Test bank chapter 7 variable costing

Chapter Variable Costing: A Tool for Management True/False T Easy In the preparation of financial statements using variable costing, fixed manufacturing overhead is treated as a period cost F Hard Direct labor is always considered to be a product cost under variable costing F Medium Under variable costing, the unit product cost contains some fixed manufacturing overhead cost F Medium Under variable costing it may be possible to report a profit even if the company sells less than the breakeven volume of sales T Easy Under variable costing, the impact of fixed cost is emphasized because the total amount of such cost for the period appears in the income statement F Easy Absorption costing treats fixed manufacturing overhead as a period cost, rather than as a product cost F Medium The unit product cost under absorption costing contains no element of fixed manufacturing overhead cost T Easy Absorption costing treats all manufacturing costs as product costs T Easy When the number of units in work in process and finished goods inventories increase, absorption costing net income will typically be greater than variable costing net income 10 F Easy When sales exceeds production for a period, absorption costing net income will generally be greater than variable costing net income Managerial Accounting, 9/e 221 11 F Medium Absorption costing net income is closer to the net cash flow of a period than is variable costing net income 12 F Medium Variable costing is not permitted for income tax purposes, but it is widely accepted for external financial reports 13 F Medium Net income is not affected by changes in production when absorption costing is used 14 T Easy When JIT methods are introduced, the difference in net income computed under the absorption and variable costing methods is reduced 15 T Easy Since variable costing emphasizes costs by behavior, it works well with costvolumeprofit analysis Multiple Choice 16 C Easy A cost that would be included in product costs under both absorption costing and variable costing would be: a. supervisory salaries b. equipment depreciation c. variable manufacturing costs d. variable selling expenses 17 C Easy CPA adapted An allocated portion of fixed manufacturing overhead is included in product costs under: 18 B Medium CPA adapted The variable costing method ordinarily includes in product costs the following: a. Direct materials cost, direct labor cost, but no manufacturing overhead cost b. Direct materials cost, direct labor cost, and variable manufacturing overhead cost c. Prime cost but not conversion cost d. Prime cost and all conversion cost Absorption Variable costing costing a. No No b. No Yes c. Yes No d. Yes Yes 222Managerial Accounting, 9/e 19 D Easy Cay Company's fixed manufacturing overhead costs totaled $100,000, and variable selling costs totaled $80,000. Under variable costing, how should these costs be classified? Period costs Product costs a. $0 $180,000 b. $80,000 $100,000 c. $100,000 $80,000 d. $180,000 $0 20 A Easy Which of the following are considered to be product costs under variable costing? I. Variable manufacturing overhead II. Fixed manufacturing overhead III. Selling and administrative expenses a. I. b. I and II c. I and III d. I, II, and III 21 B Medium CPA adapted What factor is the cause of the difference between net income as computed under absorption costing and net income as computed under variable costing? a. Absorption costing considers all manufacturing costs in the determination of net income, whereas variable costing considers only prime costs b. Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and variable costing considers all fixed manufacturing costs as period costs c. Absorption costing includes all variable manufacturing costs in product costs, but variable costing considers variable manufacturing costs to be period costs d. Absorption costing includes all fixed manufacturing costs in product costs, but variable costing expenses all fixed manufacturing costs 22 C Easy Under variable costing, costs which are treated as period costs include: a. only fixed manufacturing costs b. both variable and fixed manufacturing costs c. all fixed costs d. only fixed selling and administrative costs Managerial Accounting, 9/e 223 23 C Medium Which of the following statements is true for a firm that uses variable costing? a. The unit product cost changes as a result of changes in the number of units manufactured b. Both variable selling costs and variable production costs are included in the unit product cost c. Net income moves in the same direction as sales d. Net income is greatest in periods when production is highest 24 B Easy Which of the following are considered to be product costs under absorption costing? I. Variable manufacturing overhead II. Fixed manufacturing overhead III. Selling and administrative expenses a. I, II, and III b. I and II c. I and III d. I 25 C Easy The term "gross margin" for a manufacturing company refers to the excess of sales over 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 A Medium CPA adapted Net income determined using full absorption costing can be reconciled to net income determined using variable costing by computing the difference between: a. Fixed manufacturing overhead costs deferred in or released from inventories b. Inventoried discretionary costs in the beginning and ending inventories c. Gross margin (absorption costing method) and contribution margin (variable costing method) d. Sales as recorded under the variable costing method and sales as recorded under the absorption costing method 27 B Medium CMA adapted Net income reported under absorption costing will exceed net income reported under variable costing for a given period if: a. production equals sales for that period b. production exceeds sales for that period c. sales exceed production for that period d. the variable manufacturing overhead exceeds the fixed manufacturing overhead 224Managerial Accounting, 9/e 28 D Medium CPA adapted What will be the difference in net income between variable costing and absorption costing if the number of units in work in process and finished goods inventories increase? a. There will be no difference in net income b. Net income computed using variable costing will be higher c. The difference in net income cannot be determined from the information given d. Net income computed using variable costing will be lower 29 A Easy The costing method that can be used most easily with breakeven analysis and other costvolumeprofit techniques is: a. variable costing b. absorption costing c. process costing d. joborder costing 30 C Hard For the most recent year, Atlantic Company's net income computed by the absorption costing method was $7,400, and its net income computed by the variable costing method was $10,100. The company's unit product cost was $17 under variable costing and $22 under absorption costing. If the ending inventory consisted of 1,460 units, the beginning inventory must have been: a. 920 units b. 1,460 units c. 2,000 units d. 12,700 units 31 B Hard During the most recent year, Evans Company had a net income of $90,000 using absorption costing and $84,000 using variable costing. The fixed overhead application rate was $6 per unit. There were no beginning inventories. If 22,000 units were produced last year, then sales for last year were: a. 15,000 units b. 21,000 units c. 23,000 units d. 28,000 units 32 D Hard During the year just ended, Roberts Company' income under absorption costing was $3,000 lower than its income under variable costing. The company sold 9,000 units during the year, and its variable costs were $9 per unit, of which $3 was variable selling expense. If production cost is $11 per unit under absorption costing every year, then how many units did the company produce during the year? a. 8,000 b. 10,000 c. 9,600 d. 8,400 Managerial Accounting, 9/e 225 33 C Hard Last year, Silver Company's variable production costs totaled $7,500 and its fixed manufacturing overhead costs totaled $4,500. The company produced 3,000 units during the year and sold 2,400 units. There were no units in the beginning inventory. Which of the following statements is true? a. Under variable costing, the units in the ending inventory will be costed at $4 each b. The net income under absorption costing for the year will be $900 lower than the net income under variable costing c. The ending inventory under variable costing will be $900 lower than the ending inventory under absorption costing d. Under absorption costing, the units in ending inventory will be costed at $2.50 each 34 D Hard During the last year, Hansen Company had net income under absorption costing that was $5,500 lower than its income under variable costing. The company sold 9,000 units during the year, and its variable costs were $10 per unit, of which $6 was variable selling expense. If fixed production cost is $5 per unit under absorption costing every year, then how many units did the company produce during the year? a. 7,625 units b. 8,450 units c. 10,100 units d. 7,900 units 35 B Medium CMA adapted Indiana Corporation produces a single product that it sells for $9 per unit. During the first year of operations, 100,000 units were produced and 90,000 units were sold. Manufacturing costs and selling and administrative expenses for the year were as follows: Fixed Costs Variable 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 226Managerial Accounting, 9/e 36 C Medium Last year, fixed manufacturing overhead was $30,000, variable production costs were $48,000, fixed selling and administration costs were $20,000, and variable selling administrative expenses were $9,600. There was no beginning inventory. During the year, 3,000 units were produced and 2,400 units were sold at a price of $40 per unit. Under variable costing, net income would be: a. a profit of $6,000 b. a profit of $4,000 c. a loss of $2,000 d. a loss of $4,400 37 D Easy CPA adapted West Co.'s manufacturing costs are as follows: Direct materials and direct labor . $700,000 Other variable manufacturing costs 100,000 Depreciation of factory building and manufacturing equipment 80,000 Other fixed manufacturing overhead 18,000 What amount should be considered product costs for external reporting purposes? a. $700,000 b. $800,000 c. $880,000 d. $898,000 38 C Hard At the end of last year, Lee Company had 30,000 units in its ending inventory. Lee's variable production costs are $10 per unit and its fixed manufacturing overhead costs are $5 per unit every year. The company's net income for the year was $12,000 higher under variable costing than under absorption costing. Given these facts, the number of units of product in inventory at the beginning of the year must have been: a. 28,800 units b. 27,600 units c. 32,400 units d. 42,000 units 39 B Medium During the last year, Moore Company's variable production costs totaled $10,000 and its fixed manufacturing overhead costs totaled $6,800. The company produced 5,000 units during the year and sold 4,600 units. There were no units in the beginning inventory. Which of the following statements is true? a. The net income under absorption costing for the year will be $800 higher than net income under variable costing b. The net income under absorption costing for the year will be $544 higher than net income under variable costing c. The net income under absorption costing for the year will be $544 lower than net income under variable costing d. The net income under absorption costing for the year will be $800 lower than net income under variable costing Managerial Accounting, 9/e 227 40 B Hard Last year, Ben Company's income under absorption costing was $4,400 lower than its income under variable costing. The company sold 8,000 units during the year, and its variable costs were $8 per unit, of which $3 was variable selling expense. Fixed manufacturing overhead was $1 per unit in beginning inventory under absorption costing. How many units did the company produce during the year? a. 12,400 units b. 3,600 units c. 7,120 units d. 7,450 units 41 C Hard Last year, Stephen Company had 20,000 units in its ending inventory. During the year, Stephen's variable production costs were $12 per unit. The fixed manufacturing overhead cost was $8 per unit in the beginning inventory. The company's net income for the year was $9,600 higher under variable costing than it was under absorption costing. Given these facts, the number of units of product in the beginning inventory last year must have been: a. 21,200 b. 19,200 c. 18,800 d. 19,520 Reference: 71 Aaker Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $99 Units in beginning inventory 0 Units produced 6,300 Units sold . 6,000 Units in ending inventory 300 Variable costs per unit: Direct materials . $12 Direct labor 42 Variable manufacturing overhead 6 Variable selling and administrative 6 Fixed costs: Fixed manufacturing overhead $170,100 Fixed selling and administrative . 24,000 228Managerial Accounting, 9/e 42 D Easy Refer To: 71 What is the unit product cost for the month under variable costing? a. $66 b. $93 c. $87 d. $60 43 A Easy Refer To: 71 What is the unit product cost for the month under absorption costing? a. $87 b. $60 c. $66 d. $93 44 D Medium Refer To: 71 The total contribution margin for the month under the variable costing approach is: a. $72,000 b. $27,900 c. $234,000 d. $198,000 45 C Medium Refer To: 71 The total gross margin for the month under the absorption costing approach is: a. $98,100 b. $198,000 c. $72,000 d. $12,000 46 A Hard Refer To: 71 What is the total period cost for the month under the variable costing approach? a. $230,100 b. $194,100 c. $170,100 d. $60,000 47 B Hard Refer To: 71 What is the total period cost for the month under the absorption costing approach? a. $170,100 b. $60,000 c. $230,100 d. $24,000 48 B Medium Refer To: 71 What is the net income for the month under variable costing? a. $8,100 b. $3,900 c. $12,000 d. ($14,100) Managerial Accounting, 9/e 229 49 C Medium Refer To: 71 What is the net income for the month under absorption costing? a. $3,900 b. ($14,100) c. $12,000 d. $8,100 Reference: 72 Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production costs were as follows: Direct material $100,000 Direct labor 75,000 Variable manufacturing overhead 50,000 Fixed manufacturing overhead 75,000 Sales totaled $440,000, variable selling and administrative expenses were $110,000, and fixed selling and administrative expenses were $45,000. There was no beginning inventory. Assume that direct labor is a variable cost 50 B Easy Refer To: 72 Under absorption costing, the unit product cost would be: a. $9.00 b. $12.00 c. $13.40 d. $14.00 51 A Medium Refer To: 72 Under absorption costing, the gross margin would be: a. $176,000 b. $242,000 c. $ 66,000 d. $ 21,000 52 D Medium Refer To: 72 The contribution margin per unit would be: a. $15.00 b. $11.00 c. $ 8.00 d. $ 6.00 53 A Easy Refer To: 72 Under variable costing, the total amount of fixed manufacturing cost in the ending inventory would be: a. $ 0 b. $ 9,000 c. $14,400 d. $27,000 54 C Medium Refer To: 72 The net income under variable costing would be: a. $ 2,000 b. $21,000 c. $12,000 d. $ 9,000 230Managerial Accounting, 9/e c. Variable costing income statement: Sales . $8,000,000 Cost of goods sold: Beginning inventory . $ 0 Cost of goods manufactured (25,000 @ $280) 7,000,000 Cost of goods available 7,000,000 Less ending inventory (5,000 units @ $280) 1,400,000 Variable cost of goods sold . 5,600,000 Variable selling and admin. expenses: (20,000 x $15) . 300,000 5,900,000 Contribution margin . 2,100,000 Less fixed expenses: Manufacturing overhead 300,000 Selling and administrative 275,000 575,000 Net income $1,525,000 114 Medium 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 The Dean Company produces and sells a single producta microwave oven. The following data refer to the year just completed: Beginning inventory $0 Units produced . 20,000 Units sold 19,000 Sales price per unit $350 Selling and administrative expenses: Variable per unit $10 Fixed (total) $225,000 Manufacturing costs: Direct materials cost per unit . $190 Direct labor cost per unit $40 Variable overhead cost per unit $25 Fixed overhead (total) . $250,000 Assume that direct labor is a variable cost Required: a. Compute the cost of a single unit of product under both the absorption costing and variable costing approaches b. Prepare an income statement for the year using absorption costing c. Prepare an income statement for the year using variable costing d. Reconcile the absorption costing and variable costing net income figures in (b) and (c) above Managerial Accounting, 9/e 253 Answer: a. Cost per unit under absorption costing: Direct materials $190.00 Direct labor 40.00 Variable overhead 25.00 Fixed overhead ($250,000  20,000) 12.50 Total cost per unit . $267.50 Cost per unit under variable costing: Direct materials $190.00 Direct labor 40.00 Variable overhead 25.00 Total cost per unit . $255.00 b. Absorption costing income statement: Sales . $6,650,000 Cost of goods sold: Beginning inventory $ 0 Cost of goods manufactured (20,000 @ $267.50) . 5,350,000 Cost of goods available . 5,350,000 Less ending inventory (1,000 units @ $267.50) 267,500 5,082,500 Gross profit 1,567,500 Less selling and administrative expenses: [($10 x 19,000) + $225,000] . 415,000 Net income $1,152,500 c. Variable costing income statement: Sales . $6,650,000 Cost of goods sold: Beginning inventory $ 0 Cost of goods manufactured (20,000 @ $255) 5,100,000 Cost of goods available . 5,100,000 Less ending inventory (1,000 units @ $255) . 255,000 Variable cost of goods sold 4,845,000 Variable selling and administrative expenses: (19,000 x $10) 190,000 5,035,000 Contribution margin 1,615,000 Less fixed expenses: Manufacturing overhead $ 250,000 Selling and administrative 225,000 475,000 Net income $1,140,000 d Net income under variable costing $1,140,000 Add fixed manufacturing overhead costs deferred in inventory under absorption costing (5,000 units X $12) . 12,500 Net income under absorption costing $1,152,500 254Managerial Accounting, 9/e 115 Medium Operating data for Fowler Company and its absorption costing income statements for the last two years are presented below: Year 1 Year 2 Units in beginning inventory 0 3,000 Units produced . 18,000 18,000 Units sold 15,000 20,000 Year 1 Year 2 Sales $240,000 $320,000 Cost of goods sold: Beginning inventory 0 30,000 Add cost of goods manufactured . 180,000 180,000 Goods available for sale . 180,000 210,000 Less ending inventory 30,000 10,000 Cost of goods sold 150,000 200,000 Gross margin 90,000 120,000 Selling & admin. expenses 80,000 90,000 Net income . $ 10,000 $ 30,000 Variable manufacturing costs are $6 per unit. Fixed manufacturing overhead totals $72,000 in each year. This overhead is applied at the rate of $4 per unit. Variable selling and administrative expenses were $2 per unit sold Required: a. What was the unit product cost in each year under variable costing? b. Prepare new income statements for each year using variable costing c. Reconcile the absorption costing and variable costing net income for each year Answer: a. The manufacturing cost of $6 per unit is the unit product under variable costing in both years Managerial Accounting, 9/e cost 255 b. Year 1 Year 2 Sales $240,000 $320,000 Less variable expenses: Variable cost of goods sold: Beginning inventory . 0 18,000 Add variable manufacturing costs @ $6 108,000 108,000 Goods available for sale 108,000 126,000 Less ending inventory @ $6 18,000 6,000 Variable cost of goods sold . 90,000 120,000 Variable selling and administrative @ $2 30,000 40,000 Total variable expenses . 120,000 160,000 Contribution margin 120,000 160,000 Less fixed expenses: Fixed manufacturing overhead 72,000 72,000 Fixed selling and administrative* 50,000 50,000 Total 122,000 122,000 Net income $( 2,000) $ 38,000 Year 1: $80,000 $2 x 15,000 = $50,000 c. Year 1 Year 2 Variable costing net income $( 2,000) $38,000 Add fixed factory overhead deferred in inventory under absorption costing (3,000 units x $4 per unit) 12,000 Less fixed factory overhead released from inventory under absorption costing (2,000 units x $4 per unit) (8,000) Absorption costing net income $10,000 $30,000 116 Hard Pabbatti Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $112 Units in beginning inventory 500 Units produced 2,800 Units sold . 2,900 Units in ending inventory 400 Variable costs per unit: Direct materials . $37 Direct labor 19 Variable manufacturing overhead 7 Variable selling and administrative 5 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 256Managerial Accounting, 9/e Required: a. What is the unit product cost for the month under variable costing? b. Prepare an income statement for the month using the contribution format and the variable costing method c. Without preparing an income statement, determine the absorption costing net income for the month (Hint: Use the reconciliation method.) Answer: a. Variable costing unit product cost Direct materials $37 Direct labor 19 Variable manufacturing overhead . 7 Unit product cost $63 b. Variable costing income statement Sales $324,800 Less variable expenses: Variable cost of goods sold: Beginning inventory . $ 31,500 Add variable manufacturing costs 176,400 Goods available for sale 207,900 Less ending inventory . 25,200 Variable cost of goods sold . 182,700 Variable selling and administrative . 14,500 197,200 Contribution margin 127,600 Less fixed expenses: Fixed manufacturing overhead 109,200 Fixed selling and administrative 5,800 115,000 Net income $ 12,600 c. Computation of absorption costing net income Fixed manufacturing overhead per unit $39.00 Change in inventories (units) (100) Variable costing net income $12,600 Add fixed manufacturing overhead costs deferred in inventory under absorption costing 0 Deduct fixed manufacturing overhead costs released from inventory under absorption costing (3,900) Absorption costing net income $8,700 117 Medium Qabar Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $110 Units in beginning inventory 0 Units produced 4,600 Units sold . 4,200 Units in ending inventory 400 Managerial Accounting, 9/e 257 Variable costs per unit: Direct materials . $46 Direct labor 28 Variable manufacturing overhead 5 Variable selling and administrative 10 Fixed costs: Fixed manufacturing overhead $55,200 Fixed selling and administrative . 25,200 Required: a. What is the unit product cost for the month under variable costing? b. Prepare an income statement for the month using the format and the variable costing method c. Without preparing an income statement, determine the costing net income for the month (Hint: Use the reconciliation method.) contribution absorption Answer: a. Variable costing unit product cost Direct materials . $46 Direct labor 28 Variable manufacturing overhead 5 Unit product cost $79 b. Variable costing income statement Sales $462,000 Less variable expenses: Variable cost of goods sold: Beginning inventory $ 0 Add variable manufacturing costs 363,400 Goods available for sale 363,400 Less ending inventory 31,600 Variable cost of goods sold 331,800 Variable selling and administrative 42,000 373,800 Contribution margin 88,200 Less fixed expenses: Fixed manufacturing overhead 55,200 Fixed selling and administrative . 25,200 80,400 Net income . $ 7,800 c. Computation of absorption costing net income Fixed manufacturing overhead per unit $12.00 Change in inventories (units) 400 Variable costing net income $7,800 Add fixed manufacturing overhead costs deferred in inventory under absorption costing 4,800 Deduct fixed manufacturing overhead costs released from inventory under absorption costing 0 Absorption costing net income $12,600 118 Medium UHF Antennas, Inc., produces and sells a unique television antenna. The company has just opened a new plant to manufacture the antenna, and the 258Managerial Accounting, 9/e following cost and revenue data have been reported for the first month of the new plant's operation: Beginning inventory 0 Units produced . 35,000 Units sold 30,000 Selling price per unit . $50 Selling and administrative expenses: Variable per unit $2 Fixed (total) . $360,000 Manufacturing costs: Direct material cost per unit . $9 Direct labor cost per unit $8 Variable overhead cost per unit $3 Fixed overhead cost (total) . $350,000 Management is anxious to see how profitable the new antenna will be and has asked that an income statement be prepared for the month. Assume that direct labor is a variable cost Required: a. Assuming that the company uses absorption costing, compute the unit product cost and prepare an income statement b. Assuming that the company uses variable costing, compute the unit product cost and prepare an income statement c. Explain the reason for any difference in the ending inventories under the two costing methods and the impact of this difference on reported net income Answer: a. Unit product cost under absorption costing: Direct materials cost per unit . $ 9 Direct labor cost per unit $ 8 Variable overhead cost per unit $ 3 Fixed overhead cost per unit: $350,000/35,000 units $10 Total cost per unit under absorption costing. $30 Income statement under absorption costing: Sales ($50 x 30,000) $1,500,000 Cost of goods sold: Beginning inventory $ 0 Cost of goods manufactured 1,050,000 Cost of goods available 1,050,000 Ending inventory (5,000 x $30) . 150,000 900,000 Gross margin 600,000 Selling and administrative expense: [360,000 + ($2 x 30,000) 420,000 Net income $ 180,000 Cost of goods manufactured: $30 x 35,000 = $1,050,000 Managerial Accounting, 9/e 259 b Unit product cost under variable costing: Direct materials cost per unit . $ 9 Direct labor cost per unit $ 8 Variable overhead cost per unit $ 3 Total cost per unit under variable costing $20 Income statement under variable costing: Sales ($50 x 30,000) $1,500,000 Cost of goods sold: Beginning inventory $ 0 Cost of goods manufactured ($20 x 35,000 units) . 700,000 Cost of goods available . 700,000 Ending inventory (5,000 x $20) 100,000 Variable cost of goods sold 600,000 Variable selling and administrative expenses: ($2 x 30,000) . 60,000 660,000 Contribution margin 840,000 Fixed expenses: Fixed overhead $350,000 Fixed selling and administrative 360,000 710,000 Net income $ 130,000 c Net income under variable costing . $130,000 Add fixed manufacturing overhead costs deferred in inventory under absorption costing (5,000 units X $10) 50,000 Net income under absorption costing $180,000 119 Medium Data concerning Sonderegger Company’s operations last year appear below: Units in beginning inventory 0 Units produced 70,000 Units sold 60,000 Selling price per unit $12.00 Variable costs per unit: Direct materials $2.00 Direct labor 1.00 Variable manufacturing overhead . 1.00 Variable selling and administrative 1.50 Fixed costs in total: Fixed manufacturing overhead $140,000 Fixed selling and administrative 150,000 Required: a. Prepare an income statement for the year using absorption costing b. Prepare an income statement for the year using variable costing c. Prepare a report reconciling the difference in net income between absorption and variable costing for the year 260Managerial Accounting, 9/e Answer: a Sales $720,000 Cost of goods sold: Beginning inventory $ 0 Add cost of goods manufactured @ $6* 420,000 Goods available for sale . 420,000 Less ending inventory @ $6* 60,000 360,000 Gross margin 360,000 Selling and administrative expenses* 240,000 Net income . $120,000 * $6 = $2.00 + $1.00 + $1.00 + $140,000/70,000 ** 60,000 units x $1.50 per unit variable plus $150,000 fixed b Sales $720,000 Less variable expenses: Variable cost of goods sold: Beginning inventory 0 Add variable manuf. costs @ $4 280,000 Goods available for sale 280,000 Less ending inventory @ $4 40,000 Variable cost of goods sold 240,000 Variable selling & admin. @ $1.50 . 90,000 330,000 Contribution margin . 390,000 Less fixed expenses: Fixed manufacturing overhead 140,000 Fixed selling & admin. 150,000 290,000 Net income $100,000 c Variable costing net income . $100,000 Add fixed factory overhead deferred in inventory under absorption costing (10,000 units x $2 per unit) 20,000 Absorption costing net income $120,000 120 Hard Nelson Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $84 Units in beginning inventory 500 Units produced 1,900 Units sold . 2,100 Units in ending inventory 300 Variable costs per unit: Direct materials . $25 Direct labor 10 Variable manufacturing overhead 7 Variable selling and administrative 10 Managerial Accounting, 9/e 261 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 262Managerial Accounting, 9/e Required: a. Prepare an income statement for the month using the format and the variable costing method b. Prepare an income statement for the month using the costing method contribution absorption Answer: a. Variable costing income statement Sales $176,400 Less variable expenses: Variable cost of goods sold: Beginning inventory . $ 21,000 Add variable manufacturing costs 79,800 Goods available for sale 100,800 Less ending inventory . 12,600 Variable cost of goods sold . 88,200 Variable selling and administrative . 21,000 109,200 Contribution margin 67,200 Less fixed expenses: Fixed manufacturing overhead 38,000 Fixed selling and administrative 21,000 59,000 Net income $ 8,200 b. Absorption costing income statement Sales $176,400 Cost of goods sold: Beginning inventory $ 31,000 Add cost of goods manufactured 117,800 Goods available for sale 148,800 Less ending inventory . 18,600 130,200 Gross margin 46,200 Less selling and administrative expenses: Variable selling and administrative 21,000 Fixed selling and administrative 21,000 42,000 Net income $ 4,200 121 Medium Oakes Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $108 Units in beginning inventory 0 Units produced 1,100 Units sold . 900 Units in ending inventory 200 Variable costs per unit: Direct materials . $28 Direct labor 30 Variable manufacturing overhead 7 Variable selling and administrative 11 Fixed costs: Fixed manufacturing overhead $14,300 Fixed selling and administrative . 1,800 Managerial Accounting, 9/e 263 Required: a. Prepare an income statement for the month using the format and the variable costing method b. Prepare an income statement for the month using the costing method contribution absorption Answer: a. Variable costing income statement Sales $97,200 Less variable expenses: Variable cost of goods sold: Beginning inventory $ 0 Add variable manufacturing costs 71,500 Goods available for sale 71,500 Less ending inventory 13,000 Variable cost of goods sold 58,500 Variable selling and administrative 9,900 68,400 Contribution margin 28,800 Less fixed expenses: Fixed manufacturing overhead 14,300 Fixed selling and administrative . 1,800 16,100 Net income . $12,700 b. Absorption costing income statement Sales $97,200 Cost of goods sold: Beginning inventory $ 0 Add cost of goods manufactured . 85,800 Goods available for sale . 85,800 Less ending inventory 15,600 70,200 Gross margin 27,000 Less selling and administrative expenses: Variable selling and administrative 9,900 Fixed selling and administrative . 1,800 11,700 Net income . $15,300 122 Medium The Miller Company had the following results for its first two years of operation: Year 1 Year 2 Sales $1,200,000 $1,200,000 Cost of goods sold 800,000 680,000 Gross margin . 400,000 520,000 Selling and administrative expense 300,000 300,000 Net income $ 100,000 $ 220,000 In Year 1, the company produced and sold 40,000 units of its only product; in Year 2, the company again sold 40,000 units, but increased production to 50,000 units. The company’s variable production cost is $5 per unit and its fixed manufacturing overhead cost is $600,000 a year. Fixed manufacturing overhead costs are applied to the product on the basis of each year's unit production (i.e., a new fixed overhead rate is computed each year). Variable selling and administrative expenses are $2 per unit sold 264Managerial Accounting, 9/e Required: a. Compute the unit product cost for each year under absorption costing and under variable costing b. Prepare an income statement for each year, using the contribution approach with variable costing c. Reconcile the variable costing and absorption costing income figures for each year d. Explain why the net income for Year 2 under absorption costing was higher than the net income for Year 1, although the same number of units were sold in each year Answer: a. Cost per unit under absorption costing: Year 1 Year 2 Variable production cost per unit $ 5 $ 5 Fixed manufacturing overhead cost: ($600,000/40,000) $15 ($600,000/50,000) _ $12 Unit product cost $20 $17 Cost per unit under variable costing: Year 1 Year 2 Variable production cost per unit $5 $5 b. Income statements for each year under variable costing: Year 1 Year 2 Sales . $1,200,000 $1,200,000 Cost of goods sold ($5 x 40,000) 200,000 200,000 Variable selling and administrative expense ($2 x 40,000) . 80,000 80,000 Contribution margin 920,000 920,000 Fixed expenses: Fixed manufacturing overhead 600,000 600,000 Fixed selling and administrative expense . 220,000 220,000 Net income $ 100,000 $ 100,000 c. Reconciliation of absorption costing and variable costing net incomes: Year 1 Year 2 Net income under variable costing . $100,000 $100,000 Fixed manufacturing overhead deferred in (released from) inventory: Year 1 0 Year 2 (10,000 units x $12 per unit) 120,000 Net income under absorption costing $100,000 $220,000 d. The increase in production in Year 2, in the face of level sales, caused a buildup of inventory and a deferral of a portion of the overhead costs of Year 2 to the next year. This deferral of cost relieved Year 2 of $120,000 of fixed manufacturing overhead. Income for Year 2 was $120,000 higher than income of Year 1, even though the same number of units was sold each year. By increasing production and building up inventory, the company was able to increase profits without increasing sales. This is Managerial Accounting, 9/e 265 major criticism of the absorption 123 Hard costing approach The Hadfield Company manufactures and sells a unique electronic part. The company's plant is highly automated with low variable and high fixed manufacturing costs. Operating results on an absorption costing basis for the first three years of activity were as follows: Year 1 Year 2 Year 3 Sales $704,000 $528,000 $704,000 Cost of goods sold: Beginning inventory 0 0 220,000 Cost of goods manufactured 520,000 550,000 496,000 Goods available for sale 520,000 550,000 716,000 Less ending inventory 0 220,000 186,000 Cost of goods sold 520,000 330,000 530,000 Gross margin . 184,000 198,000 174,000 Less selling and administrative expense 180,000 160,000 180,000 Net income (loss) $ 4,000 $ 38,000 $ (6,000) Additional information about the company is as follows: - - - Variable manufacturing costs (direct labor, direct materials, and variable manufacturing overhead) total $3 per unit, and fixed manufacturing overhead costs total $400,000 Fixed manufacturing costs are applied to units of product on the basis of the number of units produced each year (i.e., a new fixed overhead rate is computed each year) The company uses a FIFO inventory flow assumption Variable selling and administrative expenses are $2 per unit sold. Fixed selling and administrative expenses total $100,000 Production and sales information for the three years is as follows: Year 1 Year 2 Year 3 Production in units 40,000 50,000 32,000 Sales in units . 40,000 30,000 40,000 266Managerial Accounting, 9/e 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 b. Production increased sharply in Year 2 even though unit sales declined. The increase in production resulted in a lower unit product cost in Year 2 than in Year 1. Furthermore, because production exceeded sales, fixed manufacturing overhead costs were deferred in inventories. These effects more than offset the loss of revenue due to lower sales. The company's income thus rose even though sales were down c. Production decreased sharply in Year 3. This resulted in an increase in the unit product cost. In addition, inventories decreased and as a result fixed manufacturing overhead deferred in inventories in Year 2 were released to the income statement in Year 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 Managerial Accounting, 9/e 267

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