Chapter 07

True/False Questions

1. Under variable costing, only variable production costs are treated as product costs.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

2. Under variable costing, variable selling and administrative costs are included in product costs.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

3. Absorption costing treats all manufacturing costs as product costs.


4. In the preparation of financial statements using variable costing, fixed manufacturing overhead is treated as a period cost.


5. Absorption costing treats fixed manufacturing overhead as a period cost.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

6. When the number of units in work in process and finished goods inventories increase, absorption costing net operating income will typically be greater than variable costing net operating income.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Easy

7. Net operating income computed using absorption costing will always be greater than net operating income computed using variable costing.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-5

8. When reconciling variable costing and absorption costing net operating income, fixed manufacturing overhead costs released from inventory under absorption costing should be added to variable costing net operating income to arrive at the absorption costing net operating income.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

9. When production exceeds sales for the period, absorption costing net operating income will exceed variable costing net operating income.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

10. Under variable costing it may be possible to report a profit even if the company sells less than the break-even volume of sales.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium

11. Absorption costing net operating income is closer to the net cash flow of a period than is variable costing net operating income.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium

12. Variable costing is not permitted for income tax purposes, but it is widely accepted for external financial reports.


13. A basic concept of the contribution approach and variable costing is that fixed costs are not important in an organization.


14. Variable costing is better suited to cost-volume-profit calculations than absorption costing.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy

15. When lean production is introduced, the difference in net operating income computed under the absorption and variable costing methods is reduced.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy

Multiple Choice Questions

16. How would the following costs be classified (product or period) under variable costing at a retail clothing store?

Cost of purchasing clothing Sales commissionsA) Product ProductB) Product PeriodC) Period ProductD) Period Period

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

17. The principal difference between variable costing and absorption costing centers on:A) whether variable manufacturing costs should be included as product costs.B) whether fixed manufacturing costs should be included as product costs.C) whether fixed manufacturing costs and fixed selling and administrative costs

should be included as product costs.D) none of these.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

18. Which of the following costs at a manufacturing company would be treated as a product cost under the variable costing method?A) direct material costB) property taxes on the factory buildingC) sales manager's salaryD) all of the above

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium


19. Assuming that direct labor is a variable cost, the primary difference between the absorption and variable costing is that:A) variable costing treats only direct materials and direct labor as product cost

while absorption costing treats direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

B) variable costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs while absorption costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

C) variable costing treats only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable portion of selling and administrative expenses as product cost while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.

D) variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

20. The costing method that treats all fixed costs as period costs is:A) absorption costing.B) job-order costing.C) variable costing.D) process costing.

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

21. In its first year of operations, Bronfren Corporation produced 800,000 sets and sold 780,000 sets of artificial tan lines. What would have happened to net operating income in this first year under the following costing methods if Bronfren had produced 20,000 fewer sets? (Assume that Bronfren has both variable and fixed production costs.)

Variable costing Absorption costingA) Increase IncreaseB) Decrease IncreaseC) Decrease DecreaseD) No effect Decrease


22. When sales are constant, but the production level fluctuates, net operating income determined by the variable costing method will:A) fluctuate in direct proportion to changes in production.B) remain constant.C) fluctuate inversely with changes in production.D) be greater than net operating income under absorption costing.


23. Under the variable costing method, which of the following is always expensed in its entirety in the period in which it is incurred?A) fixed manufacturing overhead costB) fixed selling and administrative expenseC) variable selling and administrative expenseD) all of the above

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard


24. Which of the following will usually be found on an income statement prepared using the absorption costing method?

Contribution Margin Gross MarginA) Yes YesB) Yes NoC) No YesD) No No

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

25. Net operating income under variable and absorption costing will generally:A) always be equal.B) never be equal.C) be equal only when production and sales are equal.D) be equal only when production exceeds sales.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

26. When production exceeds sales, net operating income reported under variable costing generally will be:A) greater than net operating income reported under absorption costing.B) less than net operating income reported under absorption costingC) equal to net operating income reported under absorption costing.D) higher or lower because no generalization can be made.


27. Net operating income under absorption costing may differ from net operating income determined under variable costing. How is this difference calculated?A) change in the quantity of units in inventory times the fixed manufacturing

overhead rate per unit.B) number of units produced during the period times the fixed manufacturing

overhead rate per unit.C) change in the quantity of units in inventory times the variable manufacturing

cost per unit.D) number of units produced during the period times the variable manufacturing

cost per unit.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard Source: CMA, adapted

28. When sales are constant, but the production level fluctuates, net operating income determined by the absorption costing method will:A) tend to fluctuate in the same direction as fluctuations in the level of production.B) tend to remain constant.C) tend to fluctuate inversely with fluctuations in the level of production.D) none of these


29. A reason why absorption costing income statements are sometimes difficult for the manager to interpret is that:A) they omit variable expenses entirely in computing net operating income.B) they shift portions of fixed manufacturing overhead from period to period

according to changing levels of inventories.C) they include all fixed manufacturing overhead on the income statement each

year as a period cost.D) they ignore inventory levels in computing income charges.



30. Under the theory of constraints (TOC), which of the following is treated as a period cost?

Direct labor Direct materialA) Yes YesB) Yes NoC) No YesD) No No

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

31. Fleet Corporation produces a single product. The company manufactured 700 units last year. The ending inventory consisted of 100 units. There was no beginning inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing costs were $2.00 per unit. What would be the change in the dollar amount of ending inventory if variable costing was used instead of absorption costing?A) $800 decreaseB) $200 decreaseC) $0D) $200 increase

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adaptedSolution:Change in inventory × Fixed manufacturing costs per unit= 100 × $2 = $200 decrease

32. Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:

Unit product cost under variable costing......................... $5.20 per unitFixed manufacturing overhead cost for the year............. $260,000Fixed selling and administrative cost for the year........... $180,000Units (calculators) produced and sold............................. 400,000

What is Shun's unit product cost under absorption costing for last year?A) $4.10B) $4.55C) $5.85D) $6.30

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = Fixed manufacturing overhead ÷ Units produced = $260,000 ÷ 400,000 units = $0.65 per unitUnit product cost = $5.20 + $0.65 = $5.85


33. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Units in beginning inventory..................... 0Units produced........................................... 7,100Units sold................................................... 7,000Units in ending inventory........................... 100

Variable costs per unit:Direct materials....................................... $33Direct labor............................................. $53Variable manufacturing overhead........... $1Variable selling and administrative........ $7

Fixed costs:Fixed manufacturing overhead............... $170,400Fixed selling and administrative............. $7,000

What is the unit product cost for the month under variable costing?A) $118B) $94C) $111D) $87

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $33 + $53 + $1 = $87





What is the unit product cost for the month under absorption costing?A) $67B) $105C) $111D) $73


Solution:

Unit fixed manufacturing overhead = $72,200 ÷ 1,900 = $38Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead cost + Fixed manufacturing overhead cost= $33 + $32 + $2 + $38 = $105



Selling price............................................... $79




What is the total period cost for the month under the variable costing approach?A) $138,600B) $134,400C) $46,200D) $184,800


Solution:

Total variable selling and administrative cost = $8 × 6,300 = $50,400Period cost = Total variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost= $50,400 + $46,200 + $88,200 = $184,800


Selling price............................................... $97




What is the total period cost for the month under the absorption costing approach?A) $56,700B) $65,500C) $8,800D) $37,800

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Total variable selling and administrative cost = $9 × 2,100 = $18,900Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $18,900 + $37,800 = $56,700


37. Mullee Corporation produces a single product and has the following cost structure:

Number of units produced each year..................... 7,000Variable costs per unit:

Direct materials................................................... $51Direct labor......................................................... $12Variable manufacturing overhead....................... $2Variable selling and administrative expense...... $5

Fixed costs per year:Fixed manufacturing overhead........................... $441,000Fixed selling and administrative expense........... $112,000

The unit product cost under absorption costing is:A) $149B) $65C) $63D) $128


Solution:

Unit fixed manufacturing overhead = $441,000 ÷ 7,000 = $63Unit product cost = $63 + $51 + $12 + $2 = $128

38. Stoneberger Corporation produces a single product and has the following cost structure:



Fixed costs per year:Fixed manufacturing overhead........................... $296,000Fixed selling and administrative expense........... $76,000

The unit product cost under variable costing is:A) $128B) $125C) $202D) $131


Solution:

Unit product cost = $50 + $72 + $6 = $128


39. Beamish Inc., which produces a single product, has provided the following data for its most recent month of operations:

Number of units produced..................................... 8,000Variable costs per unit:


Fixed costs:Fixed manufacturing overhead........................... $312,000Fixed selling and administrative expense........... $448,000

There were no beginning or ending inventories. The unit product cost under absorption costing was:A) $93B) $97C) $136D) $194


Solution:


40. Kray Inc., which produces a single product, has provided the following data for its most recent month of operations:

Number of units produced............................................... 3,000Variable costs per unit:

Direct materials............................................................ $91Direct labor................................................................... $13Variable manufacturing overhead................................ $7Variable selling and administrative expense................ $6

Fixed costs:Fixed manufacturing overhead..................................... $237,000Fixed selling and administrative expense..................... $165,000

There were no beginning or ending inventories. The unit product cost under variable costing was:A) $111B) $190C) $117D) $110


Solution:



41. The following data pertain to last year's operations at Clarkson, Incorporated, a company that produces a single product:

Units in beginning inventory..................... 0Units produced........................................... 100,000Units sold................................................... 98,000

Selling price per unit.................................. $10.00

Variable costs per unit:Direct materials....................................... $1.50Direct labor............................................. $2.50Variable manufacturing overhead........... $1.00Variable selling and administrative........ $2.00

Fixed costs per year:Fixed manufacturing overhead............... $200,000Fixed selling and administrative............. $50,000

What was the absorption costing net operating income last year?A) $44,000B) $48,000C) $50,000D) $49,000


Solution:

Unit fixed manufacturing overhead = $200,000 ÷ 100,000 = $2Unit product cost = $1.50 + $2.50 + $1 + $2 = $7

Absorption costing income statementSales ($10 × 98,000).............................................. $980,000Cost of goods sold ($7 × 98,000)........................... 686,000 Gross margin.......................................................... 294,000Selling and administrative expenses expenses:

Variable selling and administrative.................... $196,000Fixed selling and administrative......................... 50,000 246,000

Net operating income............................................. $ 48,000


Selling price............................................... $135


Variable costs per unit:Direct materials.......................................... $49Direct labor................................................ $38Variable manufacturing overhead.............. $6Variable selling and administrative........... $11

Fixed costs:Fixed manufacturing overhead.................. $108,800Fixed selling and administrative................ $74,400

The total contribution margin for the month under the variable costing approach is:A) $155,000B) $260,400C) $192,200D) $83,400


Solution:

Sales revenue ($135 × 6,200)................................. $837,000Variable cost:.........................................................

Direct materials ($49 × 6,200)............................ $303,800Direct labor ($38 × 6,200).................................. 235,000Variable manufacturing overhead ($6 × 6,200).. 37,200Variable selling and administrative ($11 ×

6,200)............................................................... 68,200 644,800Contribution margin............................................... $192,200



Selling price............................................... $123

Units in beginning inventory..................... 0Units produced........................................... 1,000Units sold................................................... 900Units in ending inventory........................... 100



What is the net operating income for the month under variable costing?A) $12,700B) $5,600C) $1,700D) $14,400


Solution:

Sales ($123 × 900)................................................. $110,700Variable cost of goods sold ($71 × 900)................ 63,900Less variable selling and administrative ($6 × 900) 5,400 Contribution margin............................................... 41,400Fixed cost:

Fixed manufacturing overhead........................... $17,000Fixed selling and administrative......................... 11,700 28,700


44. Swifton Company produces a single product. Last year, the company had net operating income of $40,000 using variable costing. Beginning and ending inventories were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost was $3.00 per unit, what was the income using absorption costing?A) $15,000B) $25,000C) $40,000D) $55,000


Solution:

Difference between absorption costing net income and variable costing net income = Change in inventory in units × Unit fixed manufacturing overhead= (27,000 − 22,000) × $3 = 5,000 × $3 = $15,000Net income under absorption costing = $40,000 + $15,000 = $55,000

45. Blake Company produces a single product. Last year, Blake's net operating income under absorption costing was $3,600 lower than under variable costing. The company sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1 was variable selling expense. If production cost was $11 per unit under absorption costing, then how many units did the company produce during the year?A) 8,200 unitsB) 8,800 unitsC) 11,200 unitsD) 11,800 units

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard

Solution:

Direct material + Direct labor + Variable manufacturing overhead= Variable unit product cost = $9 – $1 = $8Unit fixed manufacturing overhead = $11 – $8 = $3Difference in net income between methods ÷ Unit fixed manufacturing overhead = ($3,600) ÷ $3 per unit = (1,200) unitsUnits produced = Units sold + Change in inventory = 10,000 + (1,200) = 8,800


46. Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations:

Year 1 Year 2Units (spice racks) produced.................................. 40,000 40,000Units (spice racks) sold.......................................... 37,000 41,000Absorption costing net operating income.............. $44,000 $52,000Variable costing net operating income.................. $38,000 ???

Pungent's cost structure and selling price were the same for both years. What is Pungent's variable costing net operating income for Year 2?A) $48,000B) $50,000C) $54,000D) $56,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard

Solution:

Unit fixed manufacturing overhead = Difference in net income ÷ Change in inventory = ($44,000 – $38,000) ÷ (40,000 – 37,000) = $6,000 ÷ 3,000 = $2Variable costing net operating income = Absorption costing net income − Difference in net operating income= $52,000 − [(40,000 − 41,000) × $2)]= $52,000 − ($2,000) = $54,000

47. Sipho Corporation manufactures a variety of products. Last year, the company's variable costing net operating income was $90,900. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $21,900. What was the absorption costing net operating income last year?A) $69,000B) $90,900C) $21,900D) $112,800


Solution:

Absorption costing net income = Variable costing net income – fixed manufacturing overhead costs released from inventory= $90,900 – $21,900 = $69,000

48. Last year, Kirsten Corporation's variable costing net operating income was $63,400. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $10,700. What was the absorption costing net operating income last year?A) $10,700B) $74,100C) $63,400D) $52,700


Solution:

Absorption costing net income = Variable costing net income – fixed manufacturing overhead costs released from inventory= $63,400 – $10,700 = $52,700


49. Bellue Inc. manufactures a variety of products. Variable costing net operating income was $96,300 last year and ending inventory decreased by 2,600 units. Fixed manufacturing overhead cost was $1 per unit. What was the absorption costing net operating income last year?A) $2,600B) $93,700C) $96,300D) $98,900


Solution:

Absorption costing net income = Variable costing net income − fixed manufacturing overhead costs released from inventory= $96,300 − [2,600 × $1] = $96,300 − $2,600 = $93,700

50. Last year, Tinklenberg Corporation's variable costing net operating income was $52,400 and its ending inventory decreased by 1,400 units. Fixed manufacturing overhead cost was $8 per unit. What was the absorption costing net operating income last year?A) $41,200B) $11,200C) $63,600D) $52,400


Solution:

Absorption costing net income = Variable costing net income − fixed manufacturing overhead costs released from inventory= $52,400 − [1,400 × $8] = $52,400 − $11,200 = $41,200

Use the following to answer questions 51-53:

Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000 units and sold 12,000 units. Production costs for the year were as follows:

Direct materials...................................................... $150,000Direct labor............................................................ $180,000Variable manufacturing overhead.......................... $135,000Fixed manufacturing overhead.............................. $210,000

Sales totaled $840,000 for the year, variable selling expenses totaled $60,000, and fixed selling and administrative expenses totaled $180,000. There were no units in the beginning inventory. Assume that direct labor is a variable cost.

51. The contribution margin per unit would be:A) $25B) $39C) $34D) $35

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Unit selling price ($840,000 ÷ 12,000).................. $70Less direct materials ($150,000 ÷ 15,000)............. $10Less direct labor ($180,000 ÷ 15,000)................... 12Less variable manufacturing overhead ($135,000

÷ 15,000)............................................................ 9Less variable selling and administrative ($60,000

÷ 12,000)............................................................ 5 36 Contribution margin............................................... $34


52. Under absorption costing, the carrying value on the balance sheet of the ending inventory for the year would be:A) $135,000B) $93,000C) $105,000D) $0


Solution:

Unit fixed manufacturing overhead = $210,000 ÷ 15,000 = $14Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead= $10 + $12 + $9 + $14 = $45Carrying value = Unit product cost × Ending inventory in units= $45 × (15,000 − 12,000) = $45 × 3,000 = $135,000

53. Under variable costing, the company's net operating income for the year would be:A) $42,000 higher than under absorption costingB) $30,000 higher than under absorption costingC) $30,000 lower than under absorption costingD) $42,000 lower than under absorption costing


Solution:

Unit fixed manufacturing overhead × Change in inventory in units= $14 × (15,000 − 12,000) = $14 × 3,000 = $42,000Since the units produced are greater than the units sold (inventory increased), net income under absorption costing will be higher than net income under variable costing.


Abdi Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $81




54. What is the unit product cost for the month under variable costing?A) $77B) $66C) $68D) $57


Solution:

Direct materials + Direct labor + Variable manufacturing overhead= $20 + $30 + $7 = $57


55. What is the unit product cost for the month under absorption costing?A) $66B) $77C) $57D) $68


Solution:

Unit fixed manufacturing overhead = $65,700 ÷ 7,300 = $9Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $20 + $30 + $7 + $9 = $66

56. The total contribution margin for the month under the variable costing approach is:A) $91,000B) $168,000C) $105,000D) $25,300


Solution:

Unit selling price.................................................... $81Less unit variable costs:

Direct materials................................................... $20Direct labor......................................................... 30Variable manufacturing overhead....................... 7Variable selling and administrative.................... 11 68

Contribution margin............................................... $13Total contribution margin = $13 × 7,000 = $91,000

57. The total gross margin for the month under the absorption costing approach is:A) $105,000B) $124,800C) $7,000D) $91,000


Solution:

Unit fixed manufacturing overhead = $9Unit product cost under absorption costing = $20 + $30 + $7 + $9 = $66

Sales revenue ($81 × 7,000)................................... $567,000Cost of goods sold ($66 × 7,000)........................... 462,000 Gross margin.......................................................... $105,000

58. What is the total period cost for the month under the variable costing approach?A) $65,700B) $163,700C) $98,000D) $86,700


Solution:

Variable selling and administrative cost + Fixed costs= ($11 × 7,000) + ($65,700 + $21,000)= $77,000 + $86,700 = $163,700


59. What is the total period cost for the month under the absorption costing approach?A) $98,000B) $65,700C) $21,000D) $163,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Variable selling and administrative cost + Fixed selling and administrative cost= $11 × 7,000 + $21,000= $77,000 + $21,000 = $98,000

60. What is the net operating income for the month under variable costing?A) $2,700B) $4,300C) $7,000D) $(12,800)


Solution:

Sales revenue ($81 × 7,000)................................... $567,000Variable costs:

Product cost ($57 × 7,000).................................. $399,000Variable selling and administrative ($11 ×

7,000)............................................................... 77,000 476,000 Contribution margin............................................... 91,000Fixed costs:

Fixed manufacturing overhead........................... $ 65,700Fixed selling and administrative......................... 21,000 86,700

Contribution margin............................................... $ 4,300

61. What is the net operating income for the month under absorption costing?A) $7,000B) $4,300C) $(12,800)D) $2,700


Solution:

Sales revenue ($81 × 7,000)................................... $567,000Cost of goods sold ($66 × 7,000)........................... 462,000 Gross margin.......................................................... 105,000Selling and administrative expenses:

Variable selling and administrative ($11 × 7,000)............................................................... $77,000

Fixed selling and administrative......................... 21,000 98,000 Net operating income............................................. $ 7,000


Hopkins Company manufactures a single product. The following data pertain to the company's operations last year:

Selling price per unit.................................. $24Variable costs per unit:

Production............................................... $8Selling and administration...................... $2

Fixed costs in total:Production............................................... $48,000Selling and administration...................... $36,000

At the beginning of the year there were no units in inventory. A total of 12,000 units were produced during the year, and 10,000 units were sold.


62. Under variable costing, the unit product cost is:A) $8.00B) $10.00C) $12.00D) $14.00


Solution:

Production cost = $8

63. Under absorption costing, the unit product cost is:A) $8.00B) $10.00C) $12.00D) $15.00


Solution:

Unit fixed manufacturing overhead = $48,000 ÷ 12,000 = $4Unit product cost = $8 + $4 = $12

64. The net operating income under variable costing would be:A) $64,000B) $60,000C) $56,000D) $52,000


Solution:

Sales revenue ($24 × 10,000)................................. $240,000Variable costs:

Variable cost of goods sold ($8 × 10,000).......... $80,000Variable selling and administrative ($2 ×

10,000)............................................................. 20,000 100,000 Contribution margin............................................... 140,000Fixed costs:



65. The net operating income under absorption costing would be:A) the same as the income under variable costing.B) $8,000 greater than the income under variable costing.C) $12,000 greater than the income under variable costing.D) $8,000 less than the income under variable costing.


Solution:

Unit fixed manufacturing overhead × Change in number of units in ending inventory = $4 × (12,000 − 10,000) = $4 × 2,000= $8,000 greater than the income under variable costing since inventory increased



Phearsum Corporation manufactures a parachute. Shown below is Phearsum's cost structure:

Variable cost per parachute

Total fixed cost for the year

Manufacturing cost.................. $160 $342,000Selling and administrative........ $10 $171,000

In its first year of operations, Phearsum produced and sold 4,000 parachutes. The parachutes sold for $310 each.

66. If Phearsum would have sold only 3,800 parachutes in its first year, what total amount of cost would have been assigned to the 200 parachutes in finished goods inventory under the variable costing method?A) $28,000B) $32,000C) $34,000D) $49,100


Solution:

Unit product cost = $160Total cost of ending finished goods inventory = $160 × 200 = $32,000

67. Refer back to the original data. How would Phearsum's absorption costing net operating income been affected in its first year if only 3,800 parachutes were sold instead of 4,000?A) net operating income would have been $2,350 lowerB) net operating income would have been $10,900 lowerC) net operating income would have been $12,900 lowerD) net operating income would have been $28,000 lower

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Hard

Solution:

Unit fixed manufacturing overhead = $342,000 ÷ 4,000 = $85.50Unit product cost under absorption costing = $160 + $85.50 = $245.50Unit gross margin = $310 − $245.50 = $64.50

Cost savings ($10 × 200).................................... $ 2,000Less: decrease in gross margin ($64.50 × 200)... 12,900 Net operating income increase (decrease).......... ($10,900)

68. Refer back to the original data. How would Phearsum's variable costing net operating income been affected in its first year if 4,500 parachutes were produced instead of 4,000 and Phearsum still sold 4,000 parachutes?A) net operating income would not have been affectedB) net operating income would have been $38,000 higherC) net operating income would have been $57,000 higherD) net operating income would have been $75,000 lower

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Medium



Feery Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $110






Solution:




Solution:


71. What is the net operating income for the month under variable costing?A) $1,800B) $16,700C) $9,500D) $18,500


Solution:







72. What is the net operating income for the month under absorption costing?A) $18,500B) $1,800C) $9,500D) $16,700


Solution:

Sales revenue ($110 × 3,700)................................. $407,000Cost of goods sold ($90 × 3,700)........................... 333,000 Gross margin.......................................................... 74,000Selling and administrative expenses costs:




Jarbo Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $129




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.



Solution:





Solution:




Solution:








Solution:

Sales revenue ($129 × 3,800)................................. $490,200Cost of goods sold ($103 × 3,800)......................... 391,400 Gross margin.......................................................... 98,800Selling and administrative expenses costs:




Beach Corporation, which produces a single product, budgeted the following costs for its first year of operations. These costs are based on a budgeted volume of 30,000 towels produced and sold:

Direct materials.......................................... $96,000Direct labor................................................ $48,000Variable manufacturing overhead.............. $72,000Fixed manufacturing overhead.................. $60,000Variable selling and administrative........... $12,000Fixed selling and administrative................ $36,000

During the first year of operations, Beach Towel actually produced 30,000 towels but only sold 24,000 towels. Actual costs did not fluctuate from the cost behavior patterns described above. The 24,000 towels were sold for $16 per towel. Assume that direct labor is a variable cost.


77. What is the total cost that would be assigned to Beach Towel's finished goods inventory at the end of the first year of operations under the variable costing method?A) $43,200B) $45,600C) $55,200D) $64,800


Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 30,000 units = ($96,000 + $48,000 + $72,000) ÷ 30,000 = $7.20Total cost of ending finished goods inventory = Unit product cost × Ending inventory = $7.20 × (30,000 − 24,000) = $7.20 × 6,000 = $43,200

78. Under the absorption costing method, what is Beach Towel's actual net operating income for its first year?A) $60,000B) $115,200C) $117,600D) $124,800


Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead) ÷ 30,000 units= ($96,000 + $48,000 + $72,000 + $60,000) ÷ 30,000 = $9.20Unit variable selling and administrative cost = $12,000 ÷ 30,000 = $0.40

Sales revenue ($16 × 24,000)................................. $384,000Cost of goods sold ($9.20 × 24,000)...................... 220,800 Gross margin.......................................................... 163,200Selling and administrative expenses:

Variable selling and administrative ($0.40 × 24,000)............................................................. $ 9,600

Fixed selling and administrative......................... 36,000 45,600 Net operating income............................................. $117,600

79. Assuming no change in cost structure, which of the following would have increased Beach Towel's net operating income under the variable costing method in its first year of operations?A) an increase in sales volume with no increase in production volumeB) an increase in production volume with no increase in sales volumeC) both A and B aboveD) none of the above



Blake Corporation, which produces a single product, has provided the following absorption costing income statement for the month of June:

Blake CorporationIncome Statement

For the month ended June 30

Sales (9,500 units)...................................... $285,000Cost of goods sold:

Beginning inventory............................... $ 16,000Add cost of goods manufactured............ 160,000Goods available for sale.......................... 176,000Less ending Inventory............................. 24,000

Cost of goods sold...................................... 152,000 Gross margin.............................................. 133,000Selling and administrative expenses:

Fixed....................................................... $ 75,000Variable................................................... 19,000 94,000

Net operating income................................. $ 39,000

During June, the company's variable production costs were $10 per unit and its fixed manufacturing overhead totaled $60,000. A total of 10,000 units were produced during June and the company had 1,000 units in the beginning inventory. The company uses the LIFO method to value inventories.


80. The contribution margin per unit during June was:A) $20B) $18C) $16D) $14


Solution:

Selling price ($285,000 ÷ 9,500)........................... $30Less variable product cost...................................... 10Less unit variable selling and administrative

($19,000 ÷ 9,500)............................................... 2 Unit contribution margin $18

81. The carrying value on the balance sheet of the company's inventory on June 30 under the variable costing method would be:A) $10,000B) $12,000C) $15,000D) $24,000


Solution:

Ending inventory = Beginning inventory + Units produced − Units sold= 1,000 + 10,000 − 9,500 = 1,500Carrying value = Ending inventory in units × Variable production cost= 1,500 × $10 = $15,000

82. Net operating income under the variable costing method for June would be:A) $36,000B) $40,000C) $53,000D) $60,000


Solution:

Sales revenue (9,500 units).................................... $285,000Variable costs:

Variable cost of goods sold ($10 × 9,500).......... $95,000Variable selling and administrative.................... 19,000 114,000

Contribution margin............................................... 171,000Fixed costs:



83. The break-even point in units for the month under variable costing would be:A) 6,000 unitsB) 6,750 unitsC) 7,500 unitsD) 9,000 units


Solution:

Sales revenue (9,500 units).................................... $285,000Variable costs:

Variable cost of goods sold ($10 × 9,500).......... $95,000Variable selling and administrative.................... 19,000 114,000

Contribution margin............................................... $171,000Fixed costs ÷ Unit contribution margin = (Fixed manufacturing overhead + Fixed selling and administrative) ÷ Unit contribution margin = ($60,000 + $75,000) ÷ ($171,000 ÷ 9,500) = $135,000 ÷ $18 per unit = 7,500 units



Haaikon Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $86






Solution:

Unit product cost = Direct materials + Direct Labor + Variable manufacturing overhead = $17 + $39 + $1 = $57



Solution:



3,300)............................................................... 26,400 214,500 Contribution margin............................................... $ 69,300



Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost= ($8 × 3,300) + $40,800 + $23,100= $26,400 + $40,800 + $23,100 = $90,300


87. What is the net operating income for the month under variable costing?A) $6,600B) $(300)C) $5,400D) $1,200


Solution:







Ibarra Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $81






Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead= $22 + $28 + $6 = $56


89. What is the net operating income for the month under variable costing?A) $0B) $(19,800)C) $(3,000)D) $3,000


Solution:





Net operating income............................................. $ (3,000)


Yankee Company manufactures a single product. The company has the following cost structure:

Variable costs per unit:Production................................... $4Selling and administrative.......... $1

Fixed costs in total:Production................................... $12,000Selling and administrative.......... $8,000

Last year, 4,000 units were produced and 3,500 units were sold. There were no beginning inventories.

90. Under variable costing, the unit product cost would be:A) $4B) $5C) $7D) $8


Solution:

Production cost = $4

91. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:A) the same as under absorption costingB) $1,500 less than under absorption costingC) $2,000 higher than under absorption costingD) $2,000 less than under absorption costing


Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3Difference in carrying value of ending finished goods inventory = Unit fixed manufacturing overhead × Change in inventory in units= $3 × (4,000 − 3,500)= $1,500 less than under absorption costing


92. Under absorption costing, the cost of goods sold for the year would be:A) $28,000B) $24,500C) $17,500D) $14,000


Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3Product cost = $4 + $3 = $7Cost of goods sold = $7 × 3,500 = $24,500


Peterson Company produces a single product. Data from the company's records for last year follow:

Units in beginning inventory..................... 0Units produced........................................... 70,000Units sold................................................... 60,000

Sales........................................................... $1,400,000Manufacturing costs:

Variable................................................... $630,000Fixed....................................................... $315,000

Selling and administrative expenses:Variable................................................... $98,000Fixed....................................................... $140,000

93. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:A) $90,000B) $104,000C) $105,000D) $135,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit variable product cost = $630,000 ÷ 70,000 = $9Change in inventory in units = 70,000 − 60,000 = 10,000Carrying value of ending inventory = $9 × 10,000 = $90,000

94. Under the absorption costing method, Peterson's net operating income would be:A) $217,000B) $307,000C) $352,000D) $374,500

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted

Solution:

Product cost = $9 + $4.50 = $13.50Sales revenue...................................................... $1,400,000Cost of goods sold ($13.50 × 60,000)................. 810,000 Gross margin....................................................... 590,000Selling and administrative expenses:

Variable selling and administrative................. $ 98,000Fixed selling and administrative...................... 140,000 238,000

Net operating income.......................................... $ 352,000



McCoy Corporation manufactures a computer monitor. Shown below is McCoy's cost structure:

Variable cost per monitor

Total fixed cost for the year

Manufacturing cost........................ $75.20 $912,000Selling and administrative.............. $14.60 $456,000

In its first year of operations, McCoy produced 100,000 monitors but only sold 95,000. McCoy's gross margin in this first year was $2,629,600. McCoy's contribution margin in this first year was $2,109,000.

95. Under the variable costing method, what is McCoy's net operating income for its first year?A) $266,000B) $741,000C) $1,261,600D) $2,173,600


Solution:

Contribution margin............................................... $2,109,000Fixed costs:

Fixed manufacturing overhead........................... $912,000Fixed selling and administrative......................... 456,000 1,368,000


96. Under the absorption costing method, what is McCoy's net operating income for its first year?A) $266,000B) $786,600C) $1,261,600D) $2,173,600


Solution:

Gross margin.......................................................... $2,629,600Selling and administrative expenses:

Variable selling and administrative ($14.60 × 95,000)............................................................. $1,387,000

Fixed selling and administrative......................... 456,000 1,843,000 Net operating income............................................. $ 786,600

97. If McCoy produces 100,000 monitors and sells 100,000 monitors in the second year of operations, which of the following statements will be true? (Assume no change in cost structure or selling price.)A) McCoy's variable costing net operating income in its second year will be greater

than its absorption costing net operating incomeB) McCoy's absorption costing unit product cost will decrease in the second yearC) McCoy's gross margin will be equal to its contribution margin in its second yearD) Both A and B aboveE) none of the above

Ans: E AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard



Mediocre Manufacturing Company produces a single product. Management budgeted the following costs for its first year of operations. These costs are based on a budgeted volume of 4,000 units produced and sold:

Direct materials.............................. $28,000Direct labor.................................... $14,000Manufacturing overhead:

Variable....................................... $56,000Fixed........................................... $63,000

Selling and administrative:Variable....................................... $7,000Fixed........................................... $42,000

During the first year of operations, Mediocre actually produced 4,000 units but only sold 3,500 units. Actual costs did not fluctuate from the cost behavior patterns described above. The 3,500 units were sold for $72 per unit. Assume that direct labor is a variable cost.

98. What is the total cost that would be assigned to Mediocre's finished goods inventory at the end of the first year of operations under the absorption costing method?A) $12,250B) $20,125C) $23,000D) $26,250


Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $28,000 + $14,000 + $56,000 + $63,000 = $161,000Unit product cost = $161,000 ÷ 4,000 = $40.25Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $40.25 × (4,000 − 3,500) = $20,125

99. Under the variable costing method, what is Mediocre's actual net operating income for its first year?A) $42,000B) $54,250C) $55,125D) $63,000


Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 4,000 units = ($28,000 + $14,000 + $56,000) ÷ 4,000 = $24.50


Variable cost of goods sold ($24.50 × 3,500)..... $85,750Variable selling and administrative ($1.75 ×




100. Assuming no change in cost structure, which of the following would have increased Mediocre's net operating income under the absorption costing method in its first year of operations?A) an increase in sales volume with no increase in production volumeB) an increase in production volume with no increase in sales volumeC) both A and B aboveD) none of the above




JV Company produces a single product that sells for $7.00 per unit. Last year, 100,000 units were produced and 80,000 units were sold. There were no beginning inventories. The company has the following cost structure:

Fixed Costs Variable CostsRaw materials................................. -- $1.50 per unit producedDirect labor.................................... -- $1.00 per unit producedFactory overhead............................ $150,000 $0.50 per unit producedSelling and administrative.............. $80,000 $0.50 per unit sold

101. The unit product cost under absorption costing is:A) $2.50B) $3.00C) $3.50D) $4.50

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit fixed overhead = $150,000 ÷ 100,000 = $1.50Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $1.50 + $1.00 + $0.50 + $1.50 = $4.50

102. The net operating income under variable costing is:A) $50,000B) $80,000C) $90,000D) $120,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted

Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead= $1.50 + $1 + $0.50 = $3


Variable cost of goods sold ($3 × 80,000).......... $240,000Variable selling and administrative ($0.50 ×

80,000)............................................................. 40,000 280,000 Contribution margin............................................... 280,000Fixed costs:

Fixed manufacturing overhead........................... 150,000Fixed selling and administrative......................... 80,000 230,000




Gadepelli Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $106





Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Medium

Solution:

Unit product cost = $15 + $14 + $6 = $35



1,400)............................................................... 5,600 54,600 Contribution margin............................................... $ 93,800



Solution:


Sales revenue ($106 × 1,400)................................. $148,400Cost of goods sold ($67 × 1,400)........................... 93,800 Gross margin.......................................................... $ 54,600



Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost= $4 × 1,400 + $51,200 + $23,800= $5,600 + $51,200 + $23,800 = $80,600




Solution:

Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $4 × 1,400 + $23,800 = $29,400


During its first year of operations, Carlos Manufacturing Company incurred the following costs to produce 8,000 units of its product:

Direct materials.......................................... $7 per unitDirect labor................................................ $3 per unitVariable manufacturing overhead.............. $18 per unitFixed manufacturing overhead.................. $450,000 in total

The company also incurred the following costs in the sale of 7,500 units of product during its first year:

Variable selling and administrative........... $2 per unitFixed selling and administrative................ $60,000 in total

Assume that direct labor is a variable cost.

107. What is the total cost that would be assigned to Carlos' finished goods inventory at the end of the first year of operations under the absorption costing method?A) $15,000B) $42,125C) $44,000D) $47,125


Solution:

Unit fixed manufacturing overhead = $450,000 ÷ 8,000 = $56.25Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $7 + $3 + $18 + $56.25 = $84.25Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $84.25 × (8,000 − 7,500) = $84.25 × 500 = $42,125

108. What is the total cost that would be assigned to Carlos' finished goods inventory at the end of the first year of operations under the variable costing method?A) $15,000B) $42,125C) $44,000D) $14,000


Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $7 + $3 + $18 = $28Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $28 × (8,000 − 7,500) = $28 × 500 = $14,000


109. If Carlos' absorption costing net operating income for this first year is $118,125, what would its variable costing net operating income be for this first year?A) $86,000B) $90,000C) $104,125D) $146,250


Solution:

Variable costing net income = Absorption costing net income – (Unit fixed manufacturing overhead × Change in inventory in units)= $118,125 − ($56.25 × 500) = $118,125 − $28,125 = $90,000


Kern Company produces a single product. Selected information concerning the operations of the company follow:

Units in beginning inventory................................. 0Units produced....................................................... 10,000Units sold............................................................... 9,000

Direct materials...................................................... $40,000Direct labor $20,000Variable factory overhead...................................... $12,000Fixed factory overhead.......................................... $25,000Variable selling and administrative expenses........ $4,500Fixed selling and administrative expenses............. $30,000


110. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:A) $7,200B) $7,650C) $8,000D) $9,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit product cost = ($40,000 + $20,000 + $12,000) ÷ 10,000= $72,000 ÷ 10,000 = $7.20Ending inventory = Units produced − Units sold = 10,000 − 9,000 = 1,000Carrying value of ending finished goods inventory = Unit product cost × Units in ending inventory = $7.20 × 1,000 = $7,200

111. Which costing method, absorption or variable costing, would show a higher operating income for the year and by what amount?A) Absorption costing net operating income would be higher than variable costing

net operating income by $2,500.B) Variable costing net operating income would be higher than absorption costing

net operating income by $2,500.C) Absorption costing net operating income would be higher than variable costing

net operating income by $5,500.D) Variable costing net operating income would be higher than absorption costing

net operating income by $5,500.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted

Solution:

Unit fixed manufacturing overhead = $25,000 ÷ 10,000 = $2.50Difference between absorption costing net income and variable costing net income = Unit fixed manufacturing overhead × Change in ending inventory in units = $2.50 × (10,000 − 9,000) = $2,500Since inventory has increased (production exceeds sales), absorption costing net income would be higher than variable costing net income.



Lina Co. produced 100,000 units of its single product during the month of June. Costs incurred during June were as follows:

Direct materials...................................................... $100,000Direct labor............................................................ $80,000Variable manufacturing overhead.......................... $40,000Fixed manufacturing overhead.............................. $50,000Variable selling and administrative expenses........ $12,000Fixed selling and administrative expenses............. $45,000


112. The unit product cost under absorption costing would be:A) $3.27B) $2.70C) $2.20D) $1.80

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead= ($100,000 + $80,000 + $40,000 + $50,000) ÷ 100,000= $270,000 ÷ 100,000 = $2.70

113. The unit product cost under variable costing would be:A) $2.82B) $2.70C) $2.32D) $2.20

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 100,000 units = ($100,000 + $80,000 + $40,000) ÷ 100,000 = $220,000 ÷ 100,000 = $2.20


Bauxar Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $98







Solution:




Solution:



Crossbow Corp. produces a single product. Data concerning June's operations follow:

Units in beginning inventory......... 0Units produced............................... 6,000Units sold....................................... 5,000

Variable costs per unit:Manufacturing............................. $7Selling and administrative.......... $3

Fixed costs in total:Manufacturing............................. $12,000Selling and administrative.......... $3,000

116. Under variable costing, ending inventory on the balance sheet would be valued at:A) $10,000B) $7,000C) $9,000D) $12,000


Solution:

Unit product cost = $7Ending inventory = Beginning inventory + Units produced − Units sold= 0 + 6,000 − 5,000 = 1,000Value of ending inventory = Unit product cost × Units in ending inventory = $7 × 1,000 = $7,000


117. Under absorption costing, ending inventory on the balance sheet would be valued at:A) $10,000B) $7,000C) $9,000D) $12,000


Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 6,000 = $2Unit product cost = $7 + $2 = $9Value of ending inventory = Unit product cost × Units in ending inventory = $9 × 1,000 = $9,000

118. For the year in question, net operating income under variable costing will be:A) higher than net operating income under absorption costing.B) lower than net operating income under absorption costing.C) the same as net operating income under absorption costing.D) none of these



Dearne Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $67





Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost= $4 × 4,900 + $41,600 + $73,500= $19,600 + $41,600 + $73,500 = $134,700




Solution:

Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $4 × 4,900 + $73,500 = $93,100


Tat Corporation produces a single product and has the following cost structure:


Direct materials................................................... $77Direct labor......................................................... $89Variable manufacturing overhead....................... $5Variable selling and administrative expenses..... $3

Fixed costs per year:Fixed manufacturing overhead........................... $532,000Fixed selling and administrative expenses.......... $574,000

121. The unit product cost under absorption costing is:A) $247B) $166C) $332D) $171


Solution:


122. The unit product cost under variable costing is:A) $169B) $171C) $247D) $174


Solution:




Caruso Inc., which produces a single product, has provided the following data for its most recent month of operations:

Number of units produced..................................... 4,000Variable costs per unit:


Fixed costs:Fixed manufacturing overhead........................... $220,000Fixed selling and administrative expense........... $308,000

There were no beginning or ending inventories.

123. The unit product cost under absorption costing was:A) $170B) $115C) $255D) $110


Solution:


124. The unit product cost under variable costing was:A) $115B) $123C) $118D) $170


Solution:



Cloer Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $95







Solution:

Unit product cost = $10 + $48 + $5 = $63Sales revenue ($95 × 8,500)................................... $807,500Variable costs:


8,500)............................................................... 93,500 629,000 Contribution margin............................................... $178,500



Solution:


Sales revenue ($95 × 8,500)................................... $807,500Cost of goods sold ($75 × 8,500)........................... 637,500 Gross margin.......................................................... $ 170,000


Hirsch Company produces a single product. Variable manufacturing costs are $6 per unit, and fixed manufacturing costs are $2 per unit based on 50,000 units produced each year. In the current year, 50,000 units were produced, and 40,000 units were sold.

127. Under absorption costing, the amount of manufacturing cost (variable and fixed) deducted from revenue in the current year would be:A) $320,000B) $400,000C) $240,000D) $300,000


Solution:

Total manufacturing cost deducted from revenue = Total per unit product cost × Units sold = ($6 + $2) × 40,000 = $320,000

128. Under variable costing, the amount of manufacturing cost (variable and fixed) deducted from revenue in the current year would be:A) $320,000B) $240,000C) $340,000D) $400,000


Solution:

Total fixed cost = Per unit fixed cost × Units producedTotal fixed cost = $2 × 50,000 = $100,000Total manufacturing cost deducted from revenue = (Variable per unit product cost × Units sold) + Total fixed cost= ($6 × 40,000) + $100,000= $240,000 + $100,000 = $340,000



Osawa Inc. manufactured 200,000 units of its only product in its first year of operations. Variable manufacturing costs were $30 per unit. Fixed manufacturing costs were $600,000 and selling and administrative costs totaled $400,000. Osawa sold 120,000 units at a selling price of $40 per unit.

129. Osawa's net operating income using absorption costing would be:A) $200,000B) $440,000C) $600,000D) $840,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Source: CMA, adapted

Solution:

Unit fixed manufacturing cost = $600,000 ÷ 200,000 = $3Unit product cost = $30 + $3 = $33

Sales revenue ($40 × 120,000)............................... $4,800,000Cost of goods sold ($33 × 120,000)....................... 3,960,000 Gross margin.......................................................... 840,000Selling and administrative expenses cost............... 400,000 Net operating income............................................. $ 440,000

130. Osawa's net operating income using variable costing would be:A) $200,000B) $440,000C) $800,000D) $600,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Source: CMA, adapted

Solution:

Sales revenue ($40 × 120,000)............................... $4,800,000Variable cost of goods sold ($30 × 120,000)......... 3,600,000 Contribution margin............................................... 1,200,000Fixed costs:

Fixed manufacturing costs.................................. $600,000Selling and administrative.................................. 400,000 1,000,000



Eldrick Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $85







Solution:

Unit product cost = $29 + $13 + $7 = $49Sales revenue ($85 × 4,400)................................... $374,000Variable costs:







Solution:


Sales revenue ($85 ×4,400).................................... $374,000Cost of goods sold ($75 × 4,400)........................... 330,000 Gross margin.......................................................... 44,000Selling and administrative expenses:





Kiefer Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $133







Solution:









Solution:

Unit fixed manufacturing overhead= $24Unit product cost = $34 + $52 + $2 + $24 = $112

Sales revenue ($133 × 6,800)................................. $904,400Cost of goods sold ($112 × 6,800)......................... 761,600 Gross margin.......................................................... 142,800Selling and administrative expenses:




Danahy Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:

Variable costing net operating income, last year............. $52,000Variable costing net operating income, this year............ $68,000Fixed manufacturing overhead costs released from

inventory under absorption costing, last year.............. $4,000Fixed manufacturing overhead costs deferred in

inventory under absorption costing, this year.............. $6,000

135. What was the absorption costing net operating income last year?A) $50,000B) $48,000C) $52,000D) $56,000


Solution:

Absorption costing net income = Variable costing net operating income – Fixed manufacturing overhead released = $52,000 – $4,000 = $48,000

136. What was the absorption costing net operating income this year?A) $62,000B) $74,000C) $70,000D) $66,000


Solution:

Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $68,000 + $6,000 = $74,000


Helmers Corporation manufactures a variety of products. Variable costing net operating income last year was $86,000 and this year was $103,000. Last year, $32,000 in fixed manufacturing overhead costs were released from inventory under absorption costing. This year, $12,000 in fixed manufacturing overhead costs were deferred in inventory under absorption costing.




Solution:

Absorption costing net income = Variable costing net operating income – Fixed manufacturing overhead released = $86,000 – $32,000 = $54,000



Solution:

Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $103,000 + $12,000 = $115,000


Norenberg Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:

Variable costing net operating income, last year............. $88,600Variable costing net operating income, this year............ $96,100Increase in ending inventory, last year............................ 600 unitsDecrease in ending inventory, this year........................... 2,300 unitsFixed manufacturing overhead cost per unit................... $7



Solution:

Fixed manufacturing overhead deferred = 600 × $7 = $4,200Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $88,600 + $4,200 = $92,800



Solution:

Fixed manufacturing overhead released = 2,300 × $7 = $16,100Absorption costing net income = Variable costing net operating income − Fixed manufacturing overhead released = $96,100 − $16,100 = $80,000


Rosal Corporation manufactures a variety of products. Variable costing net operating income was $74,700 last year and was $82,300 this year. Last year, ending inventory increased by 2,600 units. This year, ending inventory decreased by 1,400 units. Fixed manufacturing overhead cost is $5 per unit.




Solution:

Fixed manufacturing overhead deferred = $5 × 2,600 = $13,000Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $74,700 + $13,000 = $87,700



Solution:

Fixed manufacturing overhead released = $5 × 1,400 = $7,000Absorption costing net income = Variable costing net operating income − Fixed manufacturing overhead released = $82,300 − $7,000 = $75,300

Essay Questions

143. Lehne Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $112





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 operating incomes for

the month.


Ans:

a. & b. Unit product costs

Variable costing:Direct materials.......................................... $13Direct labor................................................ 49Variable manufacturing overhead.............. 6 Unit product cost........................................ $68

Absorption costing:Direct materials.......................................... $13Direct labor................................................ 49Variable manufacturing overhead.............. 6Fixed manufacturing overhead.................. 31 Unit product cost........................................ $99

c. & d. Income statements

Variable costing income statementSales....................................................................... $336,000Less variable expenses:

Variable cost of goods sold:Beginning inventory........................................ $ 34,000Add variable manufacturing costs................... 176,800 Goods available for sale................................... 210,800Less ending inventory...................................... 6,800

Variable cost of goods sold................................. 204,000Variable selling and administrative.................... 30,000 234,000

Contribution margin............................................... 102,000Less fixed expenses:



Absorption costing income statementSales....................................................................... $336,000Cost of goods sold:

Beginning inventory........................................... $ 49,500Add cost of goods manufactured........................ 257,400 Goods available for sale...................................... 306,900Less ending inventory......................................... 9,900 297,000

Gross margin.......................................................... 39,000

Selling and administrative expenses expenses:Variable selling and administrative.................... 30,000Fixed selling and administrative......................... 15,000 45,000

Net operating income............................................. $( 6,000 )

e. ReconciliationVariable costing net operating income............................ $ 6,400Deduct fixed manufacturing overhead costs released

from inventory under absorption costing..................... (12,400)Absorption costing net operating income........................ $(6,000)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Hard

144. Maffei Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $138




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 operating incomes for

the month.


Ans:

a. & b. Unit product costs

Variable costing:Direct materials.......................................... $42Direct labor................................................ 32Variable manufacturing overhead.............. 1 Unit product cost........................................ $75

Absorption costing:Direct materials.......................................... $ 42Direct labor................................................ 32Variable manufacturing overhead.............. 1Fixed manufacturing overhead.................. 39 Unit product cost........................................ $114

c. & d. Income statements

Variable costing income statementSales....................................................................... $966,000Less variable expenses:

Variable cost of goods sold:Beginning inventory........................................ $ 0Add variable manufacturing costs................... 540,000 Goods available for sale................................... 540,000Less ending inventory...................................... 15,000

Variable cost of goods sold................................. 525,000Variable selling and administrative.................... 56,000 581,000

Contribution margin............................................... 385,000Less fixed expenses:



Absorption costing income statement....................Sales....................................................................... $966,000Cost of goods sold:

Beginning inventory........................................... $ 0Add cost of goods manufactured........................ 820,800 Goods available for sale...................................... 820,800Less ending inventory......................................... 22,800 798,000

Gross margin.......................................................... 168,000Selling and administrative expenses expenses:

Variable selling and administrative.................... 56,000Fixed selling and administrative......................... 98,000 154,000


e. ReconciliationVariable costing net operating income............................ $ 6,200Add fixed manufacturing overhead costs deferred in

inventory under absorption costing.............................. 7,800 Absorption costing net operating income........................ $14,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Medium


145. The Dean Company produces and sells a single product. The following data refer to the year just completed:

Beginning inventory........................................................ 0Units produced................................................................. 20,000Units sold......................................................................... 19,000

Selling price per unit........................................................ $350Selling and administrative expenses:

Variable per unit........................................................... $10Fixed (total).................................................................. $225,000

Manufacturing costs:Direct materials cost per unit........................................ $190Direct labor cost per unit.............................................. $40Variable manufacturing overhead cost per unit............ $25Fixed manufacturing overhead (total).......................... $250,000


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 operating income figures

in (b) and (c) above.

Ans:

a. Cost per unit under absorption costing:Direct materials................................................... $190.00Direct labor.......................................................... 40.00Variable overhead................................................ 25.00Fixed overhead ($250,000 / 20,000).................... 12.50 Total cost per unit................................................ $267.50

Cost per unit under variable costing:Direct materials................................................... $190.00Direct labor.......................................................... 40.00Variable overhead................................................ 25.00 Total cost per unit................................................ $255.00

b. Absorption costing income statement:Sales................................................................................. $6,650,000Cost of goods sold:

Beginning inventory..................................................... $ 0Add cost of goods manufactured (20,000 @ $267.50). 5,350,000 Cost of goods available................................................ 5,350,000Less ending inventory (1,000 @ $267.50)................... 267,500 5,082,500

Gross profit...................................................................... 1,567,500Selling and administrative expenses expenses:

[($10 × 19,000) + $225,000]........................................ 415,000 Net operating income....................................................... $1,152,500

c. Variable costing income statement:Sales................................................................................. $6,650,000Cost of goods sold:

Beginning inventory..................................................... $ 0Cost of goods manufactured (20,000 @ $255)............ 5,100,000 Cost of goods available................................................ 5,100,000Less ending inventory (1,000 @ $255)........................ 255,000

Variable cost of goods sold............................................. 4,845,000Variable selling and administrative expenses:

(19,000 @ $10)............................................................. 190,000 5,035,000 Contribution margin........................................................ 1,615,000Less fixed expenses:

Manufacturing overhead............................................... 250,000Selling and administrative............................................ 225,000 475,000

Net operating income...................................................... $1,140,000


d. Net operating income under variable costing.................. $1,140,000Add fixed manufacturing overhead costs deferred in

inventory under absorption costing (1,000 @ $12.50) 12,500 Net operating income under absorption costing.............. $1,152,500


146. Pacht Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $121





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

operating income for the month. (Hint: Use the reconciliation method.)

Ans:

a. Variable costing unit product costDirect materials....................................... $35Direct labor.............................................. 36Variable manufacturing overhead........... 3 Unit product cost..................................... $74

b. Variable costing income statementSales........................................................ $834,900Less variable expenses:

Variable cost of goods sold:Beginning inventory.......................... $ 29,600Add variable manufacturing costs..... 503,200 Goods available for sale.................... 532,800Less ending inventory....................... 22,200

Variable cost of goods sold.................. 510,600Variable selling and administrative...... 27,600 538,200

Contribution margin................................ 296,700Less fixed expenses:

Fixed manufacturing overhead............. 197,200Fixed selling and administrative.......... 96,600 293,800

Net operating income.............................. $ 2,900

c. Computation of absorption costing net operating incomeFixed manufacturing overhead per unit................................ $29.00Change in inventories (units)................................................ (100)

Variable costing net operating income.................................. $2,900Deduct fixed manufacturing overhead costs released from

inventory under absorption costing................................... (2,900)Absorption costing net operating income.............................. $ 0

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Hard


147. Qin Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $77




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

operating income for the month. (Hint: Use the reconciliation method.)

Ans:

a. Variable costing unit product costDirect materials....................................... $27Direct labor.............................................. 13Variable manufacturing overhead........... 5 Unit product cost..................................... $45

b. Variable costing income statementSales........................................................ $500,500Less variable expenses:

Variable cost of goods sold:Beginning inventory.......................... $ 0Add variable manufacturing costs..... 301,500 Goods available for sale.................... 301,500Less ending inventory....................... 9,000

Variable cost of goods sold.................. 292,500Variable selling and administrative...... 45,500 338,000

Contribution margin................................ 162,500Less fixed expenses:

Fixed manufacturing overhead............. 100,500Fixed selling and administrative.......... 58,500 159,000

Net operating income.............................. $ 3,500

c. Computation of absorption costing net operating incomeFixed manufacturing overhead per unit............................... $15.00Change in inventories (units)............................................... 200

Variable costing net operating income................................ $3,500Add fixed manufacturing overhead costs deferred in

inventory under absorption costing.................................. 3,000 Absorption costing net operating income............................ $6,500



148. Olguin Corporation produces a single product and has the following cost structure:


Direct materials................................................... $15Direct labor......................................................... $13Variable manufacturing overhead....................... $7Variable selling and administrative expenses..... $5

Fixed costs per year:Fixed manufacturing overhead........................... $328,000Fixed selling and administrative expenses.......... $324,000

Required:

a. Compute the unit product cost under absorption costing. Show your work!b. Compute the unit product cost under variable costing. Show your work!

Ans:

a. Absorption Costing:Direct materials.................................................................................... $ 15Direct labor.......................................................................................... 13Variable manufacturing overhead........................................................ 7 Total variable production cost.............................................................. 35Fixed manufacturing overhead ($328,000/4,000 units of product)..... 82 Unit product cost.................................................................................. $117

b. Variable Costing:Direct materials.................................................................................... $15Direct labor.......................................................................................... 13Variable manufacturing overhead........................................................ 7 Unit product cost.................................................................................. $35

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

149. Quates Corporation produces a single product and has the following cost structure:

Number of units produced each year............................... 3,000Variable costs per unit:

Direct materials............................................................ $27Direct labor................................................................... $96Variable manufacturing overhead................................ $1Variable selling and administrative expenses............... $4

Fixed costs per year:Fixed manufacturing overhead..................................... $219,000Fixed selling and administrative expenses................... $153,000

Required:

Compute the unit product cost under absorption costing. Show your work!

Ans:

Direct materials................................................................................. $ 27Direct labor....................................................................................... 96Variable manufacturing overhead..................................................... 1 Total variable production cost.......................................................... 124Fixed manufacturing overhead ($219,000/3,000 units of product). . 73 Unit product cost............................................................................... $197



150. Davitt Corporation produces a single product and has the following cost structure:

Number of units produced each year............................... 1,000Variable costs per unit:


Fixed costs per year:Fixed manufacturing overhead..................................... $88,000Fixed selling and administrative expenses................... $24,000

Required:

Compute the unit product cost under variable costing. Show your work!

Ans:

Direct materials................................................................ $57Direct labor...................................................................... 20Variable manufacturing overhead................................... 2 Unit product cost............................................................. $79


151. Murphy Inc., which produces a single product, has provided the following data for its most recent month of operation:



Fixed costs:Fixed manufacturing overhead..................................... $84,000Fixed selling and administrative expenses................... $119,000

The company had no beginning or ending inventories.

Required:

a. Compute the unit product cost under absorption costing. Show your work!b. Compute the unit product cost under variable costing. Show your work!

Ans:

a. Absorption costing:Direct materials.............................................................................. $37Direct labor..................................................................................... 43Variable manufacturing overhead.................................................. 5 Total variable production cost........................................................ 85Fixed manufacturing overhead ($84,000/7,000 units of product).. 12 Unit product cost............................................................................ $97

b. Variable costing:Direct materials.............................................................................. $37Direct labor..................................................................................... 43Variable manufacturing overhead.................................................. 5 Unit product cost............................................................................ $85



152. Vancott Inc., which produces a single product, has provided the following data for its most recent month of operation:





Required:

Compute the unit product cost under absorption costing. Show your work!

Ans:

Direct materials.................................................................................. $ 93Direct labor......................................................................................... 58Variable manufacturing overhead...................................................... 1 Total variable production cost............................................................ 152Fixed manufacturing overhead ($192,000/6,000 units of product).... 32 Unit product cost................................................................................ $184


153. Schlenz Inc., which produces a single product, has provided the following data for its most recent month of operation:





Required:

Compute the unit product cost under variable costing. Show your work!

Ans:

Direct materials.......................................... $12Direct labor................................................ 34Variable manufacturing overhead.............. 4 Unit product cost........................................ $50



154. Miller Company produces a single product. The company had the following results for its first two years of operation:

Year 1 Year 2Sales........................................................... $1,200,000 $1,200,000Cost of goods sold...................................... 800,000 680,000 Gross margin.............................................. 400,000 520,000Selling and administrative expenses.......... 300,000 300,000 Net operating 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 operating income for Year 2 under absorption costing was higher than the net operating income for Year 1, although the same number of units were sold in each year.

Ans:a. Cost per unit under absorption costing:

Year 1 Year 2Variable production cost per unit........................ $ 5 $ 5Fixed 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 $1,200,000Cost of goods sold ($5 × 40,000)........................... 200,000 200,000Variable selling and administrative expense

($2 × 40,000)...................................................... 80,000 80,000 Contribution margin............................................... 920,000 920,000Fixed expenses:

Fixed manufacturing overhead........................... 600,000 600,000Fixed selling and administrative expense........... 220,000 220,000

Net operating income............................................. $ 100,000 $ 100,000

c. Reconciliation of absorption costing and variable costing net operating incomes:

Year 1 Year 2Net operating income under variable costing................... $100,000 $100,000Fixed manufacturing overhead deferred in (released

from) inventory: Year 2 (10,000 units × $12 per unit). 120,000 Net operating income under absorption costing............... $100,000 $220,000

d. The increase in production in Year 2, in the face of level sales, caused a buildup of inventory and a deferral of a portion of the overhead costs of Year 2 to the next year. This deferral of cost relieved Year 2 of $120,000 of fixed manufacturing overhead. Income for Year 2 was $120,000 higher than income of Year 1, even though the same number of units was sold each year. By increasing production and building up inventory, the company was able to increase profits without increasing sales. This is major criticism of the absorption costing approach.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3,4 Level: Medium


155. Neukirchen Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $140





Required:

a. Prepare an income statement for the month using the contribution format and the variable costing method.

b. Prepare an income statement for the month using the absorption costing method.

Ans:

a. Variable costing income statementSales........................................................... $630,000Less variable expenses:

Variable cost of goods sold:Beginning inventory............................ $ 24,900Add variable manufacturing costs....... 356,900 Goods available for sale....................... 381,800Less ending inventory.......................... 8,300 Variable cost of goods sold.................. 373,500

Variable selling and administrative........ 27,000 400,500 Contribution margin................................... 229,500Less fixed expenses:

Fixed manufacturing overhead............... 150,500Fixed selling and administrative............. 72,000 222,500


b. Absorption costing income statementSales........................................................... $630,000Cost of goods sold:

Beginning inventory............................... $ 35,400Add cost of goods manufactured............ 507,400 Goods available for sale.......................... 542,800Less ending inventory............................. 11,800 531,000

Gross margin.............................................. 99,000Selling and administrative expenses

expenses:Variable selling and administrative........ 27,000Fixed selling and administrative............. 72,000 99,000

Net operating income................................. $ 0

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard


156. Oates Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price............................................... $120




Required:

a. Prepare an income statement for the month using the contribution format and the variable costing method.

b. Prepare an income statement for the month using the absorption costing method.

Ans:a. Variable costing income statement

Sales........................................................... $888,000Less variable expenses:

Variable cost of goods sold:Beginning inventory............................ $ 0Add variable manufacturing costs....... 532,000 Goods available for sale....................... 532,000Less ending inventory.......................... 14,000

Variable cost of goods sold..................... 518,000Variable selling and administrative........ 74,000 592,000

Contribution margin................................... 296,000Less fixed expenses:

Fixed manufacturing overhead............... 228,000Fixed selling and administrative............. 66,600 294,600


b. Absorption costing income statementSales....................................................................... $888,000Cost of goods sold:

Beginning inventory........................................... $ 0Add cost of goods manufactured........................ 760,000 Goods available for sale...................................... 760,000Less ending inventory......................................... 20,000 740,000

Gross margin.......................................................... 148,000Selling and administrative expenses expenses:

Variable selling and administrative.................... 74,000Fixed selling and administrative......................... 66,600 140,600


AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium


157. Succulent Juice Company manufactures and sells premium tomato juice by the gallon. Succulent just finished its first year of operations. The following data relates to this first year:

Number of gallons produced........................................... 75,000Number of gallons sold.................................................... 70,000Sales price........................................................................ $3.00 per gallonUnit product cost under variable costing......................... $1.45 per gallonTotal contribution margin................................................ $84,000Total fixed manufacturing overhead cost........................ $63,000Total fixed selling and administrative expense............... $10,500

Required:

Using the absorption costing method, prepare Succulent Juice Company's income statement for the year.

Ans:

Sales (70,000 × $3.00).................................................... $210,000Cost of goods sold:

Beginning inventory.................................................... $ 0Add cost of goods manufactured (75,000 × $2.29*). . . 171,750 Goods available for sale............................................... 171,750Less ending inventory (5,000 × $2.29)........................ 11,450 160,300

Gross margin................................................................... 49,700Selling and administrative expenses**........................... 35,000 Net operating income...................................................... $ 14,700

* $1.45 + ($63,000/75,000)** Total variable cost = $210,000 - $84,000 = $126,000;Variable selling and administrative = $126,000 - ($1.45 × 70,000) = $24,500Total selling and administrative = $24,500 + $10,500

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

158. Worrel Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:

Variable costing net operating income, last year............. $71,000Variable costing net operating income, this year............ $92,000Fixed manufacturing overhead costs deferred in

inventory under absorption costing, last year.............. $2,000Fixed manufacturing overhead costs released from

inventory under absorption costing, this year.............. $11,000

Required:

a. Determine the absorption costing net operating income last year. Show your work!b. Determine the absorption costing net operating income this year. Show your work!

Ans:

a. and b.Last Year This Year

Variable costing net operating income............................ $71,000 $92,000Add fixed manufacturing overhead costs deferred

in inventory under absorption costing.......................... 2,000 0Deduct fixed manufacturing overhead costs

released from inventory under absorption costing....... 0 (11,000)Absorption costing net operating income........................ $73,000 $81,000



159. Corbett Corporation manufactures a variety of products. Last year, variable costing net operating income was $72,000. The fixed manufacturing overhead costs deferred in inventory under absorption costing amounted to $29,000.Required:

Determine the absorption costing net operating income last year. Show your work!

Ans:

Variable costing net operating income............................. $72,000Add fixed manufacturing overhead costs deferred in

inventory under absorption costing............................... 29,000Deduct fixed manufacturing overhead costs released

from inventory under absorption costing...................... 0 Absorption costing net operating income......................... $101,000


160. Last year, Rasband Corporation's variable costing net operating income was $57,000. The fixed manufacturing overhead costs deferred in inventory under absorption costing amounted to $30,000.

Required:

Determine the absorption costing net operating income last year. Show your work!Ans:

Variable costing net operating income............................ $57,000Add fixed manufacturing overhead costs deferred in

inventory under absorption costing.............................. 30,000Deduct fixed manufacturing overhead costs released

from inventory under absorption costing..................... 0 Absorption costing net operating income........................ $87,000


161. Phinisee Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:

Variable costing net operating income, last year............. $82,700Variable costing net operating income, this year............ $87,800Increase in ending inventory, last year............................ 900Decrease in ending inventory, this year........................... 3,100Fixed manufacturing overhead cost per unit................... $2

Required:

a. Determine the absorption costing net operating income for last year. Show your work!

b. Determine the absorption costing net operating income for this year. Show your work!

Ans:a. and b.

Last Year This YearChange in units in ending inventory........................... $900 ($3,100)Fixed manufacturing overhead cost per unit.............. $2 $2Change in fixed manufacturing overhead in ending

inventory................................................................. $1,800 ($6,200)

Variable costing net operating income....................... $82,700 $87,800Add fixed manufacturing overhead costs deferred in

inventory under absorption costing......................... 1,800 0Deduct fixed manufacturing overhead costs released

from inventory under absorption costing................ 0 (6,200 )Absorption costing net operating income................... $84,500 $81,600



162. Last year, Denogean Corporation's variable costing net operating income was $64,200 and ending inventory increased by 1,900 units. Fixed manufacturing overhead cost per unit was $4.

Required:

Determine the absorption costing net operating income for last year. Show your work!

Ans:

Change in units in ending inventory..................................... $1,900Fixed manufacturing overhead cost per unit........................ $4Change in fixed manufacturing overhead in ending

inventory........................................................................... $7,600

Variable costing net operating income................................. $64,200Add fixed manufacturing overhead costs deferred in

inventory under absorption costing................................... 7,600Deduct fixed manufacturing overhead costs released from

inventory under absorption costing................................... 0 Absorption costing net operating income............................. $71,800


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