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Chapter 6: Variable Costing
DeAnne Company produces a single product. The company's variable costing income statement for August appears below:
DeAnne Company Income Statement For the month ended August 31
Sales ($15 per unit) ...... ....... .. ......... $600. Variable expenses: Variable cost of goods sold ......... 360, Variable selling expense ..... ........ 80, Total variable expenses. .. .. ... ... .. .. ... 440, Contribution margin ........ .... ......... .. (^) 160,000. / FL"ed expenses: Fixed manufacturing .... .......... ..... 105,000^ .0..^ ,,::;,~^ -^ ,t^ 3('J Fixed selling and administrati'e. 35, Total fixed expenses ........ ...... ......... 140, Net operating income .... .. ........... .... $ 20,
The company produced 35,000 units in August and the beginning inventory consisted of 8, units. Variable production costs per unit and total fixed costs have remained constant over the past several months.
- The value of the company's inventory on August 31 under the absorption costing method is: A. $27, B. $42,000 ) fl
C C. $36,000 ') 'L..V' , l~ Lv. ( Co c;(t ) D. $47,000 """""'"'----- g~ «C'111) I
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102. The value of the company's inventory on August 31 under the absorption costing method is:
A. $27,
B. $42,
C. $36,
D. $47,
Units sold = $600,000 + $15 per unit = 40,000 units
Units in beginning inventory + Units produced =Units sold + Units in ending inventory
8,000 units + 35,000 units = 40,000 units + Units in ending inventory
Units in ending inventory =8,000 units + 35,000 units· 40,000 units =3,000 units
Variable cost of goods sold ($360,000 ~ 40,000 units) ............................... $ 9 Fixed manufacturing overhead cost ($105,000 ~ 35,000 units) ...... .. .......... ___~ Absorption costing unit product cost (a)............................................. ........ $ ==== Units in ending inventory (b).................................................................... ... 3, Value of ending inventory under absorption costing (a) x (b) .... .. .. ....... .. ... $36,
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 06·01 Explain how variable costing differs from absorption costing and compute unit product
AI't'~+HU.:tp!r each method
Level: Hard
103. Under absorption costing, for the month ended August 31, the company would report a:
A. $20,000 profit
B. $5,000 loss
C. $35,000 profit
D. $5,000 profit
Yariable cost of goods sold ($360,000 + 40,000 units) ............................... $ 9 Fixed manufacturing overhead cost ($105,000 + 35,000 units).................. 3 Absorption costing unit product cost .......................................................... $
Sales ($15 per unit x 40,000 units) ..................................... $600, Cost of goods sold ($12 per unit x 40,000 units) ................ 480, Gross margin ....................................................................... 120,
Selling and administrative expenses ($80,000 + $35,000). 115,
Net operating income ........................................................ .. $ 5,
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Galino Company, which has only one product, has provided the following data concerning its most recent month of operations:
Selling price .... ..................... .... .... ........... $
Units in beginning inventory.. ................ 0 Units produced ....... .. ...... ..................... ... lTnits sold .......... ...... .. .............................. Units in ending inventory .......................
Variable costs per unit: Direct materials ........ .. ........................... Direct labor .... ... ....................... .... ........ .. Variable manufacturing overhead .. ...... .. Variable selling and administrative ..... .. Fixed costs: Fixed manufacturing overhead ............ .. $104, Fixed selling and adminish'ative ......... .. $13,
_~ 1I.Ko...I.'U0i.J00I0!~ 1 contribution margin for the month under the variable costing approach is:
A. $124,
B. 49,
C. $20,
D. $143,
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Galino Company, which has only one product, has provided the following data concerning its most recent month of operations:
Selling price ............ .......... ....... ....... ........ $
Units in beginning inventory ................ .. Units produced ....................................... (^) @ IJnits sold .............................................. .. _, Units in ending inventory ...... ................. 300
Variable costs per unit: Direct materials ..................................... Direct labor .......................................... .. Variable manufacturing overhead ........ .. Variable selling and administrative ....... Fixed costs: Fixed manufacturing overhead ............ .. Fixed selling and administrative ...........
107. The t0 3 gross margin for the month under the absorption costing approach is:
C A. $49,
B. $18,
C. $73,
D. $124,
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107. The total gross margin for the month under the absorption costing approach is:
A. $49,
B. $18,
C. $73,
D. $124,
Unit product cost under absorption costing:
Direct materials ........................................................................................... $ Direct labor.................................................................................................. 11 Variable manufacturing overhead... ............................................................. 6 Fixed manufacturing overhead cost ($104,400 -;- 2,900 units produced) ... 36 Absorption costing unit product cost .......................................................... $
Sales ($99 per unit x 2,600 units) ....................... .. $257, Cost of goods sold ($80 per unit x 2,600 units) .... 208, (~ross nlargin ......................................................... $ 49,
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs
under each method
Lear.. tive : 06-02 Prepare income statements using both variable and absorption costing
evel: Medium
108. What is the total period cost for the month under the variable costing approach?
A $31 , 200
B. $104,
C. $117,
D. $135,
Variable selling and administrative $ 18, ($7 per unit x 2,600 units sold) ......... .. Fixed manufacturing overhead .......... ... .. 104, Fixed selling and administrative .... ...... .. 13, Total period costs .......... .. .. ..... .. .. .......... .. $135,
AACSB : Analytic
AICPA BB : Critical Thinking
AICPA FN : Measurement
Bloom's: Application
Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs
under each method
L bjective: 06-02 Prepare income statements using both variable and absorption costing
Level: Hard
Galino Company, which has only one product, has provided the following data concerning its most recent month of operations:
Selling price ............. .... .. .. .............. ... ...... $
Units in beginning inventory ...... ............ o Units produced ..................... ................ .. 2, Units sold .. .... .. .. ....... .. ...... .. .............. .... ... 2, Units in ending inventory ....................... 300
Variable costs per unit: Direct materials ........................ .. .... ....... $ Direct labor ............ ............................ .. .. $ Variable manufacturing overhead ........ .. $ Variable selling and administrative ..... .. $ Fixed costs: Fixed manufacturing overhead ...... .. .... .. $104, Fixed selling and administrative ..... .. .. .. $13,
- What is the total period cost for the month under the absorption costing approach? A. $104 ,4 0 ~ C B. $31, C. $13, D. $135,
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- Leigh Company, which has only one product, has provided the following data concerning its most recent month of operations:
Selling pl'ice .................... .... .. ... ........ .. ... ... ...... $
Units in beginning invento .. y ....... .. .... .......... 300 Units pl'oduced .............................. .... ..... ....... 1, Units sold .................................. ..... .. ...... ... ...... 1, Units in ending invento .. y ......... ....... ............ (^100)
Va .. iable costs peJ' unit: Di ..ect nUltel'ials .............. ... ... .. .. .. ......... .. ...... $ Di ..ect labol' ........... ........... ... ... ........ .. .. .... .. .. .. $ Va .. iable manufactu .. ing ovel ·head ......... ... $ Val'iable selling and administ .. ative .......... $ Fixed costs: Fixed manufacturing ove .. head .... .. .. ..... .... $9, Fixed selling and administ .. ative ..... .......... $1,40£
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 a contribution format income statement for the month using variable costing. d. Prepare an income statement for the month using absorption costing. e. Reconcile the variable costing and absorption costing net operating incomes for the month.
a. & b. Unit product costs
Variable costing: Direct materials.. ................................. $ Direct labor ................ ...... ............ ........ 59 Variable manufaduring overhead........ 4 Unit product cost ................................. $
Absorption costing: Direct materials............ ...... .. ............... $ Direct labor .......................................... 59 Variable manufacturing overhead........ 4 Fixed manufacturing overhead............ 8 Unit product cost .... .......... ................... $
c. & d. Income statements Variable costing income statement Sales ................................................................. $140, Val'iable expenses: Val'iable cost of goods sold ........................ .. $112, Variable selling and administrative ........... (^) ------~--------~11,200 123,200- Contribution margin .................................. .. 16, Fixed expenses: Fixed manufacturing overhead ................ .. 9, Fixed selling and administrative ................ 1,400 11, ------~--------~- Net operating income ................................. .. $ 5,
Absorption costing income statement Sales ........................................................... $140, Cost of goods sold ................................... .. 123, Gross margin ............................................. 16, Selling and administrative expenses: Variable selling and administrntive ......... .. $11, Fixed selling nnd administrative ............... 1,400 12, Net opernting income ................................ $ 4,
e. Reconciliation
Vnrinble costing net operating income ............................... .. $5, Deduct fixed manufacturing overhead costs relensed from (1,600) inventol1' under absorption costing ................................ .. Absorption costing net operating income .......................... .. $4,
AACSB: Analytic; AICPA BB: Critical Thinking;AICPA FN: Measurement; Bloom's: Application; Learning Objective:
06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each
method; Learning Objective: 06-02 Prepare income statements using both variable and absorption costing;
Learning Objective: 06-03 Reconcile net operating incomes and explain why the two amounts differ; Level: Hard
