Chapter 19 – Variable Costing and Performance Reporting
QUICK STUDIES
Quick Study 19-1 (10 minutes)
1. The total production cost per unit if 25,000 units are produced is:
Per unit
Direct materials…………………………………………………………………………….….$3.00
Direct labor……………………………………………………………………………………...2.00
Variable overhead………………………………………………………….…………………4.00
Fixed overhead ($50,000/25,000 units)………………….……………….…………. 2.00
Total production cost per unit……………………………………..……….…………..$11.00
2. The manager might produce more than currently be sold if he believes
future demand for the product will increase. Alternatively, producing too
much lowers cost of goods sold and increases net income under
absorption costing, and thus can increase the manager’s bonus (if that
bonus is based on net income).
Quick Study 19-2 (10 minutes)
Cost per unit using absorption costing
Per unit
Direct materials…………………………………………………………………………….….$10.00
Direct labor……………………………………………………………………………………...20.00
Variable overhead………………………………………………………….…………………10.00
Fixed overhead ($160,000/20,000 units)………………..………….………………. 8.00
Total production cost per unit……………………………………..……….…………..$48.00
Quick Study 19-3 (10 minutes)
Cost per unit using variable costing
Per unit
Direct materials…………………………………………………………………………….….$10.00
Direct labor……………………………………………………………………………………...20.00
Variable overhead………………………………………………………….………………… 10.00
Total production cost per unit……………………………………..……….…………..$40.00
19-1
Chapter 19 – Variable Costing and Performance Reporting
Quick Study 19-4 (10 minutes)
AIRTEL COMPANY
Manufacturing Margin
Sales (10,000 units x $80 per unit)…………………………………….……. $800,000
Variable production costs (10,000 units x $40 per unit)............... 400,000
Manufacturing margin…………………………………………….………….….. $400,000
Quick Study 19-5 (10 minutes)
AIRTEL COMPANY
Contribution Margin
Manufacturing margin (from QS 19-4)……………………………….……. $400,000
Variable selling and admin costs (10,000 units x $10 per unit).... 100,000
Contribution margin………………………………………..………….…………. $300,000
Quick Study 19-6 (10 minutes)
SLAMS INC.
Absorption Costing Income Statement
Sales (4,900 units x $90 per unit)……………………………………….…….. $441,000
Cost of goods sold (4,900 units x $38 per unit*)………..……………… 186,200
Gross margin…………………………………………………………..……………… $254,800
Selling and administrative expenses
Variable (4,900 units x $2 per unit)……………………………….……….. 9,800
Fixed…………………………………………………………………..….……………. 65,200
Total selling and administrative expenses…………….………………. 75,000
Net income……………………………………………………………….…………. $179,800
* Fixed overhead cost is $13 per unit, computed as ($78,000 fixed overhead cost/6,000
units). Total production cost at 6,000 units is $25 variable + $13 fixed = $38.
19-2
Chapter 19 – Variable Costing and Performance Reporting
Quick Study 19-7 (15 minutes)
SLAMS INC.
Variable Costing Income Statement
Sales (4,900 units x $90 per unit)…………….………………... $441,000
Variable expenses
Var. manuf. expense (4,900 units x $25)…..….……………$122,500
Var. selling and admin. expense (4,900 x $2)………....... 9,800
Total variable expenses…………….…….………………….….. 132,300
Contribution margin……………………………………….………… 308,700
Fixed expenses
Fixed manufacturing overhead………………….…………….78,000
Fixed selling and administrative expenses………………. 65,200
Total fixed expenses…………………………………………..…... 143,200
Net income…………………………………..….………………….…… $165,500
Quick Study 19-8 (10 minutes)
Assuming 20,000 units produced and 20,000 units sold
TRAMOR COMPANY
Gross Margin
Sales (20,000 units x $80/unit)………………………………………………………..….$1,600,000
Cost of goods sold (20,000 units x $27 per unit*)……..……………….………. 540,000
Gross profit…………………………………………………………………..….………………$1,060,000
* Direct materials………………………………...$10 per unit
Direct labor..…..…..………………………….. 12 per unit
Variable overhead………………….…….……. 3 per unit
Fixed overhead ($40,000/20,000 units)………. 2 per unit
Total cost of production……………………….$27 per unit
19-3
Chapter 19 – Variable Costing and Performance Reporting
Quick Study 19-8 (continued)
Assuming 40,000 units produced and 20,000 units sold
TRAMOR COMPANY
Gross Margin
Sales (20,000 units x $80/unit)………………………………………………..…………$1,600,000
Cost of goods sold (20,000 units x $26 per unit*)………………………………. 520,000
Gross profit…………………………………………………………..….………………….….$1,080,000
* Direct materials $10 per unit
Direct labor 12 per unit
Variable overhead 3 per unit
Fixed overhead ($40,000/40,000 units) 1 per unit
Total cost of production $26 per unit
Gross profit increases by $20,000, computed as $1,080,000 – $1,060,000, if
40,000 units are produced. This increase in gross profit is equal to 20,000
units in ending inventory x $1 per unit of fixed overhead that is in ending
inventory rather than expensed.
Quick Study 19-9 (5 minutes)
If Tramor uses variable costing, there will be no difference in gross margin,
since fixed costs are expensed in total and not stored in ending inventory.
Variable costing gross profit (or contribution margin) is not affected by the
number of units produced, only by the number of units sold.
Quick Study 19-10 (5 minutes)
Total fixed costs = $700,000
Contribution margin per unit = $85 – ($27 + $23) = $35
Break-even volume in units = = 17,500 units
19-4
$700,000
$35/unit
Chapter 19 – Variable Costing and Performance Reporting
Quick Study 19-11 (10 minutes)
The suggested selling price for the special order ($68 per unit) exceeds the
variable costs per unit ($30 + $18 = $48 per unit). As long as fixed costs do
not change, and the company has enough capacity to produce this order
without affecting regular sales, the order will increase overall profits by $20
per unit ($68 – $48) or $40,000 ($20 x 2,000) in total.
Quick Study 19-12 (15 minutes)
Part 1
AIVARS COMPANY
Absorption Costing Income Statement
Sales (50,000 units x $60 per unit)……………………………………..……..$3,000,000
Cost of goods sold (50,000 units x $32 per unit*)……………………… 1,600,000
Gross margin…………………………………………………………..……………… 1,400,000
Selling and administrative expenses**……………………………………… 410,000
Net income…………………………………………………………………..….…. $ 990,000
* Variable manufacturing expenses………………………………………..……$28 per unit
Fixed manufacturing expenses ($320,000/80,000 units)……………………. 4 per unit
Total manufacturing cost per unit…………………………………..………...$32 per unit
**Variable selling and admin. expenses (50,000 x $5)…………………….…..$250,000
Fixed selling and administrative expenses….….…..………………………. 160,000
Total selling and administrative expenses…………………..…….…………$410,000
Part 2
The difference in income equals $120,000, computed as $990,000 –
$870,000. Aivars’ ending inventory consists of 30,000 units (80,000 units
produced less 50,000 units sold). Each unit of ending inventory has $4 in
fixed manufacturing expenses attached to it that does not get expensed
until those units are sold. This accounts for the $120,000 difference (30,000
units x $4 per unit).
19-5
Chapter 19 – Variable Costing and Performance Reporting
Quick Study 19-13 (5 minutes)
Variable costing income…………………………………….….………………… $250,000
Fixed overhead in ending inventory (48,000 x $0.75)……………...... 36,000
Fixed overhead in beginning inventory (50,000 x $0.75)………….… (37,500)
Absorption costing income……………………………………………….…….. $248,500
Quick Study 19-14 (5 minutes)
Variable costing income…………………………………….….………………… $772,200
Fixed overhead in ending inventory (5,200 x $3.00)…….………....... 15,600
Fixed overhead in beginning inventory (7,800 x $3.00)……..………. (23,400)
Absorption costing income……………………………………………….…….. $764,400
19-6
Chapter 19 – Variable Costing and Performance Reporting
EXERCISES
Exercise 19-1 (25 minutes)
Part 1
ADAMS COMPANY
Absorption Costing Income Statement
Sales (70,000 units x $350 per unit)…………………………………………..$24,500,000
Cost of goods sold (70,000 units x $200 per unit*)…….………….….. 14,000,000
Gross profit…………………………………………………………………..….……..10,500,000
Selling and administrative costs ($770,000 + $4,250,000)………….. 5,020,000
Net income……………………………………………………………..….……………$ 5,480,000
*Direct materials………………………………………….….... $ 40 per unit
Direct labor………………………………………….………….. 60 per unit
Variable overhead ($3,000,000/100,000 units)…..... 30 per unit
Fixed overhead ($7,000,000/100,000 units)............ 70 per unit
Total absorption cost per unit…………………….....…. $200 per unit
Part 2
ADAMS COMPANY
Variable Costing Income Statement
