Chapter 5 Variable Costing
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114. Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are:
Direct material $11 per unit
Direct labor 15 per unit
Variable manufacturing overhead 12 per unit
Fixed manufacturing overhead per year $448,000
In addition, the company has selling and administrative costs:
Fixed selling costs per year $175,000
Fixed administrative costs per year 75,000
Variable selling and admin costs per year $6 per unit
During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory
totaled 1,800 units. Assume the same unit costs in all years.
a. How much is net income using full costing?
b. How much fixed manufacturing overhead is in ending inventory under full costing?
Answer
Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition
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115. Below is a variable costing income statement for Hops Dollar Store. The budget for 2017
follows:
Hops Dollar Store
Budgeted Variable Costing Income Statement
For the Year Ending December 31, 2017
Sales $15,000,000
Less variable costs:
Cost of goods sold $5,000,000
Selling expense 4,000,000 9,000,000
Contribution margin 6,000,000
Less fixed costs:
Manufacturing expense 2,300,000
Selling expense 1,200,000
Administrative expense 2,000,000 5,500,000
Net income $ 500,000
For the coming year, the company is considering hiring two additional sales representatives
at $80,000 each for base salary plus 5 percent of their sales for commissions. The
company anticipates that each sales representative will generate $900,000 of incremental
sales. Calculate the impact on profit of the proposed hiring decision. Should the company
hire the two additional sales representatives?
Answer
Chapter 5 Variable Costing
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116. Perfect Buy produces electronic garage door openers. Information on the first three years
of business follows:
2017 2018 2019
Units sold 20,000 20,000 20,000
Units produced 20,000 25,000 15,000
Fixed production costs $500,000 $500,000 $500,000
Variable production costs per unit $100 $100 $100
Selling price per unit $200 $200 $200
Fixed selling and administrative
expense $150,000 $150,000 $150,000
a. Calculate net income and the value of ending inventory for each year using variable
costing.
b. Explain why, using variable costing, profit does not fluctuate from year to year.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition
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117. The following information is available for Trailblazer, a manufacturer of four-wheel all–
terrain vehicles for its first two years of operation:
2017 2015
Vehicles produced 1,000 1,400
Vehicles sold 900 1,200
Selling price per unit $1,200 $1,200
Direct material per unit $350 $350
Direct labor per unit $220 $220
Variable manufacturing overhead per unit $40 $40
Fixed manufacturing overhead per year $112,000 $112,000
Variable selling and administrative expense per unit $20 $20
Fixed selling and administrative expense per year $35,000 $35,000
Calculate net income for 2015 using full costing.
Chapter 5 Variable Costing
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118. The following information relates to Markley Mattresses for fiscal year 2017, the company’s
first year of operations:
Units produced 20,000
Units sold 17,000
Selling price per unit $30
Direct material per unit $5
Direct labor per unit $5
Variable manufacturing overhead per unit $2
Variable selling cost per unit $3
Annual fixed manufacturing overhead $160,000
Annual fixed selling and administrative expense $80,000
a. Prepare an income statement using full costing.
b. Prepare an income statement using variable costing.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition
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119. Adam Tools produces screwdrivers and had 1,700 in inventory at the beginning of the year.
It has a variable manufacturing cost of $5.00 per unit, a variable selling cost of $0.75 per
unit; a fixed manufacturing cost of $45,000 per year; and a fixed selling and administrative
cost of $24,000 per year. The selling price is $14.00 per screwdriver. During the year,
18,000 screwdrivers were produced and 18,400 were sold. Assume the same unit costs in
all years.
a. What is the product cost per screwdriver using variable costing?
b. What is the product cost per screwdriver using full costing?
c. Prepare an income statement using variable costing. Omit the statement heading.
d. Prepare an income statement using full costing. Omit the statement heading.
Answer
120. Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are:
Direct material $11 per unit
Direct labor 15 per unit
Variable manufacturing overhead 12 per unit
Fixed manufacturing overhead per year $448,000
In addition, the company has selling and administrative costs:
Fixed selling costs per year $175,000
Fixed administrative costs per year 75,000
Variable selling and admin costs per year $6 per unit
During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory
totaled 1,800 units. Assume the same unit costs in all years. What is the value of ending
inventory using full costing?
Chapter 5 Variable Costing
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121. Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are:
Direct material $11 per unit
Direct labor 15 per unit
Variable manufacturing overhead 12 per unit
Fixed manufacturing overhead per year $448,000
In addition, the company has selling and administrative costs:
Fixed selling costs per year $175,000
Fixed administrative costs per year 75,000
Variable selling and admin costs per year $6 per unit
During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory
totaled 1,800 units. Assume the same unit costs in all years. How much is gross margin per
unit and in total?
Answer
122. Last month, Toro Tools produced 6,000 wheelbarrows and sold 6,200 at a price of $62
each. Toro had 900 wheelbarrows in beginning inventory. Manufacturing costs consisted of
direct materials of $84,000, direct labor of $27,300, variable manufacturing overhead of
$21,000, and fixed manufacturing overhead of $120,000. General and administrative fixed
costs totaled $32,000. Variable selling costs were $1 per wheelbarrow. Assume the same
unit costs in all years.
a. Calculate Toro Tools’ net income using full costing.
b. Calculate Toro Tools’ net income using variable costing.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition
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123. Assess Digital produces digital controls. Information on its first three years of business is as
follows:
2017 2018 2019 Total
Units sold 20,000 20,000 20,000 60,000
Units produced 20,000 25,000 15,000 60,000
Fixed production costs $500,000 $500,000 $500,000
Variable production costs per unit $100 $100 $100
Selling price per unit $200 $200 $200
Fixed selling and administrative exp. $150,000 $150,000 $150,000
a. Calculate net income and the value of ending inventory for each year using full
costing.
b. Explain why profit fluctuates from year to year even though the number of units
sold, the selling price, and the cost structure remain constant.
Answer
Chapter 5 Variable Costing
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124. Wise Company began operations in 2017. A company has $8.00 per unit in variable
production costs and $3.00 per unit in variable selling and administrative costs. The annual
fixed production cost is $180,000. The annual fixed selling and administrative cost is
$20,000.
a. Complete the table below for the number of units and dollar value of ending
inventory under variable costing for each year.
2017
2018
2019
2020
Units produced
60,000
70,000
80,000
90,000
Units sold
55,000
72,000
82,000
91,000
Units in ending inventory
Ending inventory using variable
costing
b. Assume that the selling price and cost structure stayed the same over the 4-year
period. How would the total net income compare for the entire period between
variable and full costing?
Answer
a.
Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition
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CHALLENGE EXERCISES
125. ABT makes a single product, bucket stoppers. During 2017, 155,000 units were sold and
150,000 units were produced. Information for 2017 appears below:
Beginning inventory in units 6,000
Variable production cost per unit $1.20
Variable operating costs per unit $0.80
Fixed production cost per year $127,500
Fixed selling and administrative cost per year $32,000
Selling price per unit $6.00
a. How much is the contribution margin for 2017 under variable costing?
b. How much is the gross margin for 2017 under full costing?
c. Explain why variable and full costing produce different results.
Chapter 5 Variable Costing
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126. Bucket Zone had 2,200 buckets in its beginning inventory. It manufactured 23,000 buckets
and sold 23,400 buckets during the year. Costs involved in production are $3 for direct
materials, $2 for direct labor, and $1.20 for variable overhead, each on a per unit basis.
The company has annual fixed selling and administrative costs of $78,000 and fixed annual
manufacturing overhead costs totaling $86,250. Operating income using variable costing is
$33,000.
a. Determine the amount by which net income will differ under absorption costing
compared to variable costing.
b. Determine operating income under absorption costing.
c. How would the difference between variable and full costing be impacted if the
company switched to a JIT system? Explain.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition
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SHORT-ANSWER ESSAYS
127. Explain the significant difference between variable costing and full costing.
128. Why is a variable costing income statement more useful for internal purposes?
Answer
129. Under full costing, how does increasing production increase income? Does this work under
variable costing? Why or why not?
Answer
130. Can a company continue to increase income indefinitely by using full costing?
Answer
131. What is the implication of a company using JIT with full costing versus using JIT with
variable costing?
Answer