Chapter 07

Chapter 7 Variable Costing: A Tool for Management 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. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 4. In the preparation of financial statements using variable costing, fixed manufacturing overhead is treated as a period cost. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 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 FN: Reporting LO: 2

AICPA BB: Critical Thinking Level: Easy

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Chapter 7 Variable Costing: A Tool for Management 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 FN: Reporting LO: 3

AICPA BB: Critical Thinking 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 FN: Reporting LO: 4

AICPA BB: Critical Thinking 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 FN: Reporting LO: 4

AICPA BB: Critical Thinking Level: Medium

12. Variable costing is not permitted for income tax purposes, but it is widely accepted for external financial reports. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium 13. A basic concept of the contribution approach and variable costing is that fixed costs are not important in an organization. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium 14. Variable costing is better suited to cost-volume-profit calculations than absorption costing. Ans: True AACSB: Analytic AICPA FN: Reporting LO: 4

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Chapter 7 Variable Costing: A Tool for Management 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 FN: Reporting LO: 5

AICPA BB: Critical Thinking Level: Easy

Multiple Choice Questions 16. How would the following costs be classified (product or period) under variable costing at a retail clothing store? A) B) C) D)

Cost of purchasing clothing Sales commissions Product Product Product Period Period Product 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 cost B) property taxes on the factory building C) sales manager's salary D) all of the above Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

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Chapter 7 Variable Costing: A Tool for Management 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

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Chapter 7 Variable Costing: A Tool for Management 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.) A) B) C) D)

Variable costing Absorption costing Increase Increase Decrease Increase Decrease Decrease No effect Decrease

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 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. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 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 cost B) fixed selling and administrative expense C) variable selling and administrative expense D) all of the above Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

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Chapter 7 Variable Costing: A Tool for Management 24. Which of the following will usually be found on an income statement prepared using the absorption costing method? A) B) C) D)

Contribution Margin Gross Margin Yes Yes Yes No No Yes 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 costing C) equal to net operating income reported under absorption costing. D) higher or lower because no generalization can be made. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

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Chapter 7 Variable Costing: A Tool for Management 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 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium 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. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium

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Chapter 7 Variable Costing: A Tool for Management 30. Under the theory of constraints (TOC), which of the following is treated as a period cost? A) B) C) D)

Direct labor Direct material Yes Yes Yes No No Yes 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 decrease B) $200 decrease C) $0 D) $200 increase Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted Solution: Change in inventory × Fixed manufacturing costs per unit = 100 × $2 = $200 decrease

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Chapter 7 Variable Costing: A Tool for Management 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......................... Fixed manufacturing overhead cost for the year............. Fixed selling and administrative cost for the year........... Units (calculators) produced and sold.............................

$5.20 per unit $260,000 $180,000 400,000

What is Shun's unit product cost under absorption costing for last year? A) $4.10 B) $4.55 C) $5.85 D) $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 unit Unit product cost = $5.20 + $0.65 = $5.85

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Chapter 7 Variable Costing: A Tool for Management 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..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 7,100 7,000 100

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$33 $53 $1 $7

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$170,40 0 $7,000

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

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Chapter 7 Variable Costing: A Tool for Management 34. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 1,900 1,700 200

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$33 $32 $2 $6

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$72,20 0 $6,800

What is the unit product cost for the month under absorption costing? A) $67 B) $105 C) $111 D) $73 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $72,200 ÷ 1,900 = $38 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead cost + Fixed manufacturing overhead cost = $33 + $32 + $2 + $38 = $105

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Chapter 7 Variable Costing: A Tool for Management 35. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Selling price...............................................

$79

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 6,600 6,300 300

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$14 $30 $4 $8

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$46,20 0 $88,20 0

What is the total period cost for the month under the variable costing approach? A) $138,600 B) $134,400 C) $46,200 D) $184,800 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Total variable selling and administrative cost = $8 × 6,300 = $50,400 Period cost = Total variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost = $50,400 + $46,200 + $88,200 = $184,800

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Chapter 7 Variable Costing: A Tool for Management 36. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Selling price...............................................

$97

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 2,200 2,100 100

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$32 $25 $2 $9

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$8,800 $37,80 0

What is the total period cost for the month under the absorption costing approach? A) $56,700 B) $65,500 C) $8,800 D) $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 = $18,900 Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $18,900 + $37,800 = $56,700

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Chapter 7 Variable Costing: A Tool for Management 37. Mullee Corporation produces a single product and has the following cost structure: Number of units produced each year..................... Variable costs per unit: Direct materials.................................................. Direct labor......................................................... Variable manufacturing overhead...................... Variable selling and administrative expense...... Fixed costs per year: Fixed manufacturing overhead........................... Fixed selling and administrative expense...........

7,000 $51 $12 $2 $5 $441,00 0 $112,00 0

The unit product cost under absorption costing is: A) $149 B) $65 C) $63 D) $128 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $441,000 ÷ 7,000 = $63 Unit product cost = $63 + $51 + $12 + $2 = $128

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Chapter 7 Variable Costing: A Tool for Management 38. Stoneberger Corporation produces a single product and has the following cost structure: Number of units produced each year..................... Variable costs per unit: Direct materials.................................................. Direct labor......................................................... Variable manufacturing overhead...................... Variable selling and administrative expense...... Fixed costs per year: Fixed manufacturing overhead........................... Fixed selling and administrative expense...........

4,000 $50 $72 $6 $3 $296,00 0 $76,000

The unit product cost under variable costing is: A) $128 B) $125 C) $202 D) $131 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit product cost = $50 + $72 + $6 = $128

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Chapter 7 Variable Costing: A Tool for Management 39. Beamish Inc., which produces a single product, has provided the following data for its most recent month of operations: Number of units produced..................................... Variable costs per unit: Direct materials................................................... Direct labor......................................................... Variable manufacturing overhead....................... Variable selling and administrative expense...... Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative expense...........

8,000 $37 $56 $4 $2 $312,00 0 $448,00 0

There were no beginning or ending inventories. The unit product cost under absorption costing was: A) $93 B) $97 C) $136 D) $194 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $312,000 ÷ 8,000 = $39 Unit product cost = $37 + $56 + $4 + $39 = $136

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Chapter 7 Variable Costing: A Tool for Management 40. Kray Inc., which produces a single product, has provided the following data for its most recent month of operations: Number of units produced............................................... Variable costs per unit: Direct materials............................................................ Direct labor................................................................... Variable manufacturing overhead................................ Variable selling and administrative expense................ Fixed costs: Fixed manufacturing overhead..................................... Fixed selling and administrative expense.....................

3,000 $91 $13 $7 $6 $237,00 0 $165,00 0

There were no beginning or ending inventories. The unit product cost under variable costing was: A) $111 B) $190 C) $117 D) $110 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $91 + $13 + $7 = $111

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Chapter 7 Variable Costing: A Tool for Management 41. The following data pertain to last year's operations at Clarkson, Incorporated, a company that produces a single product: Units in beginning inventory..................... Units produced........................................... Units sold...................................................

0 100,000 98,000

Selling price per unit..................................

$10.00

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$1.50 $2.50 $1.00 $2.00

Fixed costs per year: Fixed manufacturing overhead............... Fixed selling and administrative.............

$200,00 0 $50,000

What was the absorption costing net operating income last year? A) $44,000 B) $48,000 C) $50,000 D) $49,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit fixed manufacturing overhead = $200,000 ÷ 100,000 = $2 Unit product cost = $1.50 + $2.50 + $1 + $2 = $7 Absorption costing income statement Sales ($10 × 98,000)............................................ Cost of goods sold ($7 × 98,000)......................... Gross margin........................................................ Selling and administrative expenses expenses: Variable selling and administrative................... $196,000 Fixed selling and administrative....................... 50,000 Net operating income...........................................

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$980,000 686,000 294,000 246,000 $ 48,000

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Chapter 7 Variable Costing: A Tool for Management 42. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Selling price...............................................

$135

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 6,400 6,200 200

Variable costs per unit: Direct materials.......................................... Direct labor................................................ Variable manufacturing overhead............. Variable selling and administrative...........

$49 $38 $6 $11

Fixed costs: Fixed manufacturing overhead.................. Fixed selling and administrative................

$108,80 0 $74,400

The total contribution margin for the month under the variable costing approach is: A) $155,000 B) $260,400 C) $192,200 D) $83,400 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Sales revenue ($135 × 6,200)................................ Variable cost:......................................................... Direct materials ($49 × 6,200)............................ Direct labor ($38 × 6,200).................................. Variable manufacturing overhead ($6 × 6,200). Variable selling and administrative ($11 × 6,200).............................................................. Contribution margin..............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$837,000 $303,800 235,000 37,200 68,200

644,800 $192,200

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Chapter 7 Variable Costing: A Tool for Management 43. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Selling price...............................................

$123

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 1,000 900 100

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$41 $26 $4 $6

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$17,00 0 $11,70 0

What is the net operating income for the month under variable costing? A) $12,700 B) $5,600 C) $1,700 D) $14,400 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Sales ($123 × 900)................................................. Variable cost of goods sold ($71 × 900)................ Less variable selling and administrative ($6 × 900) Contribution margin............................................... Fixed cost: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

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$110,700 63,900 5,400 41,400 $17,000 11,700

28,700 $ 12,700

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Chapter 7 Variable Costing: A Tool for Management 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) $15,000 B) $25,000 C) $40,000 D) $55,000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium 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 = $15,000 Net 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 units B) 8,800 units C) 11,200 units D) 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 = $8 Unit fixed manufacturing overhead = $11 – $8 = $3 Difference in net income between methods ÷ Unit fixed manufacturing overhead = ($3,600) ÷ $3 per unit = (1,200) units Units produced = Units sold + Change in inventory = 10,000 + (1,200) = 8,800

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Chapter 7 Variable Costing: A Tool for Management 46. Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations: Units (spice racks) produced................................. Units (spice racks) sold.......................................... Absorption costing net operating income.............. Variable costing net operating income..................

Year 1 40,000 37,000 $44,00 0 $38,00 0

Year 2 40,000 41,000 $52,00 0 ???

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) $48,000 B) $50,000 C) $54,000 D) $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 = $2 Variable 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

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Chapter 7 Variable Costing: A Tool for Management 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) $69,000 B) $90,900 C) $21,900 D) $112,800 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 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) $10,700 B) $74,100 C) $63,400 D) $52,700 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Solution: Absorption costing net income = Variable costing net income – fixed manufacturing overhead costs released from inventory = $63,400 – $10,700 = $52,700

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Chapter 7 Variable Costing: A Tool for Management 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) $2,600 B) $93,700 C) $96,300 D) $98,900 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium 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) $41,200 B) $11,200 C) $63,600 D) $52,400 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium 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

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Chapter 7 Variable Costing: A Tool for Management 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...................................................... Direct labor............................................................ Variable manufacturing overhead......................... Fixed manufacturing overhead..............................

$150,00 0 $180,00 0 $135,00 0 $210,00 0

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) $25 B) $39 C) $34 D) $35 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard Solution: Unit selling price ($840,000 ÷ 12,000).................. Less direct materials ($150,000 ÷ 15,000)............ Less direct labor ($180,000 ÷ 15,000)................... Less variable manufacturing overhead ($135,000 ÷ 15,000)............................................................ Less variable selling and administrative ($60,000 ÷ 12,000)............................................................ Contribution margin..............................................

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$70 $10 12 9 5

36 $34

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Chapter 7 Variable Costing: A Tool for Management 52. Under absorption costing, the carrying value on the balance sheet of the ending inventory for the year would be: A) $135,000 B) $93,000 C) $105,000 D) $0 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium Solution: Unit fixed manufacturing overhead = $210,000 ÷ 15,000 = $14 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $10 + $12 + $9 + $14 = $45 Carrying 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 costing B) $30,000 higher than under absorption costing C) $30,000 lower than under absorption costing D) $42,000 lower than under absorption costing Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit fixed manufacturing overhead × Change in inventory in units = $14 × (15,000 − 12,000) = $14 × 3,000 = $42,000 Since 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.

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 54-61: Abdi Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$81

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 7,300 7,000 300

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$20 $30 $7 $11

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$65,70 0 $21,00 0

54. What is the unit product cost for the month under variable costing? A) $77 B) $66 C) $68 D) $57 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Direct materials + Direct labor + Variable manufacturing overhead = $20 + $30 + $7 = $57

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Chapter 7 Variable Costing: A Tool for Management 55. What is the unit product cost for the month under absorption costing? A) $66 B) $77 C) $57 D) $68 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $65,700 ÷ 7,300 = $9 Unit 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) $91,000 B) $168,000 C) $105,000 D) $25,300 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit selling price................................................... Less unit variable costs: Direct materials.................................................. Direct labor......................................................... Variable manufacturing overhead...................... Variable selling and administrative.................... Contribution margin.............................................. Total contribution margin = $13 × 7,000 = $91,000

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$81 $20 30 7 11

68 $13

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Chapter 7 Variable Costing: A Tool for Management 57. The total gross margin for the month under the absorption costing approach is: A) $105,000 B) $124,800 C) $7,000 D) $91,000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit fixed manufacturing overhead = $9 Unit product cost under absorption costing = $20 + $30 + $7 + $9 = $66 $567,00 Sales revenue ($81 × 7,000).................................. 0 462,00 Cost of goods sold ($66 × 7,000).......................... 0 $105,00 Gross margin.......................................................... 0 58. What is the total period cost for the month under the variable costing approach? A) $65,700 B) $163,700 C) $98,000 D) $86,700 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard Solution: Variable selling and administrative cost + Fixed costs = ($11 × 7,000) + ($65,700 + $21,000) = $77,000 + $86,700 = $163,700

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Chapter 7 Variable Costing: A Tool for Management 59. What is the total period cost for the month under the absorption costing approach? A) $98,000 B) $65,700 C) $21,000 D) $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) $2,700 B) $4,300 C) $7,000 D) $(12,800) Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: $567,00 0

Sales revenue ($81 × 7,000).................................. Variable costs: Product cost ($57 × 7,000)................................. Variable selling and administrative ($11 × 7,000).............................................................. Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Contribution margin..............................................

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$399,00 0 77,000 $ 65,700 21,000

476,000 91,000 86,700 $ 4,300

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management 61. What is the net operating income for the month under absorption costing? A) $7,000 B) $4,300 C) $(12,800) D) $2,700 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Sales revenue ($81 × 7,000).................................. Cost of goods sold ($66 × 7,000).......................... Gross margin.......................................................... Selling and administrative expenses: Variable selling and administrative ($11 × 7,000).............................................................. Fixed selling and administrative......................... Net operating income.............................................

$567,00 0 462,000 105,000 $77,000 21,000

98,000 $ 7,000

Use the following to answer questions 62-65: Hopkins Company manufactures a single product. The following data pertain to the company's operations last year: Selling price per unit.................................. Variable costs per unit: Production............................................... Selling and administration...................... Fixed costs in total: Production............................................... Selling and administration......................

$24 $8 $2 $48,00 0 $36,00 0

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.

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Chapter 7 Variable Costing: A Tool for Management 62. Under variable costing, the unit product cost is: A) $8.00 B) $10.00 C) $12.00 D) $14.00 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Production cost = $8 63. Under absorption costing, the unit product cost is: A) $8.00 B) $10.00 C) $12.00 D) $15.00 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $48,000 ÷ 12,000 = $4 Unit product cost = $8 + $4 = $12

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Chapter 7 Variable Costing: A Tool for Management 64. The net operating income under variable costing would be: A) $64,000 B) $60,000 C) $56,000 D) $52,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Sales revenue ($24 × 10,000)................................ Variable costs: Variable cost of goods sold ($8 × 10,000)......... Variable selling and administrative ($2 × 10,000)............................................................ Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

$240,00 0 $80,000 20,000 $48,000 36,000

100,000 140,000 84,000 $ 56,000

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

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 66-68: Phearsum Corporation manufactures a parachute. Shown below is Phearsum's cost structure:

Manufacturing cost.................. Selling and administrative.......

Variable cost per parachute $160 $10

Total fixed cost for the year $342,000 $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) $28,000 B) $32,000 C) $34,000 D) $49,100 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit product cost = $160 Total cost of ending finished goods inventory = $160 × 200 = $32,000

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Chapter 7 Variable Costing: A Tool for Management 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 lower B) net operating income would have been $10,900 lower C) net operating income would have been $12,900 lower D) 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 = $85.50 Unit product cost under absorption costing = $160 + $85.50 = $245.50 Unit gross margin = $310 − $245.50 = $64.50 Cost savings ($10 × 200).................................... $ 2,000 Less: 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 affected B) net operating income would have been $38,000 higher C) net operating income would have been $57,000 higher D) 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

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 69-72: Feery Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$110

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 3,800 3,700 100

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$32 $34 $6 $11

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$68,40 0 $14,80 0

69. What is the unit product cost for the month under variable costing? A) $72 B) $90 C) $83 D) $101 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Direct materials + Direct labor + Variable manufacturing overhead = $32 + $34 + $6 = $72

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Chapter 7 Variable Costing: A Tool for Management 70. What is the unit product cost for the month under absorption costing? A) $83 B) $90 C) $72 D) $101 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $68,400 ÷ 3,800 = $18 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $32 + $34 + $6 + $18 = $90 71. What is the net operating income for the month under variable costing? A) $1,800 B) $16,700 C) $9,500 D) $18,500 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: $407,00 0

Sales revenue ($110 × 3,700)................................ Variable costs: Variable cost of goods sold ($72 × 3,700)......... Variable selling and administrative ($11 × 3,700).............................................................. Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$266,40 0 40,700 $ 68,400 14,800

307,100 99,900 83,200 $ 16,700

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Chapter 7 Variable Costing: A Tool for Management 72. What is the net operating income for the month under absorption costing? A) $18,500 B) $1,800 C) $9,500 D) $16,700 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Sales revenue ($110 × 3,700)................................ Cost of goods sold ($90 × 3,700).......................... Gross margin.......................................................... Selling and administrative expenses costs: Variable selling and administrative ($11 × 3,700).............................................................. Fixed selling and administrative......................... Net operating income.............................................

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$407,00 0 333,000 74,000 $40,700 14,800

55,500 $ 18,500

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 73-76: Jarbo Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$129

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

500 3,600 3,800 300

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$13 $59 $4 $8

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$97,20 0 $64,60 0

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. 73. What is the unit product cost for the month under variable costing? A) $76 B) $103 C) $84 D) $111 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium Solution: Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $13 + $59 + $4 = $76

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Chapter 7 Variable Costing: A Tool for Management 74. What is the unit product cost for the month under absorption costing? A) $84 B) $76 C) $103 D) $111 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium Solution: Unit fixed manufacturing overhead = $97,200 ÷ 3,600 = $27 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $13 + $59 + $4 + $27 = $103 75. What is the net operating income for the month under variable costing? A) $3,800 B) $24,400 C) $9,200 D) $8,100 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: $490,20 0

Sales revenue ($129 × 3,800)................................ Variable costs: Variable cost of goods sold ($76 × 3,800)......... Variable selling and administrative ($8 × 3,800).............................................................. Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

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$288,80 0 30,400 $ 97,200 64,600

319,200 171,000 161,800 $ 9,200

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management 76. What is the net operating income for the month under absorption costing? A) $8,100 B) $9,200 C) $3,800 D) $24,400 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Sales revenue ($129 × 3,800)................................ Cost of goods sold ($103 × 3,800)........................ Gross margin.......................................................... Selling and administrative expenses costs: Variable selling and administrative ($8 × 3,800).............................................................. Fixed selling and administrative......................... Net operating income.............................................

$490,20 0 391,400 98,800 $30,400 64,600

95,000 $ 3,800

Use the following to answer questions 77-79: 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.......................................... Direct labor................................................ Variable manufacturing overhead............. Fixed manufacturing overhead.................. Variable selling and administrative........... Fixed selling and administrative................

$96,00 0 $48,00 0 $72,00 0 $60,00 0 $12,00 0 $36,00 0

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Chapter 7 Variable Costing: A Tool for Management 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.

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Chapter 7 Variable Costing: A Tool for Management 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) $43,200 B) $45,600 C) $55,200 D) $64,800 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium Solution: Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 30,000 units = ($96,000 + $48,000 + $72,000) ÷ 30,000 = $7.20 Total 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) $60,000 B) $115,200 C) $117,600 D) $124,800 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 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 = $9.20 Unit variable selling and administrative cost = $12,000 ÷ 30,000 = $0.40 $384,00 Sales revenue ($16 × 24,000)................................ 0 Cost of goods sold ($9.20 × 24,000)..................... 220,800 Gross margin.......................................................... 163,200 Selling and administrative expenses: Variable selling and administrative ($0.40 × 24,000)............................................................ $ 9,600 Fixed selling and administrative......................... 36,000 45,600 $117,60 Net operating income............................................. 0

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Chapter 7 Variable Costing: A Tool for Management

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Chapter 7 Variable Costing: A Tool for Management 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 volume B) an increase in production volume with no increase in sales volume C) both A and B above D) none of the above Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Use the following to answer questions 80-83: Blake Corporation, which produces a single product, has provided the following absorption costing income statement for the month of June: Blake Corporation Income Statement For the month ended June 30 Sales (9,500 units).................................... Cost of goods sold: Beginning inventory.............................. Add cost of goods manufactured.......... Goods available for sale........................ Less ending Inventory........................... Cost of goods sold.................................... Gross margin............................................ Selling and administrative expenses: Fixed..................................................... Variable................................................. Net operating income...............................

$285,00 0 $ 16,000 160,000 176,000 24,000 152,000 133,000 $ 75,000 19,000

94,000 $ 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.

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Chapter 7 Variable Costing: A Tool for Management 80. The contribution margin per unit during June was: A) $20 B) $18 C) $16 D) $14 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Selling price ($285,000 ÷ 9,500)........................... Less variable product cost..................................... Less unit variable selling and administrative ($19,000 ÷ 9,500)............................................... Unit contribution margin

$30 10 2 $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) $10,000 B) $12,000 C) $15,000 D) $24,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium Solution: Ending inventory = Beginning inventory + Units produced − Units sold = 1,000 + 10,000 − 9,500 = 1,500 Carrying value = Ending inventory in units × Variable production cost = 1,500 × $10 = $15,000

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Chapter 7 Variable Costing: A Tool for Management 82. Net operating income under the variable costing method for June would be: A) $36,000 B) $40,000 C) $53,000 D) $60,000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Sales revenue (9,500 units).................................... Variable costs: Variable cost of goods sold ($10 × 9,500)......... Variable selling and administrative.................... Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

$285,00 0 $95,000 19,000 $60,000 75,000

114,000 171,000 135,000 $ 36,000

83. The break-even point in units for the month under variable costing would be: A) 6,000 units B) 6,750 units C) 7,500 units D) 9,000 units Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium Solution: Sales revenue (9,500 units).................................... Variable costs: Variable cost of goods sold ($10 × 9,500)......... Variable selling and administrative.................... Contribution margin..............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$285,00 0 $95,000 19,000

114,00 0 $171,00 0

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Chapter 7 Variable Costing: A Tool for Management Fixed 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

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 84-87: Haaikon Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$86

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 3,400 3,300 100

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$17 $39 $1 $8

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$40,80 0 $23,10 0

84. What is the unit product cost for the month under variable costing? A) $77 B) $57 C) $69 D) $65 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit product cost = Direct materials + Direct Labor + Variable manufacturing overhead = $17 + $39 + $1 = $57

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Chapter 7 Variable Costing: A Tool for Management 85. The total contribution margin for the month under the variable costing approach is: A) $56,100 B) $28,500 C) $95,700 D) $69,300 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: $283,80 0

Sales revenue ($86 × 3,300).................................. Variable costs: Variable cost of goods sold ($57 × 3,300).........

$188,10 0

Variable selling and administrative ($8 × 3,300)..............................................................

26,40 0

Contribution margin..............................................

214,50 0 $ 69,300

86. What is the total period cost for the month under the variable costing approach? A) $40,800 B) $90,300 C) $49,500 D) $63,900 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard 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

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Chapter 7 Variable Costing: A Tool for Management 87. What is the net operating income for the month under variable costing? A) $6,600 B) $(300) C) $5,400 D) $1,200 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: $283,80 0

Sales revenue ($86 × 3,300).................................. Variable costs: Variable cost of goods sold ($57 × 3,300)......... Variable selling and administrative ($8 × 3,300).............................................................. Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$188,10 0 26,400 $ 40,800 23,100

214,500 69,300 63,900 $ 5,400

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 88-89: Ibarra Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$81

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 6,900 6,600 300

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$22 $28 $6 $5

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$69,00 0 $66,00 0

88. What is the unit product cost for the month under variable costing? A) $71 B) $66 C) $56 D) $61 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Product cost = Direct materials + Direct labor + Variable manufacturing overhead = $22 + $28 + $6 = $56

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Chapter 7 Variable Costing: A Tool for Management 89. What is the net operating income for the month under variable costing? A) $0 B) $(19,800) C) $(3,000) D) $3,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: $534,60 0

Sales revenue ($81 × 6,600).................................. Variable costs: Variable cost of goods sold ($56 × 6,600)......... Variable selling and administrative ($5 × 6,600).............................................................. Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

$369,60 0 33,000 $ 69,000 66,000

402,600 132,000 135,000 $ (3,000)

Use the following to answer questions 90-92: Yankee Company manufactures a single product. The company has the following cost structure: Variable costs per unit: Production................................... Selling and administrative.......... Fixed costs in total: Production................................... Selling and administrative..........

$4 $1 $12,00 0 $8,000

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

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Chapter 7 Variable Costing: A Tool for Management 90. Under variable costing, the unit product cost would be: A) $4 B) $5 C) $7 D) $8 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 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 costing B) $1,500 less than under absorption costing C) $2,000 higher than under absorption costing D) $2,000 less than under absorption costing Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium Solution: Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3 Difference 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

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Chapter 7 Variable Costing: A Tool for Management 92. Under absorption costing, the cost of goods sold for the year would be: A) $28,000 B) $24,500 C) $17,500 D) $14,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3 Product cost = $4 + $3 = $7 Cost of goods sold = $7 × 3,500 = $24,500 Use the following to answer questions 93-94: Peterson Company produces a single product. Data from the company's records for last year follow: Units in beginning inventory..................... Units produced........................................... Units sold................................................... Sales........................................................... Manufacturing costs: Variable.................................................. Fixed....................................................... Selling and administrative expenses: Variable.................................................. Fixed.......................................................

0 70,000 60,000 $1,400,00 0 $630,000 $315,000 $98,000 $140,000

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Chapter 7 Variable Costing: A Tool for Management 93. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be: A) $90,000 B) $104,000 C) $105,000 D) $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 = $9 Change in inventory in units = 70,000 − 60,000 = 10,000 Carrying value of ending inventory = $9 × 10,000 = $90,000 94. Under the absorption costing method, Peterson's net operating income would be: A) $217,000 B) $307,000 C) $352,000 D) $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 = $13.50 Sales revenue...................................................... Cost of goods sold ($13.50 × 60,000)................. Gross margin....................................................... Selling and administrative expenses: Variable selling and administrative................. Fixed selling and administrative...................... Net operating income..........................................

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$1,400,000 810,000 590,000 $ 98,000 140,000

238,000 $ 352,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 95-97: McCoy Corporation manufactures a computer monitor. Shown below is McCoy's cost structure: Variable cost Total fixed cost per monitor for the year Manufacturing cost........................ $75.20 $912,000 Selling 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) $266,000 B) $741,000 C) $1,261,600 D) $2,173,600 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

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$2,109,000 $912,00 0 456,00 0

1,368,000 $ 741,000

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Chapter 7 Variable Costing: A Tool for Management 96. Under the absorption costing method, what is McCoy's net operating income for its first year? A) $266,000 B) $786,600 C) $1,261,600 D) $2,173,600 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Gross margin........................................................ Selling and administrative expenses: Variable selling and administrative ($14.60 × 95,000)........................................................... Fixed selling and administrative....................... Net operating income...........................................

$2,629,600 $1,387,000 456,000

1,843,000 $ 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 income B) McCoy's absorption costing unit product cost will decrease in the second year C) McCoy's gross margin will be equal to its contribution margin in its second year D) Both A and B above E) none of the above Ans: E AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 98-100: 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.............................. Direct labor.................................... Manufacturing overhead: Variable...................................... Fixed........................................... Selling and administrative: Variable...................................... Fixed...........................................

$28,00 0 $14,00 0 $56,00 0 $63,00 0 $7,000 $42,00 0

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) $12,250 B) $20,125 C) $23,000 D) $26,250 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium Solution: Product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $28,000 + $14,000 + $56,000 + $63,000 = $161,000 Unit product cost = $161,000 ÷ 4,000 = $40.25 Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $40.25 × (4,000 − 3,500) = $20,125

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Chapter 7 Variable Costing: A Tool for Management 99. Under the variable costing method, what is Mediocre's actual net operating income for its first year? A) $42,000 B) $54,250 C) $55,125 D) $63,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 4,000 units = ($28,000 + $14,000 + $56,000) ÷ 4,000 = $24.50 Sales revenue ($72 × 3,500).................................. Variable costs: Variable cost of goods sold ($24.50 × 3,500).... Variable selling and administrative ($1.75 × 3,500).............................................................. Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative.........................

$252,00 0 $85,750 6,125

91,87 5 160,125

$63,000 42,000

Net operating income.............................................

105,00 0 $ 55,125

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 volume B) an increase in production volume with no increase in sales volume C) both A and B above D) none of the above Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 101-102: 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: Raw materials................................ Direct labor.................................... Factory overhead........................... Selling and administrative.............

Fixed Costs Variable Costs -- $1.50 per unit produced -- $1.00 per unit produced $150,000 $0.50 per unit produced $80,000 $0.50 per unit sold

101. The unit product cost under absorption costing is: A) $2.50 B) $3.00 C) $3.50 D) $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 = $1.50 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $1.50 + $1.00 + $0.50 + $1.50 = $4.50

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Chapter 7 Variable Costing: A Tool for Management 102. The net operating income under variable costing is: A) $50,000 B) $80,000 C) $90,000 D) $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 $560,00 0

Sales revenue ($7 × 80,000).................................. Variable costs: Variable cost of goods sold ($3 × 80,000)......... Variable selling and administrative ($0.50 × 80,000)............................................................ Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

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$240,00 0 40,00 0 150,000 80,00 0

280,00 0 280,000 230,00 0 $ 50,000

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 103-106: Gadepelli Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$106

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory...........................

0 1,600 1,400 200

Variable costs per unit: Direct materials....................................... Direct labor............................................. Variable manufacturing overhead........... Variable selling and administrative........

$15 $14 $6 $4

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$51,20 0 $23,80 0

103. The total contribution margin for the month under the variable costing approach is: A) $54,600 B) $99,400 C) $93,800 D) $42,600 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Medium Solution: Unit product cost = $15 + $14 + $6 = $35 Sales revenue ($106 × 1,400)................................ Variable costs: Variable cost of goods sold ($35 × 1,400)......... Variable selling and administrative ($4 × 1,400)..............................................................

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$148,40 0 $49,000 5,600 54,60

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Contribution margin..............................................

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0 $ 93,800

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Chapter 7 Variable Costing: A Tool for Management 104. The total gross margin for the month under the absorption costing approach is: A) $25,200 B) $54,600 C) $68,000 D) $93,800 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit fixed manufacturing overhead = $51,200 ÷ 1,600 = $32 Unit product cost = $15 + $14 + $6 + $32 = $67 Sales revenue ($106 × 1,400)............................... Cost of goods sold ($67 × 1,400)......................... Gross margin........................................................

$148,400 93,800 $ 54,600

105. What is the total period cost for the month under the variable costing approach? A) $75,000 B) $80,600 C) $29,400 D) $51,200 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard 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

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Chapter 7 Variable Costing: A Tool for Management 106. What is the total period cost for the month under the absorption costing approach? A) $29,400 B) $80,600 C) $23,800 D) $51,200 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard Solution: Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $4 × 1,400 + $23,800 = $29,400 Use the following to answer questions 107-109: During its first year of operations, Carlos Manufacturing Company incurred the following costs to produce 8,000 units of its product: Direct materials.......................................... Direct labor................................................ Variable manufacturing overhead............. Fixed manufacturing overhead..................

$7 per unit $3 per unit $18 per unit $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 unit Fixed selling and administrative................ $60,000 in total Assume that direct labor is a variable cost.

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Chapter 7 Variable Costing: A Tool for Management 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) $15,000 B) $42,125 C) $44,000 D) $47,125 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $450,000 ÷ 8,000 = $56.25 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $7 + $3 + $18 + $56.25 = $84.25 Total 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) $15,000 B) $42,125 C) $44,000 D) $14,000 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 = $7 + $3 + $18 = $28 Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $28 × (8,000 − 7,500) = $28 × 500 = $14,000

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Chapter 7 Variable Costing: A Tool for Management 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) $86,000 B) $90,000 C) $104,125 D) $146,250 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium 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 Use the following to answer questions 110-111: Kern Company produces a single product. Selected information concerning the operations of the company follow: Units in beginning inventory................................. Units produced....................................................... Units sold............................................................... Direct materials...................................................... Direct labor Variable factory overhead..................................... Fixed factory overhead.......................................... Variable selling and administrative expenses........ Fixed selling and administrative expenses............

0 10,000 9,000 $40,00 0 $20,00 0 $12,00 0 $25,00 0 $4,500 $30,00 0

Assume that direct labor is a variable cost.

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Chapter 7 Variable Costing: A Tool for Management 110. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be: A) $7,200 B) $7,650 C) $8,000 D) $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 = $7.20 Ending inventory = Units produced − Units sold = 10,000 − 9,000 = 1,000 Carrying 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 = $2.50 Difference 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) = $2,500 Since inventory has increased (production exceeds sales), absorption costing net income would be higher than variable costing net income.

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 112-113: Lina Co. produced 100,000 units of its single product during the month of June. Costs incurred during June were as follows: Direct materials...................................................... Direct labor............................................................ Variable manufacturing overhead......................... Fixed manufacturing overhead.............................. Variable selling and administrative expenses........ Fixed selling and administrative expenses............

$100,00 0 $80,000 $40,000 $50,000 $12,000 $45,000

Assume that direct labor is a variable cost. 112. The unit product cost under absorption costing would be: A) $3.27 B) $2.70 C) $2.20 D) $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

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Chapter 7 Variable Costing: A Tool for Management 113. The unit product cost under variable costing would be: A) $2.82 B) $2.70 C) $2.32 D) $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 Use the following to answer questions 114-115: Bauxar Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$98

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 2,200 2,100 100

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$29 $17 $5 $9

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$33,00 0 $29,40 0

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Chapter 7 Variable Costing: A Tool for Management 114. What is the unit product cost for the month under variable costing? A) $75 B) $66 C) $51 D) $60 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Direct materials + Direct labor + Variable manufacturing overhead = $29 + $17 + $5 = $51 115. What is the unit product cost for the month under absorption costing? A) $66 B) $51 C) $60 D) $75 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $33,000 ÷ 2,200 = $15 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $29 + $17 + $5 + $15 = $66

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 116-118: Crossbow Corp. produces a single product. Data concerning June's operations follow: Units in beginning inventory......... Units produced............................... Units sold.......................................

0 6,000 5,000

Variable costs per unit: Manufacturing............................ Selling and administrative..........

$7 $3

Fixed costs in total: Manufacturing............................ Selling and administrative..........

$12,00 0 $3,000

116. Under variable costing, ending inventory on the balance sheet would be valued at: A) $10,000 B) $7,000 C) $9,000 D) $12,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit product cost = $7 Ending inventory = Beginning inventory + Units produced − Units sold = 0 + 6,000 − 5,000 = 1,000 Value of ending inventory = Unit product cost × Units in ending inventory = $7 × 1,000 = $7,000

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Chapter 7 Variable Costing: A Tool for Management 117. Under absorption costing, ending inventory on the balance sheet would be valued at: A) $10,000 B) $7,000 C) $9,000 D) $12,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Unit fixed manufacturing overhead = $12,000 ÷ 6,000 = $2 Unit product cost = $7 + $2 = $9 Value 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 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 119-120: Dearne Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$67

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 5,200 4,900 300

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$20 $16 $3 $4

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$41,60 0 $73,50 0

119. What is the total period cost for the month under the variable costing approach? A) $41,600 B) $93,100 C) $115,100 D) $134,700 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

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Chapter 7 Variable Costing: A Tool for Management 120. What is the total period cost for the month under the absorption costing approach? A) $93,100 B) $73,500 C) $134,700 D) $41,600 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard Solution: Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $4 × 4,900 + $73,500 = $93,100 Use the following to answer questions 121-122: Tat Corporation produces a single product and has the following cost structure: Number of units produced each year..................... Variable costs per unit: Direct materials.................................................. Direct labor......................................................... Variable manufacturing overhead...................... Variable selling and administrative expenses..... Fixed costs per year: Fixed manufacturing overhead........................... Fixed selling and administrative expenses.........

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7,000 $77 $89 $5 $3 $532,00 0 $574,00 0

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Chapter 7 Variable Costing: A Tool for Management 121. The unit product cost under absorption costing is: A) $247 B) $166 C) $332 D) $171 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $532,000 ÷ 7,000 = $76 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $77 + $89 + $5 + $76 = $247 122. The unit product cost under variable costing is: A) $169 B) $171 C) $247 D) $174 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $77 + $89 + $5 = $171

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 123-124: Caruso Inc., which produces a single product, has provided the following data for its most recent month of operations: Number of units produced.................................... Variable costs per unit: Direct materials................................................. Direct labor....................................................... Variable manufacturing overhead..................... Variable selling and administrative expense..... Fixed costs: Fixed manufacturing overhead.......................... Fixed selling and administrative expense.........

4,000 $39 $71 $5 $8 $220,00 0 $308,00 0

There were no beginning or ending inventories. 123. The unit product cost under absorption costing was: A) $170 B) $115 C) $255 D) $110 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit fixed manufacturing overhead = $220,000 ÷ 4,000 = $55 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $39 + $71 + $5 + $55 = $170

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Chapter 7 Variable Costing: A Tool for Management 124. The unit product cost under variable costing was: A) $115 B) $123 C) $118 D) $170 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution: Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $39 + $71 + $5 = $115 Use the following to answer questions 125-126: Cloer Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$95

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 8,900 8,500 400

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$10 $48 $5 $11

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$106,80 0 $68,000

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Chapter 7 Variable Costing: A Tool for Management 125. The total contribution margin for the month under the variable costing approach is: A) $178,500 B) $71,700 C) $272,000 D) $170,000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit product cost = $10 + $48 + $5 = $63 $807,50 0

Sales revenue ($95 × 8,500).................................. Variable costs: Variable cost of goods sold ($63 × 8,500).........

$535,50 0

Variable selling and administrative ($11 × 8,500)..............................................................

93,50 0

Contribution margin..............................................

629,00 0 $178,50 0

126. The total gross margin for the month under the absorption costing approach is: A) $200,000 B) $170,000 C) $8,500 D) $178,500 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit fixed manufacturing overhead = $106,800 ÷ 8,900 = $12 Unit product cost = $10 + $48 + $5 + $12 = $75 Sales revenue ($95 × 8,500)................................. Cost of goods sold ($75 × 8,500)......................... Gross margin........................................................

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$807,500 637,500 $ 170,000

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 127-128: 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) $320,000 B) $400,000 C) $240,000 D) $300,000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 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) $320,000 B) $240,000 C) $340,000 D) $400,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Total fixed cost = Per unit fixed cost × Units produced Total fixed cost = $2 × 50,000 = $100,000 Total 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

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 129-130: 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) $200,000 B) $440,000 C) $600,000 D) $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 = $3 Unit product cost = $30 + $3 = $33 Sales revenue ($40 × 120,000)............................. $4,800,000 Cost of goods sold ($33 × 120,000)..................... 3,960,000 Gross margin........................................................ 840,000 Selling and administrative expenses cost............. 400,000 Net operating income........................................... $ 440,000

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Chapter 7 Variable Costing: A Tool for Management 130. Osawa's net operating income using variable costing would be: A) $200,000 B) $440,000 C) $800,000 D) $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).............................. Variable cost of goods sold ($30 × 120,000)......... Contribution margin.............................................. Fixed costs: Fixed manufacturing costs.................................. Selling and administrative.................................. Net operating income.............................................

$4,800,000 3,600,000 1,200,000 $600,000 400,000

1,000,000 $ 200,000

Use the following to answer questions 131-132: Eldrick Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$85

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 4,500 4,400 100

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$29 $13 $7 $5

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$117,00 0 $4,400

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Chapter 7 Variable Costing: A Tool for Management 131. What is the net operating income for the month under variable costing? A) $10,100 B) $2,600 C) $15,000 D) $17,600 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit product cost = $29 + $13 + $7 = $49 $374,00 0

Sales revenue ($85 × 4,400).................................. Variable costs: Variable cost of goods sold ($49 × 4,400)......... Variable selling and administrative ($5 × 4,400).............................................................. Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

7-88

$215,60 0 22,00 0 $117,00 0 4,40 0

237,60 0 136,400

121,40 0 $ 15,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management 132. What is the net operating income for the month under absorption costing? A) $17,600 B) $10,100 C) $15,000 D) $2,600 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit fixed manufacturing overhead = $117,000 ÷ 4,500 = $26 Unit product cost = $29 + $13 + $7 + $26 = $75 Sales revenue ($85 ×4,400).................................. Cost of goods sold ($75 × 4,400)......................... Gross margin........................................................ Selling and administrative expenses: Variable selling and administrative ($5 × 4,400)............................................................. Fixed selling and administrative....................... Net operating income...........................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$374,000 330,000 44,000 $22,000 4,400

26,400 $ 17,600

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Chapter 7 Variable Costing: A Tool for Management Use the following to answer questions 133-134: Kiefer Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$133

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

600 6,600 6,800 400

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$34 $52 $2 $11

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$158,40 0 $61,200

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.

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Chapter 7 Variable Costing: A Tool for Management 133. What is the net operating income for the month under variable costing? A) $6,800 B) $9,600 C) $29,200 D) $11,600 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: $904,40 0

Sales revenue ($133 × 6,800)................................ Variable costs: Variable cost of goods sold ($88 × 6,800)......... Variable selling and administrative ($11 × 6,800).............................................................. Contribution margin.............................................. Fixed costs: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$598,40 0 74,80 0 $158,40 0 61,20 0

673,20 0 231,200

219,60 0 $ 11,600

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Chapter 7 Variable Costing: A Tool for Management 134. What is the net operating income for the month under absorption costing? A) $11,600 B) $6,800 C) $29,200 D) $9,600 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Solution: Unit fixed manufacturing overhead= $24 Unit product cost = $34 + $52 + $2 + $24 = $112 Sales revenue ($133 × 6,800)............................... Cost of goods sold ($112 × 6,800)....................... Gross margin........................................................ Selling and administrative expenses: Variable selling and administrative ($11 × 6,800)............................................................. Fixed selling and administrative....................... Net operating income...........................................

$904,400 761,600 142,800 $74,800 61,200

136,000 6,800

$

Use the following to answer questions 135-136: 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............. Variable costing net operating income, this year............ Fixed manufacturing overhead costs released from inventory under absorption costing, last year.............. Fixed manufacturing overhead costs deferred in inventory under absorption costing, this year..............

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$52,00 0 $68,00 0 $4,000 $6,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management 135. What was the absorption costing net operating income last year? A) $50,000 B) $48,000 C) $52,000 D) $56,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 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) $62,000 B) $74,000 C) $70,000 D) $66,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Solution: Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $68,000 + $6,000 = $74,000 Use the following to answer questions 137-138: 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.

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Chapter 7 Variable Costing: A Tool for Management 137. What was the absorption costing net operating income last year? A) $106,000 B) $86,000 C) $54,000 D) $118,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Solution: Absorption costing net income = Variable costing net operating income – Fixed manufacturing overhead released = $86,000 – $32,000 = $54,000 138. What was the absorption costing net operating income this year? A) $81,000 B) $83,000 C) $115,000 D) $123,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Solution: Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $103,000 + $12,000 = $115,000 Use the following to answer questions 139-140: 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............. $88,600 Variable costing net operating income, this year............ $96,100 Increase in ending inventory, last year............................ 600 units Decrease in ending inventory, this year........................... 2,300 units Fixed manufacturing overhead cost per unit................... $7

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Chapter 7 Variable Costing: A Tool for Management 139. What was the absorption costing net operating income last year? A) $92,800 B) $88,600 C) $84,400 D) $76,700 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Solution: Fixed manufacturing overhead deferred = 600 × $7 = $4,200 Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $88,600 + $4,200 = $92,800 140. What was the absorption costing net operating income this year? A) $80,000 B) $100,500 C) $108,000 D) $112,200 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Solution: Fixed manufacturing overhead released = 2,300 × $7 = $16,100 Absorption costing net income = Variable costing net operating income − Fixed manufacturing overhead released = $96,100 − $16,100 = $80,000 Use the following to answer questions 141-142: 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.

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Chapter 7 Variable Costing: A Tool for Management 141. What was the absorption costing net operating income last year? A) $61,700 B) $74,700 C) $80,700 D) $87,700 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Solution: Fixed manufacturing overhead deferred = $5 × 2,600 = $13,000 Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $74,700 + $13,000 = $87,700 142. What was the absorption costing net operating income this year? A) $75,300 B) $89,300 C) $76,300 D) $68,700 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Solution: Fixed manufacturing overhead released = $5 × 1,400 = $7,000 Absorption costing net income = Variable costing net operating income − Fixed manufacturing overhead released = $82,300 − $7,000 = $75,300

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Chapter 7 Variable Costing: A Tool for Management 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

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

500 2,600 3,000 100

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$13 $49 $6 $10

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$80,60 0 $15,00 0

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Required: a. What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing? c. Prepare an income statement for the month using the contribution format and the variable costing method. d. Prepare an income statement for the month using the absorption costing method. e. Reconcile the variable costing and absorption costing net operating incomes for the month.

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Chapter 7 Variable Costing: A Tool for Management Ans: a. & b. Unit product costs Variable costing: Direct materials.......................................... Direct labor................................................ Variable manufacturing overhead............. Unit product cost.......................................

$1 3 49 6 $6 8

Absorption costing: Direct materials.......................................... Direct labor................................................ Variable manufacturing overhead............. Fixed manufacturing overhead.................. Unit product cost.......................................

$1 3 49 6 31 $9 9

c. & d. Income statements Variable costing income statement Sales....................................................................... Less variable expenses: Variable cost of goods sold: Beginning inventory........................................ Add variable manufacturing costs................... Goods available for sale.................................. Less ending inventory..................................... Variable cost of goods sold................................ Variable selling and administrative.................... Contribution margin.............................................. Less fixed expenses: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income............................................. Absorption costing income statement Sales....................................................................... Cost of goods sold: Beginning inventory...........................................

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$336,000 $ 34,000 176,800 210,800 6,800 204,000 30,000 80,600 15,000

234,000 102,000 95,600 $ 6,400 $336,000

$ 49,500

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management Add cost of goods manufactured........................ Goods available for sale..................................... Less ending inventory......................................... Gross margin..........................................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

257,400 306,900 9,900

297,000 39,000

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Chapter 7 Variable Costing: A Tool for Management Selling and administrative expenses expenses: Variable selling and administrative.................... Fixed selling and administrative......................... Net operating income.............................................

30,000 15,000

e. Reconciliation Variable costing net operating income............................ Deduct fixed manufacturing overhead costs released from inventory under absorption costing..................... Absorption costing net operating income........................

45,000 $( 6,000) $ 6,400 (12,400) $(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

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 7,200 7,000 200

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$42 $32 $1 $8

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$280,80 0 $98,000

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.

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Chapter 7 Variable Costing: A Tool for Management e. Reconcile the variable costing and absorption costing net operating incomes for the month.

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Chapter 7 Variable Costing: A Tool for Management Ans: a. & b. Unit product costs Variable costing: Direct materials.......................................... Direct labor................................................ Variable manufacturing overhead............. Unit product cost....................................... Absorption costing: Direct materials.......................................... Direct labor................................................ Variable manufacturing overhead............. Fixed manufacturing overhead.................. Unit product cost.......................................

$42 32 1 $75 $ 42 32 1 39 $11 4

c. & d. Income statements Variable costing income statement Sales....................................................................... Less variable expenses: Variable cost of goods sold: Beginning inventory........................................ Add variable manufacturing costs................... Goods available for sale.................................. Less ending inventory..................................... Variable cost of goods sold................................ Variable selling and administrative.................... Contribution margin.............................................. Less fixed expenses: Fixed manufacturing overhead........................... Fixed selling and administrative......................... Net operating income.............................................

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$966,000 $ 0 540,000 540,000 15,000 525,000 56,000 280,800 98,000

581,000 385,000 378,800 $ 6,200

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management Absorption costing income statement.................... Sales....................................................................... Cost of goods sold: Beginning inventory........................................... Add cost of goods manufactured........................ Goods available for sale..................................... Less ending inventory......................................... Gross margin.......................................................... Selling and administrative expenses expenses: Variable selling and administrative.................... Fixed selling and administrative......................... Net operating income............................................. e. Reconciliation Variable costing net operating income............................ Add fixed manufacturing overhead costs deferred in inventory under absorption costing.............................. Absorption costing net operating income........................

$966,000 $ 0 820,800 820,800 22,800 56,000 98,000

798,000 168,000 154,000 $ 14,000

$ 6,200 7,800 $14,00 0

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

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Chapter 7 Variable Costing: A Tool for Management 145. The Dean Company produces and sells a single product. The following data refer to the year just completed: Beginning inventory........................................................ Units produced................................................................. Units sold.........................................................................

0 20,000 19,000

Selling price per unit........................................................ Selling and administrative expenses: Variable per unit...........................................................

$350

Fixed (total).................................................................. Manufacturing costs: Direct materials cost per unit........................................ Direct labor cost per unit.............................................. Variable manufacturing overhead cost per unit............ Fixed manufacturing overhead (total)..........................

$10 $225,00 0 $190 $40 $25 $250,00 0

Assume that direct labor is a variable cost. Required: a. Compute the cost of a single unit of product under both the absorption costing and variable costing approaches. b. Prepare an income statement for the year using absorption costing. c. Prepare an income statement for the year using variable costing. d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

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Chapter 7 Variable Costing: A Tool for Management Ans: a. Cost per unit under absorption costing: Direct materials................................................... Direct labor.......................................................... Variable overhead............................................... Fixed overhead ($250,000 / 20,000)................... Total cost per unit................................................

$190.0 0 40.00 25.00 12.50 $267.5 0

Cost per unit under variable costing: Direct materials................................................... Direct labor.......................................................... Variable overhead............................................... Total cost per unit................................................ b .

$190.0 0 40.00 25.00 $255.0 0

Absorption costing income statement: Sales................................................................................. Cost of goods sold: Beginning inventory..................................................... Add cost of goods manufactured (20,000 @ $267.50). Cost of goods available................................................ Less ending inventory (1,000 @ $267.50)................... Gross profit...................................................................... Selling and administrative expenses expenses:

$6,650,00 0 $ 0 5,350,000 5,350,000 267,500

5,082,500 1,567,500 415,00 0 $1,152,50 0

[($10 × 19,000) + $225,000]........................................ Net operating income....................................................... c. Variable costing income statement:

$6,650,00 0

Sales................................................................................. Cost of goods sold: $ Beginning inventory..................................................... Cost of goods manufactured (20,000 @ $255)............ Cost of goods available................................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

0 5,100,000 5,100,000

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Chapter 7 Variable Costing: A Tool for Management Less ending inventory (1,000 @ $255)........................ Variable cost of goods sold............................................. Variable selling and administrative expenses: (19,000 @ $10)............................................................. Contribution margin........................................................ Less fixed expenses: Manufacturing overhead............................................... Selling and administrative............................................ Net operating income......................................................

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255,000 4,845,000 190,000 250,000 225,00 0

5,035,000 1,615,000 475,00 0 $1,140,00 0

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Chapter 7 Variable Costing: A Tool for Management d .

Net operating income under variable costing.................. Add fixed manufacturing overhead costs deferred in inventory under absorption costing (1,000 @ $12.50) Net operating income under absorption costing..............

$1,140,00 0 12,50 0 $1,152,50 0

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Medium 146. Pacht Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$121

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

400 6,800 6,900 300

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$35 $36 $3 $4

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$197,20 0 $96,600

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Required: a. What is the unit product cost for the month under variable costing? b. Prepare an income statement for the month using the contribution format and the variable costing method. c. Without preparing an income statement, determine the absorption costing net operating income for the month. (Hint: Use the reconciliation method.)

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Chapter 7 Variable Costing: A Tool for Management Ans: a. Variable costing unit product cost Direct materials....................................... Direct labor.............................................. Variable manufacturing overhead........... Unit product cost..................................... b .

Variable costing income statement Sales........................................................ Less variable expenses: Variable cost of goods sold: Beginning inventory......................... Add variable manufacturing costs.... Goods available for sale.................... Less ending inventory....................... Variable cost of goods sold.................. Variable selling and administrative..... Contribution margin................................ Less fixed expenses: Fixed manufacturing overhead............ Fixed selling and administrative.......... Net operating income..............................

$3 5 36 3 $7 4

$834,900 $ 29,600 503,200 532,800 22,200 510,600 27,600 197,200 96,600

538,200 296,700 293,800 $ 2,900

c. Computation of absorption costing net operating income Fixed manufacturing overhead per unit................................ Change in inventories (units)................................................ Variable costing net operating income.................................. Deduct fixed manufacturing overhead costs released from inventory under absorption costing................................... Absorption costing net operating income..............................

$29.00 (100) $2,900 (2,900) $ 0

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

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Chapter 7 Variable Costing: A Tool for Management 147. Qin Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$77

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 6,700 6,500 200

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$27 $13 $5 $7

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$100,50 0 $58,500

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.)

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Chapter 7 Variable Costing: A Tool for Management Ans: a. Variable costing unit product cost Direct materials....................................... Direct labor.............................................. Variable manufacturing overhead........... Unit product cost..................................... b .

Variable costing income statement Sales........................................................ Less variable expenses: Variable cost of goods sold: Beginning inventory......................... Add variable manufacturing costs.... Goods available for sale.................... Less ending inventory....................... Variable cost of goods sold.................. Variable selling and administrative..... Contribution margin................................ Less fixed expenses: Fixed manufacturing overhead............ Fixed selling and administrative.......... Net operating income..............................

$2 7 13 5 $4 5

$500,500 $ 0 301,500 301,500 9,000 292,500 45,500 100,500 58,500

338,000 162,500 159,000 $ 3,500

c. Computation of absorption costing net operating income Fixed manufacturing overhead per unit............................... Change in inventories (units)............................................... Variable costing net operating income................................ Add fixed manufacturing overhead costs deferred in inventory under absorption costing.................................. Absorption costing net operating income............................

$15.0 0 200 $3,50 0 3,00 0 $6,50 0

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

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Chapter 7 Variable Costing: A Tool for Management 148. Olguin Corporation produces a single product and has the following cost structure: Number of units produced each year..................... Variable costs per unit: Direct materials.................................................. Direct labor......................................................... Variable manufacturing overhead...................... Variable selling and administrative expenses..... Fixed costs per year: Fixed manufacturing overhead........................... Fixed selling and administrative expenses.........

4,000 $15 $13 $7 $5 $328,00 0 $324,00 0

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:

Unit product cost..................................................................................

$ 1 5 13 7 35 82 $11 7

Variable Costing: Direct materials.................................................................................... Direct labor.......................................................................................... Variable manufacturing overhead........................................................ Unit product cost..................................................................................

$15 13 7 $35

Direct materials.................................................................................... Direct labor.......................................................................................... Variable manufacturing overhead........................................................ Total variable production cost.............................................................. Fixed manufacturing overhead ($328,000/4,000 units of product).....

b .

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

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

AICPA FN: Reporting

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Chapter 7 Variable Costing: A Tool for Management 149. Quates Corporation produces a single product and has the following cost structure: Number of units produced each year............................... Variable costs per unit: Direct materials............................................................ Direct labor................................................................... Variable manufacturing overhead................................ Variable selling and administrative expenses............... Fixed costs per year: Fixed manufacturing overhead..................................... Fixed selling and administrative expenses...................

3,000 $27 $96 $1 $4 $219,00 0 $153,00 0

Required: Compute the unit product cost under absorption costing. Show your work! Ans: Direct materials................................................................................. Direct labor....................................................................................... Variable manufacturing overhead.................................................... Total variable production cost.......................................................... Fixed manufacturing overhead ($219,000/3,000 units of product). . Unit product cost.............................................................................. AACSB: Analytic AICPA BB: Critical Thinking LO: 1 Level: Easy

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$ 2 7 96 1 124 7 3 $19 7

AICPA FN: Reporting

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management 150. Davitt Corporation produces a single product and has the following cost structure: Number of units produced each year............................... Variable costs per unit: Direct materials............................................................ Direct labor................................................................... Variable manufacturing overhead................................ Variable selling and administrative expenses............... Fixed costs per year: Fixed manufacturing overhead..................................... Fixed selling and administrative expenses...................

1,000 $57 $20 $2 $3 $88,00 0 $24,00 0

Required: Compute the unit product cost under variable costing. Show your work! Ans: Direct materials................................................................ Direct labor...................................................................... Variable manufacturing overhead................................... Unit product cost............................................................. AACSB: Analytic AICPA BB: Critical Thinking LO: 1 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$5 7 20 2 $7 9

AICPA FN: Reporting

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Chapter 7 Variable Costing: A Tool for Management 151. Murphy Inc., which produces a single product, has provided the following data for its most recent month of operation: Number of units produced............................................... Variable costs per unit: Direct materials............................................................ Direct labor................................................................... Variable manufacturing overhead................................ Variable selling and administrative expenses............... Fixed costs: Fixed manufacturing overhead..................................... Fixed selling and administrative expenses...................

7,000 $37 $43 $5 $1 $84,000 $119,00 0

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.............................................................................. Direct labor.................................................................................... Variable manufacturing overhead.................................................. Total variable production cost........................................................ Fixed manufacturing overhead ($84,000/7,000 units of product). Unit product cost............................................................................ b .

Variable costing: Direct materials.............................................................................. Direct labor.................................................................................... Variable manufacturing overhead.................................................. Unit product cost............................................................................

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

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$37 43 5 85 12 $97

$37 43 5 $85

AICPA FN: Reporting

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management 152. Vancott Inc., which produces a single product, has provided the following data for its most recent month of operation: Number of units produced............................................... Variable costs per unit: Direct materials............................................................ Direct labor................................................................... Variable manufacturing overhead................................ Variable selling and administrative expenses............... Fixed costs: Fixed manufacturing overhead..................................... Fixed selling and administrative expenses...................

6,000 $93 $58 $1 $1 $192,00 0 $348,00 0

The company had no beginning or ending inventories. Required: Compute the unit product cost under absorption costing. Show your work! Ans: Direct materials.................................................................................. Direct labor......................................................................................... Variable manufacturing overhead...................................................... Total variable production cost............................................................ Fixed manufacturing overhead ($192,000/6,000 units of product).... Unit product cost................................................................................ AACSB: Analytic AICPA BB: Critical Thinking LO: 1 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$ 93 58 1 152 32 $18 4

AICPA FN: Reporting

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Chapter 7 Variable Costing: A Tool for Management 153. Schlenz Inc., which produces a single product, has provided the following data for its most recent month of operation: Number of units produced............................................... Variable costs per unit: Direct materials............................................................ Direct labor................................................................... Variable manufacturing overhead................................ Variable selling and administrative expenses............... Fixed costs: Fixed manufacturing overhead..................................... Fixed selling and administrative expenses...................

6,000 $12 $34 $4 $2 $486,00 0 $522,00 0

The company had no beginning or ending inventories. Required: Compute the unit product cost under variable costing. Show your work! Ans: Direct materials.......................................... Direct labor................................................ Variable manufacturing overhead............. Unit product cost.......................................

$1 2 34 4 $5 0

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

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Chapter 7 Variable Costing: A Tool for Management 154. Miller Company produces a single product. The company had the following results for its first two years of operation:

Sales........................................................... Cost of goods sold..................................... Gross margin.............................................. Selling and administrative expenses.......... Net operating income.................................

Year 1 $1,200,00 0 800,000 400,000 300,000 $ 100,000

Year 2 $1,200,00 0 680,000 520,000 300,000 $ 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.

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Chapter 7 Variable Costing: A Tool for Management Ans: a. Cost per unit under absorption costing: Variable production cost per unit........................ Fixed manufacturing overhead cost: ($600,000/40,000)............................................... ($600,000/50,000)............................................... Unit product cost.................................................

Year 1 Year 2 $5 $5 15 $20

12 $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: Sales....................................................................... Cost of goods sold ($5 × 40,000).......................... Variable selling and administrative expense ($2 × 40,000)...................................................... Contribution margin.............................................. Fixed expenses: Fixed manufacturing overhead........................... Fixed selling and administrative expense........... Net operating income.............................................

Year 1 $1,200,00 0 200,000

Year 2 $1,200,00 0 200,000

80,000 920,000

80,000 920,000

600,000 220,000 $ 100,000

600,000 220,000 $ 100,000

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

Net operating income under variable costing................... Fixed manufacturing overhead deferred in (released from) inventory: Year 2 (10,000 units × $12 per unit). Net operating income under absorption costing...............

Year 1 $100,00 0 $100,00 0

Year 2 $100,00 0 120,00 0 $220,00 0

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.

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Chapter 7 Variable Costing: A Tool for Management AACSB: Analytic AICPA BB: Critical Thinking LO: 2,3,4 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 7 Variable Costing: A Tool for Management 155. Neukirchen Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$140

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

300 4,300 4,500 100

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$25 $51 $7 $6

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$150,50 0 $72,000

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Required: 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.

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Chapter 7 Variable Costing: A Tool for Management Ans: a. Variable costing income statement Sales........................................................... Less variable expenses: Variable cost of goods sold: Beginning inventory............................ Add variable manufacturing costs....... Goods available for sale...................... Less ending inventory......................... Variable cost of goods sold................. Variable selling and administrative........ Contribution margin.................................. Less fixed expenses: Fixed manufacturing overhead............... Fixed selling and administrative............. Net operating income.................................

$630,00 0 $ 24,900 356,900 381,800 8,300 373,500 27,000 150,500 72,000

400,500 229,500 222,500 $ 7,000

b. Absorption costing income statement Sales........................................................... Cost of goods sold: Beginning inventory............................... Add cost of goods manufactured............ Goods available for sale......................... Less ending inventory............................. Gross margin.............................................. Selling and administrative expenses expenses: Variable selling and administrative........ Fixed selling and administrative............. Net operating income................................. AACSB: Analytic AICPA BB: Critical Thinking LO: 2 Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$630,00 0 $ 35,400 507,400 542,800 11,800

531,000 99,000

27,000 72,000 $

99,000 0

AICPA FN: Reporting

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Chapter 7 Variable Costing: A Tool for Management 156. Oates Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price...............................................

$120

Units in beginning inventory..................... Units produced........................................... Units sold................................................... Units in ending inventory..........................

0 7,600 7,400 200

Variable costs per unit: Direct materials...................................... Direct labor............................................. Variable manufacturing overhead.......... Variable selling and administrative........

$15 $48 $7 $10

Fixed costs: Fixed manufacturing overhead............... Fixed selling and administrative.............

$228,00 0 $66,600

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.

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Chapter 7 Variable Costing: A Tool for Management Ans: a. Variable costing income statement Sales........................................................... Less variable expenses: Variable cost of goods sold: Beginning inventory............................ Add variable manufacturing costs....... Goods available for sale...................... Less ending inventory......................... Variable cost of goods sold.................... Variable selling and administrative........ Contribution margin.................................. Less fixed expenses: Fixed manufacturing overhead............... Fixed selling and administrative............. Net operating income.................................

$888,000 $ 0 532,000 532,000 14,000 518,000 74,000 228,000 66,600

592,000 296,000 294,600 $ 1,400

b. Absorption costing income statement Sales....................................................................... Cost of goods sold: Beginning inventory........................................... Add cost of goods manufactured........................ Goods available for sale..................................... Less ending inventory......................................... Gross margin.......................................................... Selling and administrative expenses expenses: Variable selling and administrative.................... Fixed selling and administrative......................... Net operating income............................................. AACSB: Analytic AICPA BB: Critical Thinking LO: 2 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$888,00 0 $ 0 760,000 760,000 20,000 74,000 66,600

740,000 148,000 140,600 $ 7,400

AICPA FN: Reporting

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Chapter 7 Variable Costing: A Tool for Management 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........................................... Number of gallons sold.................................................... Sales price........................................................................ Unit product cost under variable costing......................... Total contribution margin................................................ Total fixed manufacturing overhead cost........................ Total fixed selling and administrative expense...............

75,000 70,000 $3.00 per gallon $1.45 per gallon $84,000 $63,000 $10,500

Required: Using the absorption costing method, prepare Succulent Juice Company's income statement for the year. Ans: Sales (70,000 × $3.00).................................................... Cost of goods sold: Beginning inventory.................................................... Add cost of goods manufactured (75,000 × $2.29*).. . Goods available for sale............................................... Less ending inventory (5,000 × $2.29)........................ Gross margin................................................................... Selling and administrative expenses**........................... Net operating income......................................................

$210,00 0 $ 0 171,750 171,750 11,450

160,300 49,700 35,000 $ 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) = $24,500 Total selling and administrative = $24,500 + $10,500 AACSB: Analytic AICPA BB: Critical Thinking LO: 2 Level: Hard

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Chapter 7 Variable Costing: A Tool for Management 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............. Variable costing net operating income, this year............ Fixed manufacturing overhead costs deferred in inventory under absorption costing, last year.............. Fixed manufacturing overhead costs released from inventory under absorption costing, this year..............

$71,00 0 $92,00 0 $2,000 $11,00 0

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. Variable costing net operating income..................... Add fixed manufacturing overhead costs deferred in inventory under absorption costing................... Deduct fixed manufacturing overhead costs released from inventory under absorption costing Absorption costing net operating income................. AACSB: Analytic AICPA BB: Critical Thinking LO: 3 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Last Year $71,000

This Year $92,000

2,000

0

0 $73,000

(11,000) $81,000

AICPA FN: Reporting

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Chapter 7 Variable Costing: A Tool for Management 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............................ Add fixed manufacturing overhead costs deferred in inventory under absorption costing.............................. Deduct fixed manufacturing overhead costs released from inventory under absorption costing..................... Absorption costing net operating income........................ AACSB: Analytic AICPA BB: Critical Thinking LO: 3 Level: Easy

$72,000 29,000 0 $101,00 0

AICPA FN: Reporting

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............................ Add fixed manufacturing overhead costs deferred in inventory under absorption costing.............................. Deduct fixed manufacturing overhead costs released from inventory under absorption costing..................... Absorption costing net operating income........................ AACSB: Analytic AICPA BB: Critical Thinking LO: 3 Level: Easy

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$57,00 0 30,000 0 $87,00 0

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Chapter 7 Variable Costing: A Tool for Management 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............. Variable costing net operating income, this year............ Increase in ending inventory, last year............................ Decrease in ending inventory, this year........................... Fixed manufacturing overhead cost per unit...................

$82,70 0 $87,80 0 900 3,100 $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. Change in units in ending inventory.......................... Fixed manufacturing overhead cost per unit.............. Change in fixed manufacturing overhead in ending inventory................................................................. Variable costing net operating income....................... Add fixed manufacturing overhead costs deferred in inventory under absorption costing........................ Deduct fixed manufacturing overhead costs released from inventory under absorption costing............... Absorption costing net operating income.................. AACSB: Analytic AICPA BB: Critical Thinking LO: 3 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Last Year $900 $2

This Year ($3,100) $2

$1,800

($6,200)

$82,700

$87,800

1,800

0

0 $84,500

(6,200) $81,600

AICPA FN: Reporting

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Chapter 7 Variable Costing: A Tool for Management 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..................................... Fixed manufacturing overhead cost per unit........................ Change in fixed manufacturing overhead in ending inventory...........................................................................

$1,900 $4

Variable costing net operating income................................. Add fixed manufacturing overhead costs deferred in inventory under absorption costing................................... Deduct fixed manufacturing overhead costs released from inventory under absorption costing................................... Absorption costing net operating income.............................

$64,200

AACSB: Analytic AICPA BB: Critical Thinking LO: 3 Level: Medium

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$7,600

7,600 0 $71,800

AICPA FN: Reporting

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition