Managerial accounting, 5th by jiambalvo test bank ch05

CHAPTER Variable Costing Summary of Questions by Objectives and Bloom’s Taxonomy Item SO BT Item True-False Statements C K 3 C K 2, C 10 Multiple Choice Questions 26 K 43 27 K 44 28 K 45 29 K 46 30 K 47 31 K 48 32 K 49 33 K 50 34 K 51 35 AP 52 36 AP 53 37 AP 54 38 AP 55 39 2, AP 56 40 K 57 41 C 58 42 C 59 Exercises 110 2,3 AP 113 111 1,2 AP 114 112 AP 115 Challenge Exercises 125 1-3 SY 126 Short-Answer Essays 127 C 128 SO BT Item SO BT Item K K K C K 2 3 2 2 2 2, 3 3 3 SO BT 11 12 13 14 15 3 K C C C C 16 17 18 19 20 3 3 K K C K K C AP AP AP AP AP AP AP AP AP AP AP C C AP AP AP 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 3 3 3 3 3 AP AP C C C AP AP K AP K K AP AP AP AP AP AP 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 2,3 3 3 3 3 3 3 3 3 2,3 AP AP AP 116 117 118 1-3 1-3 1-3 AP AP AP 119 120 121 1-4 AN C 129 AN 130 Item SO BT 21 22 23 24 25 3 5 C C K K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 3 3 3 3 3 3 3 3 AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP 1-3 3 AP AP AP 122 123 124 1-3 1-3 AP AN AP 3,5 AN 131 C 5-2 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition TRUE-FALSE The cost of ending inventory using variable costing is always greater than or equal to full costing ending inventory The cost of goods sold is always greater using variable costing than when full costing is used During pPeriods in which inventory levels increase, sales revenue will be larger when using full costing than if variable costing is used Absorption costing is another name for variable costing If a company has no fixed costs, variable costing income will equal full costing income, regardless of any increase or decrease in inventory levels during the period Variable costing income is more useful for decision making because costs are separated by function Absorption costing is required for external reporting under generally accepted accounting principles Under full costing, all fixed costs of production are included in Finished Goods Inventory and remain there until all inventory units are sold The total amount reported on an income statement for selling and administrative expense, reported on the income statement, adds to is the same amount using regardless if variable of full costing is used as determined if by using full costing is used 10 In variable costing, fixed manufacturing overhead is considered a period cost 11 Income statements of manufacturing firms prepared for external purposes use variable costing because it provides higher profits for making decisions 12 Under full costing, ending inventory includes both fixed and variable manufacturing and nonmanufacturing costs 13 Under variable costing, ending inventory reported on a company’s balance sheet includes variable production costs and variable selling and administrative costs 14 Contribution margin is reported on an absorption costing income statement 15 If the number of units sold is equal to the number of units produced, then contribution margin will equal gross margin 16 Full costing income can be increased by decreasing production even though the additional inventory items will not be sold during the current period 17 When the number of units produced exceeds the number of units sold, variable costing yields a lower net income than if full costing had been used 18 Under variable costing, net income can be increased by increasing production without increasing sales Chapter Variable Costing 5-3 19 The inventoriable cost per unit can be reduced, under variable costing, by decreasing the number of units produced 20 When the number of units produced is greater than the number of units sold, variable costing yields higher income than full costing 21 A full costing income statement will display a higher net income than variable costing as long as inventory levels continue to increase 22 If a company increases production levels without increasing its units sold, both its full costing income and cash flows will be larger than if production were at a lower level 23 Just-in-time (JIT) inventory management systems cause the difference between variable costing income and full costing income to be much greater than if standard inventory levels had been maintained by the company 24 The use of variable costing encourages management of earnings by adjusting production volume 25 Variable costing facilitates CVP analysis Answers F F F F T 10 F T F T T 11 12 13 14 15 F F F F F 16 17 18 19 20 F T F F F 21 22 23 24 25 T F F F T 5-4 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition MULTIPLE CHOICE 26 Full costing A is another name for variable costing B considers fixed manufacturing overhead as an inventory cost C often provides the information needed for CVP analysis D considers fixed production cost as period cost 27 Which of the following is accounted for differently in full costing compared to variable costing? A Direct material B Fixed manufacturing overhead C Direct labor D Variable manufacturing overhead 28 Which of the following is accounted for as a product cost in variable costing? A Product delivery costs to customers B Variable manufacturing overhead C Fixed manufacturing overhead D Product advertising costs 29 Which of the following is treated as a product cost in full costing? A Sales commissions B Product advertising C Depreciation on factory machines D Security at corporate headquarters 30 Full costing is A more useful for decision making than variable costing because it treats all costs of production as an inventory cost B required for financial reporting under generally accepted accounting principles C less likely to enable managers to manipulate income by increasing production D based on cost behavior 31 In variable costing, when does fixed manufacturing overhead become an expense? A Never B In the period when the product is sold C In the period when the expense is incurred D At the time when units are produced 32 In full costing, when does fixed manufacturing overhead become an expense? A In the period when all other fixed costs are expensed B In the period when the product is sold C In the period when the expense is incurred D At the time units when are produced 33 In variable costing, which of the following will be included as part of inventory on a company’s balance sheet? A Fixed production cost B Variable selling cost C Fixed selling costs D None of the answer choices will be part of inventory in variable costing Chapter Variable Costing 5-5 34 In full costing, which of the following will be included as part of inventory on a company’s balance sheet? A Fixed production cost B Variable selling cost C Fixed selling costs D None of the answer choices will be in inventory in full costing 35 Rango Enterprises’ manufacturing costs for 2014 are as follows: Direct materials Direct labor Manufacturing supplies Depreciation of factory equipment Other fixed manufacturing overhead $ 65,000 118,000 9,000 22,000 43,000 What amount should be considered as product costs for external reporting purposes? A $183,000 B $192,000 C $257,000 D $248,000 36 Sticker Creations’ fixed manufacturing overhead costs totaled $68,000 and its variable selling costs totaled $45,000 Under full costing, how should these costs be classified? A B C D 37 Period Costs $68,000 $113,000 $0 $45,000 Product Costs $45,000 $0 $113,000 $68,000 Diecast Tools’ manufacturing costs for 2014 are as follows: Direct materials Direct labor Depreciation of factory equipment Production supervisor’s salary Other fixed manufacturing overhead $100,000 120,000 30,000 72,000 50,000 What amount should be considered product costs for external reporting purposes? A $220,000 B $293,000 C $402,000 D $372,000 38 Robley Company’s fixed manufacturing overhead costs totaled $235,000 and fixed corporate operating costs totaled $116,000 Under full costing, how should these costs be classified? A B C D Period Costs $235,000 $0 $351,000 $116,000 Product Costs $116,000 $351,000 $0 $235,000 5-6 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 39 Cold City Blowers produces snow blowers The selling price per snow blower is $80 Costs involved in production are: Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year $ 22 15 206,400 In addition, the company has fixed selling and administrative costs of $88,000 per year During the year, Cold City Blowers produced 8,600 snow blowers and sold 8,000 snow blowers There is no beginning inventory Ignoring taxes, how much will full costing net income differ from variable costing net income? A $15,480 B $14,400 C $206,400 D $192,000 40 Which of the following items appears on a variable costing income statement but not on a full costing income statement? A Sales B Gross margin C Net income D Contribution margin 41 Variable costing income is a function of A only units sold B only units produced C both units sold and units produced D neither units sold nor units produced 42 Which of the following items on a variable costing income statement will change in direct proportion to a change in sales? A Sales, contribution margin, and net income B Sales, variable costs, and contribution margin C Sales, variable costs, contribution margin, fixed costs, and net income D Sales, variable costs, and fixed costs 43 If a company’s income is positive and fixed costs exist, which of the following items will increase or decrease at a greater rate than the change in the amount of sales on a variable costing income statement? A Variable costs B Fixed costs C Contribution margin D Net income Chapter Variable Costing 44 5-7 Ranger Productions experienced the following costs in 2014: Direct materials Direct labor Variable manufacturing overhead Variable selling costs Fixed manufacturing overhead Fixed selling costs Fixed administrative costs $1.50 per unit $2.60 per unit $1.20 per unit $4.40 per unit $84,000 $32,000 $15,000 During 2014, the company manufactured 65,000 units and sold 62,000 units The unit cost is the same throughout the year Beginning inventory is zero How much will the company report as total variable product costs on its 2014 contribution income statement? A $328,600 B $601,400 C $344,500 D $630,500 45 Anders Supply experienced the following costs in May: Direct materials Direct labor Manufacturing overhead costs Variable Fixed Selling & administrative costs Variable selling costs Fixed selling costs Fixed administrative costs $6.50 per unit $2.20 per unit $3.10 per unit $44,000 $1.50 per unit $21,000 $16,000 During May, the company manufactured 22,000 units and sold 24,000 units Beginning inventory totaled 3,400 units If the average selling price per unit was $28, how much is the company’s contribution margin? A $327,400 B $352,800 C $323,400 D $344,800 46 Roger Excavating Company experienced the following costs in 2014: Direct materials Direct labor Variable manufacturing overhead Variable selling Fixed manufacturing overhead Fixed selling Fixed administrative $1.75 per unit $2.00 per unit $2.50 per unit $0.75 per unit $50,000 $15,000 $5,000 During 2014, the company manufactured 100,000 units and sold 80,000 units If the average selling price per unit was $22.65, what is the amount of the company’s contribution margin per unit? A $16.40 B $15.65 C $18.90 D $13.65 5-8 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 47 Data from Rannier Metals for 2014 is as follows: Sales Variable cost of goods sold Fixed manufacturing overhead Variable selling & administrative costs Fixed selling & administrative costs $20 per unit ?? $85,000 ?? $150,000 The company produced 145,000 units during the year and sold 130,000 units Variable production costs per unit and fixed costs have remained constant all year Net income for the year was $1,000,000 How much was the company’s contribution margin? A $765,000 B $1,235,000 C $1,365,000 D Not enough information is provided to determine the answer 48 During the past year, Waxman Electronics manufactured 25,000 speakers during 2014 and sold 26,000 speakers Production costs during the year were as follows: Fixed manufacturing overhead Variable manufacturing overhead Direct labor Direct materials $546,000 234,000 312,000 780,000 Sales totaled $3,120,000, variable selling and administrative costs totaled $182,000, and fixed selling and administrative costs totaled $114,000 There were 2,200 speakers in beginning inventory How much is the contribution margin per unit? A $48.00 B $69.00 C $62.00 D None of these answer choices are correct 49 Cold City Blowers produces snow blowers The selling price per snow blower is $100 Costs involved in production are: Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year $ 22 15 23,400 In addition, the company has fixed selling and administrative costs of $9,360 per year During the year, Cold City Blowers produced 780 snow blowers and sold 800 snow blowers Beginning inventory consisted of 50 snow blowers How much is variable cost of goods sold? A $34,400 B $33,540 C $29,600 D None of these answer choices are correct Chapter Variable Costing 50 5-9 Cold City Blowers produces snow blowers The selling price per snow blower is $100 Costs involved in production are: Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year $ 22 15 23,400 In addition, the company has fixed selling and administrative costs of $9,360 per year During the year, Cold City Blowers produced 780 snow blowers and sold 800 snow blowers Beginning inventory consisted of 50 snow blowers How much is net income using variable costing? A $11,700 B $12,240 C $12,840 D $45,600 51 The following information relates to Charlin Industries for the year ending December 31, 2014, the company’s first year of operations: Units produced Units sold Units in ending inventory Fixed manufacturing overhead 100,000 80,000 20,000 $650,000 How much fixed manufacturing overhead would be expensed in 2014 using variable costing? A $520,000 B $130,000 C $650,000 D $0 52 Sol Enterprises’ contribution income statement utilizing variable costing appears below: Sol Enterprises Income Statement For the Year ended December 31, 2014 Sales ($12 per unit) Less variable costs: Cost of goods sold $100,000 Selling & administrative costs 18,000 Contribution margin Less fixed costs: Manufacturing overhead 60,900 Selling & administrative costs 15,000 Net income $240,000 118,000 122,000 75,900 $ 46,100 Sol produced 21,000 units during the year Variable costs per unit and fixed production costs have remained constant the entire year There were no beginning inventories How much is the dollar value of the ending inventory using variable costing? A $5,000 B $7,900 C $8,800 D $2,900 5-10 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 53 Acosta Supplies experienced the following costs in 2014: Direct materials Direct labor Variable manufacturing overhead Variable selling Fixed manufacturing overhead Fixed selling and administrative $1.50 per unit $4.50 per unit $2.00 per unit $1.00 per unit $70,000 $80,000 During 2014, the company manufactured 4,000 units and sold 4,200 units Assume the same unit costs in all years Beginning inventory consists of 800 units How much are total variable costs on the company’s 2014 contribution margin income statement? A $37,800 B $36,000 C $33,600 D $32,000 54 Beiber Boxers contribution income statement utilizing variable costing for 2014 appears below: Sales ($12 per unit) Less variable costs: Cost of goods sold Selling & administrative Contribution margin Less fixed costs: Manufacturing overhead Selling & administrative costs Net income $78,000 $26,000 9,750 12,600 14,950 35,750 42,250 27,550 $ 14,700 The company produced 7,000 units during the year Variable and fixed production costs have remained constant the entire year There were no beginning inventories How much is the dollar value of the ending inventory using full costing? A $2,000 B $2,900 C $3,850 D None of these answer choices are correct 55 When the number of units sold is equal to the number of units produced, the net income be using absorption costing will be A greater than net income using variable costing B equal to net income using variable costing C less than net income using variable costing D None of the answer choices is always correct 56 If the number of units sold is greater than the number of units produced, A full costing and variable costing will yield the same net income B variable costing will assign some fixed manufacturing costs to the units in ending inventory C net income will be higher under variable costing than under full costing D inventory levels will increase 5-36 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition EXERCISES 110 Arctic AC Company is a small manufacturer of window air conditioners The units sell for $180 each In 2014, the company produced 1,000 units and sold 940 units Beginning inventory was zero Below is the variable costing income statements for 2014: Arctic AC Company Variable Costing Income Statement For the Year Ending December 31, 2012 Sales Less variable costs: Variable cost of goods sold Variable selling expense Contribution margin Less fixed costs: Fixed manufacturing expense Fixed selling expense Fixed administrative expense Net income a b $26,320 12,220 21,000 6,580 4,700 How much net income will be reported under full costing? Reconcile the difference in profit between the two income amounts Answer a Fixed manufacturing overhead Divided by units produced Fixed manufacturing overhead per unit Sales Less cost of goods sold Gross margin Less selling and administrative expense Selling expense Net income b $169,200 Variable costing net income Add: Fixed costs deferred in inventory ($21 × 60) Full costing net income $21,000 1,000 $ 21.00 $169,200 46,060 $123,140 23,500 $99,640 $98,380 1,260 $99,64 38,540 130,660 32,280 $98,380 Chapter Variable Costing 111 5-37 The following information is available for Trailblazer, a manufacturer of four-wheel all-terrain vehicles: Vehicles produced Vehicles sold 2014 20,000 18,000 2015 16,000 18,000 Selling price per unit Direct material per unit Direct labor per unit $8,000 $1,600 $3,000 $8,000 $1,600 $3,000 $600 $4,800,000 $3,000,000 $600 $4,800,000 $3,000,000 Variable manufacturing overhead per unit Fixed manufacturing overhead per year Fixed selling and administrative expense per year In the company’s second year, the company needed to get rid of excess inventory (the extra units produced but not sold in 2014), so it cut back production to 16,000 units a b c Calculate profit for both years using variable costing How much is reported as ending inventory when using variable costing? Does variable costing profit present a more realistic view of performance during the two years? Explain Answer a Variable manufacturing costs per unit Sales ($8,000 × 18,000 units) Less cost of goods sold: ($5,200 × 18,000 units) Contribution margin Less fixed costs: Manufacturing Selling and administrative Net income 2014 $5,200 2015 $5,200 $144,000,000 $144,000,000 93,600,000 50,400,000 93,600,000 50,400,000 4,800,000 3,000,000 $ 42,600,000 4,800,000 3,000,000 $ 42,600,000 Total $85,200,000 b Ending inventory $10,400,000 $0 ($5,200 × 2,000 units) ($5,200 × units) c Variable costing presents a more realistic view of firm performance in that income is the same in both years, which is consistent with the firm having the same cost structure and level of sales in both years 5-38 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 112 Nader, Inc produces e-readers that it sells for $80 each Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year $11 per unit 15 per unit 12 per unit $448,000 In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and administrative costs per year $175,000 75,000 $6 per unit During the year, Nader produced 28,000 readers and sold 29,400 Beginning inventory totaled 1,800 units Assume the same unit costs in all years What is the value of ending inventory using variable costing? Answer Ending inventory in units = 1,800 + 28,000 – 29,400 = 400 units Ending inventory under variable costing: ($11 + $15 + $12) × 400 = $15,200 113 Nader, Inc produces e-readers that it sells for $80 each Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year $11 per unit 15 per unit 12 per unit $448,000 In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and administrative costs per year $175,000 75,000 $6 per unit During the year, Nader produced 28,000 readers and sold 29,400 Beginning inventory totaled 1,800 units Assume the same unit costs in all years How much is net income using variable costing? Answer Sales ($80 × 29,400) Less variable cost of goods sold ($38 × 29,400) Less variable selling and administrative costs ($6 × 29,400) Contribution margin Less Fixed manufacturing overhead $448,000 Selling expense 175,000 Administrative expense 75,000 Net income $2,352,000 1,117,200 176,400 1,058,400 698,000 $ 360,400 Chapter Variable Costing 114 5-39 Nader, Inc produces e-readers that it sells for $80 each Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year $11 per unit 15 per unit 12 per unit $448,000 In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and admin costs per year $175,000 75,000 $6 per unit During the year, Nader produced 28,000 readers and sold 29,400 Beginning inventory totaled 1,800 units Assume the same unit costs in all years a b Answer a How much is net income using full costing? How much fixed manufacturing overhead is in ending inventory under full costing? Sales ($80 × 29,400) Less cost of goods sold ($54 × 29,400)* Gross margin Less selling and administrative expenses: Fixed selling and administrative expense $250,000 Variable selling and admin expenses ($6 × 29,400) 176,400 Net income $2,352,000 1,587,600 764,400 426,400 $ 338,000 * Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 per unit Product cost per unit = $11 + $15 + $12 + $16 = $54 b Units in ending inventory = 1,800 + 28,000 – 29,400 = 400 Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 per unit Cost of ending inventory = $16 × 400 = $6,400 5-40 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 115 Below is a variable costing income statement for Hops Dollar Store The budget for 2014 follows: Hops Dollar Store Budgeted Variable Costing Income Statement For the Year Ending December 31, 2014 Sales Less variable costs: Cost of goods sold Selling expense Contribution margin Less fixed costs: Manufacturing expense Selling expense Administrative expense Net income $15,000,000 $5,000,000 4,000,000 2,300,000 1,200,000 2,000,000 9,000,000 6,000,000 5,500,000 $ 500,000 For the coming year, the company is considering hiring two additional sales representatives at $80,000 each for base salary plus percent of their sales for commissions The company anticipates that each sales representative will generate $900,000 of incremental sales Calculate the impact on profit of the proposed hiring decision Should the company hire the two additional sales representatives? Answer Contribution margin ÷ Sales = Contribution margin ratio $6,000,000 ÷ $15,000,000 = 0.40 = 40.00% (Incremental sales × CMR) − Salaries – Commission = Incremental profit ($1,800,000 × 40) − $160,000 − ($1,800,000 × 05) = $470,000 profit increase Since profit increases, Hops Dollar Store should hire the two additional sales representatives Chapter Variable Costing 116 5-41 Perfect Buy produces electronic garage door openers Information on the first three years of business follows: Units sold Units produced Fixed production costs Variable production costs per unit Selling price per unit Fixed selling and administrative expense a b 2014 20,000 20,000 $500,000 $100 $200 2015 20,000 25,000 $500,000 $100 $200 2016 20,000 15,000 $500,000 $100 $200 $150,000 $150,000 $150,000 Calculate net income and the value of ending inventory for each year using variable costing Explain why, using variable costing, profit does not fluctuate from year to year Answer a Units sold Selling price per unit Sales Less variable cost of goods sold: ($100 × 20,000) Contribution margin Less fixed costs: Production Selling and administrative Net income Ending inventory ($100 × 5,000) 2014 20,000 $ 200 4,000,000 2015 20,000 $ 200 4,000,000 2016 20,000 $ 200 4,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 500,000 150,000 $1,350,000 500,000 150,000 $1,350,000 500,000 150,000 $1,350,000 $0 $500,000 $0 b Under variable costing system, profit remains the same each period because fixed manufacturing overhead is treated as a period cost and expensed each year even if units produced differ from the units sold 5-42 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 117 The following information is available for Trailblazer, a manufacturer of four-wheel all-terrain vehicles for its first two years of operation: 2014 2015 Vehicles produced 1,000 1,400 Vehicles sold 900 1,200 Selling price per unit Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year Variable selling and administrative expense per unit Fixed selling and administrative expense per year $1,200 $350 $220 $1,200 $350 $220 $40 $112,000 $20 $35,000 $40 $112,000 $20 $35,000 Calculate net income for 2015 using full costing Answer Sales ($1,200 × 1,200) Less cost of goods sold ($690 × 1,200)* Gross margin Less selling and administrative expenses: Fixed selling and administrative expense Variable selling and admin expenses ($20 × 1,200) Net income $1,440,000 828,000 612,000 $35,000 24,000 * Fixed manufacturing cost per unit = $112,000 ÷ 1,400 = $80 per unit Product cost per unit = $350 + $220 + $40 + $80 = $690 59,000 $ 553,000 Chapter Variable Costing 118 5-43 The following information relates to Markley Mattresses for fiscal year 2014, the company’s first year of operations: Units produced Units sold Selling price per unit Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Variable selling cost per unit Annual fixed manufacturing overhead Annual fixed selling and administrative expense a b 20,000 17,000 $30 $5 $5 $2 $3 $160,000 $80,000 Prepare an income statement using full costing Prepare an income statement using variable costing Answer a Markley Mattresses Full Costing Income Statement For the Year Ending December 31, 2014 Sales ($30 × 17,000) Less cost of goods sold ($20 × 17,000)* Gross margin Less selling and administrative expenses Fixed selling and administrative expense Variable selling expenses ($3 × 17,000) Profit $510,000 340,000 170,000 $80,000 51,000 131,000 $ 39,000 * Product cost per unit: $5 + $5 + $2 + $8 ($160,000 ÷ 20,000) = $20 b Markley Mattresses Variable Income Statement For the Year Ending December 31, 2014 Sales ($30 × 17,000) Less variable expenses Production costs ($12 × 17,000) Selling costs ($3 × 17,000) Contribution margin Less fixed expenses Manufacturing overhead Selling and administrative expense Profit $510,000 $204,000 51,000 160,000 80,000 255,000 255,000 240,000 $ 15,000 5-44 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 119 Adam Tools produces screwdrivers and had 1,700 in inventory at the beginning of the year It has a variable manufacturing cost of $5.00 per unit, a variable selling cost of $0.75 per unit; a fixed manufacturing cost of $45,000 per year; and a fixed selling and administrative cost of $24,000 per year The selling price is $14.00 per screwdriver During the year, 18,000 screwdrivers were produced and 18,400 were sold Assume the same unit costs in all years a b c d Answer: a $5.00 b $5.00 + ($45,000 ÷ 18,000) = $7.50 c Sales (18,400 × $14) Variable manufacturing cost (18,400 × $5) Variable selling cost (18,400 × $0.75) Contribution margin Fixed production costs Fixed selling & administrative costs Net income d 120 What is the product cost per screwdriver using variable costing? What is the product cost per screwdriver using full costing? Prepare an income statement using variable costing Omit the statement heading Prepare an income statement using full costing Omit the statement heading $257,600 $92,000 13,800 45,000 24,000 Sales (18,400 × $14) Cost of goods sold (18,400 × $7.50) Gross margin Selling & administrative [$24,000 + ($0.75 × 18,400)] Net income 105,800 151,800 69,000 $ 82,800 $257,600 138,000 119,600 37,800 $ 81,800 Nader, Inc produces e-readers that it sells for $80 each Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year $11 per unit 15 per unit 12 per unit $448,000 In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and admin costs per year $175,000 75,000 $6 per unit During the year, Nader produced 28,000 readers and sold 29,400 Beginning inventory totaled 1,800 units Assume the same unit costs in all years What is the value of ending inventory using full costing? Answer Ending inventory in units = 1,800 + 28,000 – 29,400 = 400 units Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 per unit Product cost per unit = $11 + $15 + $12 + $16 = $54 Ending inventory under full costing: $54 × 400 units = $21,600 Chapter Variable Costing 121 5-45 Nader, Inc produces e-readers that it sells for $80 each Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year $11 per unit 15 per unit 12 per unit $448,000 In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and admin costs per year $175,000 75,000 $6 per unit During the year, Nader produced 28,000 readers and sold 29,400 Beginning inventory totaled 1,800 units Assume the same unit costs in all years How much is gross margin per unit and in total? Answer Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 Gross margin per unit = $80.00 – $11.00 – $15.00 – $12.00 – $16.00 = $26.00 Total gross margin = $26 × 29,400 = $764,400 122 Last month, Toro Tools produced 6,000 wheelbarrows and sold 6,200 at a price of $62 each Toro had 900 wheelbarrows in beginning inventory Manufacturing costs consisted of direct materials of $84,000, direct labor of $27,300, variable manufacturing overhead of $21,000, and fixed manufacturing overhead of $120,000 General and administrative fixed costs totaled $32,000 Variable selling costs were $1 per wheelbarrow Assume the same unit costs in all years a b Answer a b Calculate Toro Tools’ net income using full costing Calculate Toro Tools’ net income using variable costing Net income using full costing approach: Revenue = 6,200 × $62 = $384,400 Variable manufacturing cost per unit = ($84,000 + $27,300 + $21,000) ÷ 6,000 = $22.05 Fixed manufacturing cost per unit = $120,000 ÷ 6,000 = $20.00 Cost of goods sold = ($42.05 × 6,200) = $260,710 Variable selling costs = $1 × 6,200 = $6,200 Net income = $384,400 – $260,710 – $32,000 – $6,200 = $85,490 Net income using variable costing approach: Revenue = 6,200 × $62 = $384,400 Variable manufacturing cost per unit = ($84,000 + $27,300 + $21,000) ÷ 6,000 = $22.05 Variable selling costs = $1 × 6,200 = $6,200 Net income = $384,400 – ($22.05 × 6,200) – $120,000 – $32,000 – $6,200 = $89,490 5-46 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 123 Assess Digital produces digital controls Information on its first three years of business is as follows: Units sold Units produced Fixed production costs Variable production costs per unit Selling price per unit Fixed selling and administrative exp 2014 20,000 20,000 $500,000 $100 $200 $150,000 2015 20,000 25,000 $500,000 $100 $200 $150,000 2016 20,000 15,000 $500,000 $100 $200 $150,000 Total 60,000 60,000 a Calculate net income and the value of ending inventory for each year using full costing b Explain why profit fluctuates from year to year even though the number of units sold, the selling price, and the cost structure remain constant Answer 2014 $500,000 20,000 $25.00 100.00 $ 125.00 2015 $500,000 25,000 $20.00 100.00 $ 120.00 2016 $500,000 15,000 $33.33 100.00 $ 133.33 Sales ($200 × 20,000 units) $4,000,000 Less cost of goods sold: ($125 × 20,000) 2,500,000 ($120 × 20,000) ($120 × 5,000) + ($133.33 × 15,000) $4,000,000 $4,000,000 Gross margin Less selling and admin expense Net income 1,500,000 150,000 $1,350,000 1,600,000 150,000 $1,450,000 1,400,050 150,000 $1,250,050 $0 $600,000 $0 Fixed production overhead Divided by units produced Fixed production overhead per unit Variable production costs per unit Full cost per unit Ending inventory ($120 × 5,000) b 2,400,000 2,599,950 Even though sales revenue amounts are the same in each period, profit fluctuates This results because different quantities are produced each period which affects the fixed manufacturing overhead included in cost of goods sold versus ending inventory Chapter Variable Costing 124 5-47 Wise Company began operations in 2014 A company has $8.00 per unit in variable production costs and $3.00 per unit in variable selling and administrative costs The annual fixed production cost is $180,000 The annual fixed selling and administrative cost is $20,000 a Complete the table below for the number of units and dollar value of ending inventory under variable costing for each year Units produced Units sold Units in ending inventory 2014 60,000 55,000 2015 70,000 72,000 2016 80,000 82,000 2017 90,000 91,000 Ending inventory using variable costing b Assume that the selling price and cost structure stayed the same over the 4-year period How would the total net income compare for the entire period between variable and full costing? Answer a 2014 Units produced 60,000 Units sold 55,000 Units in ending inventory 5,000 Ending inventory using variable costing $8 × 5,000 = $40,000 $8 × 3000 = $8 × 1,000 = b 2015 70,000 72,000 3,000 2016 80,000 82,000 1,000 2017 90,000 91,000 $8,000 $0 $24,000 Since sales equals production for the 4-year period, net income will remain be the same 5-48 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition CHALLENGE EXERCISES 125 ABT makes a single product, bucket stoppers During 2014, 155,000 units were sold and 150,000 units were produced Information for 2014 appears below: Beginning inventory in units Variable production cost per unit Variable operating costs per unit Fixed production cost per year Fixed selling and administrative cost per year Selling price per unit a b c 6,000 $1.20 $0.80 $127,500 $32,000 $6.00 How much is the contribution margin for 2014 under variable costing? How much is the gross margin for 2014 under full costing? Explain why variable and full costing produce different results Answer a Sales ($6 × 155,000) Variable cost of production ($1.20 × 155,000) Variable operating costs ($0.80 × 155,000) Contribution margin b Fixed cost per unit = $127,500 ÷ 150,000 = $0.85 Full cost per unit = $0.85 + $1.20 = $2.05 Sales ($6 × 155,000) Cost of goods sold ($2.05 × 155,000) Gross margin c $930,000 186,000 124,000 $620,000 $930,000 317,750 $612,250 Under full costing, a proportional share of the fixed manufacturing overhead costs is attached to each unit produced The fixed costs associated with the extra units are reported on the balance sheet as ending inventory, rather than on the income statement as an expense The entire fixed manufacturing cost is expensed under variable costing, making income smaller than if only part of the fixed cost was expensed Chapter Variable Costing 126 5-49 Bucket Zone had 2,200 buckets in its beginning inventory It manufactured 23,000 buckets and sold 23,400 buckets during the year Costs involved in production are $3 for direct materials, $2 for direct labor, and $1.20 for variable overhead, each on a per unit basis The company has annual fixed selling and administrative costs of $78,000 and fixed annual manufacturing overhead costs totaling $86,250 Operating income using variable costing is $33,000 a b c Answer a b Determine the amount by which net income will differ under absorption costing compared to variable costing Determine operating income under absorption costing How would the difference between variable and full costing be impacted if the company switched to a JIT system? Explain Change in inventory level = 23,400 – 23,000 = 400 units decrease Fixed manufacturing cost per unit = $86,250 ÷ 23,000 = $3.75 per unit Difference = $3.75 × 400 units = $1,500 Variable costing operating income Less fixed costs difference Absorption costing operating income $33,000 (1,500) $31,500 c.Companies that use JIT inventory systems have very low inventory levels since they don’t produce until they are ready to sell products Units they produce are approximately equal to those they sell, so the change in the inventory level is very close to zero Since the difference in variable and full costing income is due to the change in inventory units, the net income difference will be close to zero as well SHORT-ANSWER ESSAYS 127 Explain the significant difference between variable costing and full costing Answer The significant difference between variable costing and full costing is the treatment of fixed manufacturing overhead In variable costing, fixed manufacturing overhead is treated as a period cost and expensed as it is incurred In full costing, fixed manufacturing overhead is considered a cost that becomes part of inventory and is not expensed until the goods are sold 128 Why is a variable costing income statement more useful for internal purposes? Answer The format separates fixed and variable costs facilitating cost-volume-profit analysis Also, it discourages over-production since managers cannot increase income by increasing production 5-50 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 129 Under full costing, how does increasing production increase income? Does this work under variable costing? Why or why not? Answer Since fixed production costs are included in the unit product cost using full costing, increasing production will reduce the fixed cost per unit When these reduced costs are included in cost of goods sold, income will be higher Variable costing treats fixed production costs as a period cost, and expenses the full amount regardless of production Thus, income is unaffected by increasing production 130 Can a company continue to increase income indefinitely by using full costing? Answer It is possible that a growing company can this The only way to this is to produce more than is sold in each year This will result in a continuous buildup of inventory For most companies, that would not be a good strategy as it would lead to expensive cash outflow for buildups of inventories along with all the associated carrying costs 131 What is the implication of a company using JIT with full costing versus using JIT with variable costing? Answer JIT companies have very little inventory and so there is very little difference between full and variable costing income ...5-2 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition TRUE-FALSE The cost of ending inventory using variable costing... 14 15 F F F F F 16 17 18 19 20 F T F F F 21 22 23 24 25 T F F F T 5-4 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition MULTIPLE CHOICE 26 Full costing A is another name for variable... $0 $351,000 $116,000 Product Costs $116,000 $351,000 $0 $235,000 5-6 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition 39 Cold City Blowers produces snow blowers The selling price