ACCT2112 Week 8 Tutorial Questions with Solutions Inventory Costing S2

2023

Question 1
Under absorption costing, fixed manufacturing cost is part of ________.
a. period costs
b. inventoriable costs
c. treated as an expense
d. sunk costs
e. None of the answers.

Question 2
Alpha Company makes a product with the following costs per unit:
Direct materials $180
Direct labour $20
Manufacturing overhead (variable) $30
Manufacturing overhead (fixed) $130
Marketing costs $75

What would be the inventoriable cost per unit under variable costing and what would it be
under absorption costing?

a. $180 for variable costing and $305 under absorption costing

b. $230 for variable costing and $305 under absorption costing
c. $230 for variable costing and $360 under absorption costing
d. $200 for variable costing and $305 under absorption costing
e. None of the answers.
Explanation: Variable costing: $180 + $20 + $30 = $230
Absorption costing: $180 + $20 + $30 + $130 = $360

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Question 3
Beta Motors produces and sells an auto part for $60 per unit. In 2022, 120,000 parts were
produced and 75,000 units were sold. Other information for the year includes:

Direct materials $20 per unit

Direct manufacturing labour $5 per unit
Variable manufacturing costs $3 per unit
Sales commissions $7 per part
Fixed manufacturing costs $760,000 per year
Administrative expenses, all fixed $270,000 per year
What is the inventoriable cost per unit using variable costing?
a. $20
b. $25
c. $28
d. $35
e. None of the answers.

Question 4
In comparing the absorption and variable cost methods, each of the following statements is true
except:
a. SG&A fixed expenses are not included in inventory in either method.
b. Only the absorption method may be used for external financial reporting.
c. Variable costing charges fixed overhead costs to the period they are incurred.
d. When inventory increases over the period, net income under the variable costing
method will exceed net income under absorption costing method.
e. None of the answers.

Question 5
Gamma Company has just completed its first year of operations. The company has not had
any sales to date. Gamma has incurred the following costs associated with its production as of
31 August 2023:
Direct materials $45,000
Production labour 35,000
Bookkeeper salary 28,000
Factory utilities 18,500
Office rent 12,000
Factory supervisor salary 9,600
Machine maintenance contract 7,500
Using the absorption costing method, compute the inventory amount shown on the balance
sheet on 31 August 2023.
a. $155,600
b. $115,600
c. $98,500
d. $80,000
e. None of the answers.
$(45,000 + 35,000 + 18,500 + 9,600 + 7,500 = $115,600)

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Question 6
Delta Company planned and actually manufactured 200,000 units of its single product in
2022, its first year of operation. Variable manufacturing cost was $20 per unit produced.
Variable operating (nonmanufacturing) cost was $10 per unit sold. Planned and actual fixed
manufacturing costs were $600,000. Planned and actual fixed operating (nonmanufacturing)
costs totaled $400,000. Delta sold 120,000 units of product at $40 per unit.

i. Delta’s 2022 operating income using absorption costing is _________.

a. $440,000
b. $200,000
c. $600,000
d. $840,000
e. None of the answers.

ii. Delta’s 2022 operating income using variable costing is ____________.

a. $800,000
b. $440,000
c. $200,000
d. $600,000
e. None of the answers.

Solution:
i. Absorption Costing:
Revenuesa $4,800,000
Cost of goods sold:
Variable manufacturing costsb $2,400,000
c
Allocated fixed manufacturing costs 360,000 2,760,000
Gross margin 2,040,000
Operating costs:
Variable operatingd 1,200,000
Fixed operating 400,000 1,600,000
Operating income $ 440,000
a
$40 × 120,000
b
$20 × 120,000
c
Fixed manufacturing rate = $600,000 ÷ 200,000 = $3 per output unit
Fixed manufacturing costs = $3 × 120,000
d $10 × 120,000

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 ii. Variable Costing:
Revenuesa $4,800,000
Variable costs:
Variable manufacturing cost of goods soldb $2,400,000
Variable operating costsc 1,200,000 3,600,000
Contribution margin 1,200,000
Fixed costs:
Fixed manufacturing costs 600,000
Fixed operating costs 400,000 1,000,000
Operating income $ 200,000
a b c
$40 × 120,000 $20 × 120,000 $10 × 120,000

Question 7
Alpha Company planned and actually manufactured 200,000 units of its single product in
2022, its first year of operation. Variable manufacturing cost was $20 per unit produced.
Variable operating (nonmanufacturing) cost was $10 per unit sold. Planned and actual fixed
manufacturing costs were $600,000. Planned and actual fixed operating (nonmanufacturing)
costs totaled $400,000. Alpha sold 120,000 units of product at $40 per unit.

Required:
a. Calculate Alpha’s 2022 operating income using absorption costing.
b. Calculate Alpha’s 2022 operating income using variable costing.

Solution:
a. Absorption Costing:
Revenuesa $4,800,000
Cost of goods sold:
Variable manufacturing costsb $2,400,000
c
Allocated fixed manufacturing costs 360,000 2,760,000
Gross margin 2,040,000
Operating costs:
Variable operatingd 1,200,000
Fixed operating 400,000 1,600,000
Operating income $ 440,000
a
$40 × 120,000
b
$20 × 120,000
c
Fixed manufacturing rate = $600,000 ÷ 200,000 = $3 per output unit
Fixed manufacturing costs = $3 × 120,000
d $10 × 120,000

b. Variable Costing:

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 Revenuesa $4,800,000
Variable costs:
Variable manufacturing cost of goods soldb $2,400,000
Variable operating costsc 1,200,000 3,600,000
Contribution margin 1,200,000
Fixed costs:
Fixed manufacturing costs 600,000
Fixed operating costs 400,000 1,000,000
Operating income $ 200,000
a
$40 × 120,000
b
$20 × 120,000
c
$10 × 120,000

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Question 8 (Additional practice question for students)
Beta Company manufacturers a coffee machines and began operations in 2022. For 2022,
Beta budgeted to produce and sell 20,000 units. The company had no price, spending, or
efficiency variances and writes off production-volume variance to cost of goods sold. Actual
data for 2022 are given as follows:

Units produced 18,000

Units sold 17,500
Selling price $450
Variable costs:
Manufacturing cost per unit produced
Direct materials $30
Direct manufacturing labour 25
Manufacturing overhead 60
Marketing cost per unit sold 45
Fixed costs:
Manufacturing costs $1,200,000
Administrative costs 965,450
Marketing 1,366,400

Required:
a. Prepare a 2022 income statement for Beta Company using variable costing.
b. Prepare a 2022 income statement for Beta Company using absorption costing.
c. Explain the differences in operating incomes obtained in requirements a and b.
d. Beta’s management is considering implementing a bonus for the supervisors based on
gross margin under absorption costing. What incentives will this bonus plan create for the
supervisors? What modifications could Beta management make to improve such a plan?
Explain briefly.

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Solution:

a. The variable manufacturing cost per unit is $30 + $25 + $60 = $115.

2022 Variable-Costing Based Income Statement

Revenues (17,500 $450 per unit) $7,875,000
Variable costs
Beginning inventory $ 0
Variable manufacturing costs (18,000 units $115 per unit) 2,070,000
Cost of goods available for sale 2,070,000
Deduct: Ending inventory (500 units $115 per unit) (57,500)
Variable cost of goods sold 2,012,500
Variable marketing costs (17,500 units $45 per unit) 787,500
Total variable costs 2,800,000
Contribution margin 5,075,000
Fixed costs
Fixed manufacturing costs 1,200,000
Fixed administrative costs 965,450
Fixed marketing 1,366,400
Total fixed costs 3,531,850
Operating income $1,543,150

b. Fixed manufacturing overhead rate = $1,200,000 / 20,000 units = $60 per unit

2022 Absorption-Costing Based Income Statement

Revenues (17,500 units $450 per unit) $7,875,000
Cost of goods sold
Beginning inventory $ 0
Variable manufacturing costs (18,000 units $115 per unit) 2,070,000
Allocated fixed manufacturing costs (18,000 units $60 per unit) 1,080,000
Cost of goods available for sale 3,150,000
Deduct ending inventory [500 units ($115 + $60) per unit] (87,500)
Add unfavorable production volume variance 120,000a U
Cost of goods sold 3,182,500
Gross margin 4,692,500
Operating costs
Variable marketing costs (17,500 units $45 per unit) 787,500
Fixed administrative costs 965,450
Fixed marketing 1,366,400
Total operating costs 3,119,350
Operating income $1,573,150
a
PVV = $1,200,000 budgeted fixed mfg. costs – $1,080,000 allocated fixed mfg. costs =
$120,000 U

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c. 2022 operating income under absorption costing is greater than the operating income under
variable costing because in 2022 inventory increased by 500 units. As a result, under
absorption costing, a portion of the fixed overhead remained in the ending inventory and led
to a lower cost of goods sold (relative to variable costing). As shown below, the difference in
the two operating incomes is exactly the same as the difference in the fixed manufacturing
costs included in ending versus beginning inventory (under absorption costing).

Operating income under absorption costing $1,573,150

Operating income under variable costing 1,543,150
Difference in operating income under absorption versus variable
costing $ 30,000

Under absorption costing:

Fixed mfg. costs in ending inventory (500 units $60 per unit) $ 30,000
Fixed mfg. costs in beginning inventory (0 units $60 per unit) 0
Change in fixed mfg. costs between ending and beginning inventory $ 30,000

d. Class discussion