Carr Company manufactured 25,000 units and sold 20,000 units.
Production costs for the year were as follows:
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.
86. Under absorption costing, the ending inventory for the year would be
D valued at:
Medium a. $179,500.
Refer To: b. $213,500.
7-13 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.
7-13 d. $50,000 higher than under absorption costing.
Reference: 7-14
Last year, Harris Company manufactured 17,000 units and sold 13,000 units. Production
costs for the year were as follows:
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.
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.
7-14 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.
7-14 c. $108,000 lower than under absorption costing.
d. $60,000 lower than under absorption costing.
Reference: 7-15
Fahey Company manufactures a single product which it sells for $25 per unit. The
company has the following cost structure:
There were no units in beginning inventory. During the year, 18,000 units were
produced and 15,000 units were sold.
91. Under absorption costing, the unit product cost would be:
C a. $ 9.
Easy b. $12.
Refer To: c. $13.
7-15 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.
7-15 d. $69,000.
Reference: 7-16
Erie Company manufactures a single product. Assume the following data for the year
just completed:
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.
93. Under absorption costing, the unit product cost would be:
D a. $8.
Easy b. $17.75.
Refer To: c. $13.
7-16 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.
7-16 d. $417,500.
Reference: 7-17
Chown Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $248,000
Fixed selling and administrative ....... 140,400
95. The total contribution margin for the month under the variable costing
B approach is:
Medium a. $179,400.
Refer To: b. $390,000.
7-17 c. $421,200.
d. $142,000.
96. The total gross margin for the month under the absorption costing
B approach is:
Medium a. $196,800.
Refer To: b. $179,400.
7-17 c. $390,000.
d. $7,800.
Reference: 7-18
Delvin Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $7,200
Fixed selling and administrative ....... 28,500
97. What is the total period cost for the month under the variable costing
B approach?
Hard a. $42,000
Refer To: b. $49,200
7-18 c. $35,700
d. $7,200
98. What is the total period cost for the month under the absorption
A costing approach?
Hard a. $42,000
Refer To: b. $7,200
7-18 c. $49,200
d. $28,500
Reference: 7-19
Gabbert Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $93,600
Fixed selling and administrative ....... 61,200
99. The total contribution margin for the month under the variable costing
D approach is:
Medium a. $62,800.
Refer To: b. $95,200.
7-19 c. $183,600.
d. $156,400.
100. The total gross margin for the month under the absorption costing
A approach is:
Medium a. $95,200.
Refer To: b. $156,400.
7-19 c. $6,800.
d. $107,600.
101. What is the total period cost for the month under the variable costing
D approach?
Hard a. $93,600
Refer To: b. $154,800
7-19 c. $88,400
d. $182,000
102. What is the total period cost for the month under the absorption
A costing approach?
Hard a. $88,400
Refer To: b. $182,000
7-19 c. $61,200
d. $93,600
Reference: 7-20
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:
104. The carrying value on the balance sheet of the ending finished goods
B inventory under absorption costing would be:
Medium a. $ 80,000.
Refer To: b. $104,000.
7-20 c. $110,000.
d. $124,000.
Reference: 7-21
Elliot Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $117,600
Fixed selling and administrative ....... 22,500
105. What is the net income for the month under variable costing?
D a. $18,000
Medium b. ($19,600)
Refer To: c. $9,600
7-21 d. $8,400
106. What is the net income for the month under absorption costing?
D a. ($19,600)
Medium b. $9,600
Refer To: c. $8,400
7-21 d. $18,000
Reference: 7-22
Khanam Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $ 67,200
Fixed selling and administrative ....... 161,500
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.
107. What is the net income for the month under variable costing?
B a. $8,500
Medium b. $9,300
Refer To: c. $3,200
7-22 d. $15,100
108. What is the net income for the month under absorption costing?
A a. $8,500
Medium b. $9,300
Refer To: c. $3,200
7-22 d. $15,100
Reference: 7-23
DeAnne Company's variable costing income statement for August appears below:
DeAnne Company
Income Statement
For the month ended August 31
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.
7-23 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.
7-23 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:
Fixed costs:
Fixed manufacturing overhead ........... $62,000
Fixed selling and administrative ....... 35,400
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:
Absorption costing:
Direct materials ....................... $42
Direct labor ........................... 28
Variable manufacturing overhead ........ 1
Fixed manufacturing overhead ........... 10
Unit product cost ...................... $81
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:
Fixed costs:
Fixed manufacturing overhead ........... $199,200
Fixed selling and administrative ....... 106,600
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:
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
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. The EG Company produces and sells one product--a microwave oven. The
Medium following data refer to the year just completed:
Required:
Answer:
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
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. The Dean Company produces and sells a single product--a microwave oven.
Medium The following data refer to the year just completed:
Required:
Answer:
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
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. 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
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:
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
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:
Fixed costs:
Fixed manufacturing overhead ........... $109,200
Fixed selling and administrative ....... 5,800
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. 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:
117. Qabar Company, which has only one product, has provided the following
Medium data concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $55,200
Fixed selling and administrative ....... 25,200
Required:
Answer:
a. Variable costing unit product cost
Direct materials ....................... $46
Direct labor ........................... 28
Variable manufacturing overhead ........ 5
Unit product cost ...................... $79
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:
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:
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
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
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. Data concerning Sonderegger Company’s operations last year appear below:
Medium
Units in beginning inventory ............ -0-
Units produced .......................... 70,000
Units sold .............................. 60,000
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
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. Nelson Company, which has only one product, has provided the following
Hard data concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $38,000
Fixed selling and administrative ....... 21,000
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:
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
121. Oakes Company, which has only one product, has provided the following
Medium data concerning its most recent month of operations:
Fixed costs:
Fixed manufacturing overhead ........... $14,300
Fixed selling and administrative ....... 1,800
Required:
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
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
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
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
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:
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 3
Sales .......................... $704,000 $528,000 $704,000
Less 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 ..... 200,000 150,000 200,000
Contribution margin ............ 504,000 378,000 504,000
Less fixed expenses:
Fixed manufacturing overhead .. 400,000 400,000 400,000
Fixed sellling and admin. ..... 100,000 100,000 100,000
Total fixed expenses ........ 500,000 500,000 500,000
Net income (loss) .............. $ 4,000 $(122,000) $ 4,000
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.