SHORT ANSWER
1. Compare and contrast absorption and variable costing.
2. Since fixed product costs are eventually recorded as expenses under both variable and absorption
costing by the time the inventory is sold, why does it matter whether fixed overhead is treated as a
product cost or a period cost?
3. Provide an argument in favor of using variable costing and an argument against the use of variable
costing.
4. Compare and contrast absorption and variable costing.
PROBLEM
1. Baker Company produced 30,000 units and sold 28,000 units in 2011. Beginning inventory was zero.
During the period, the following costs were incurred:
Indirect labour
£ 60,000
Indirect materials
30,000
Other
90,000
Fixed manufacturing overhead
180,000
Fixed administrative expenses
150,000
Fixed selling expenses
120,000
Variable selling expenses, per unit
40
Direct labour, per unit
80
Direct materials, per unit
20
Required:
Compute the monetary amount of ending inventory using:
a.
Absorption costing
b.
Variable costing
Variable costs:
Direct materials
Direct labour
Indirect labour
Indirect materials
Other variable overhead
____3.00
Variable product costs per unit
£ 106.00
Fixed manufacturing overhead
Total product costs per unit
Inventory units
Inventory value
£112,000
b.
Variable product costs per unit
£ 106.00
Inventory units
___1,000
Inventory value
2. The variable costing income statement for Jackson Company for 2011 is as follows:
£100,000
£30,000
_10,000
__40,000
£ 60,000
£24,000
_14,400
__38,400
£ 21,600
Selected data for 2011 concerning the operations of the company are as follows:
-0- units
8,000 units
£3.00 per unit
1.60 per unit
1.40 per unit
Required:
Prepare an absorption costing income statement for 2011.
3. Daggett Company produced 30,000 units and sold 28,000 units during the current fiscal period.
Beginning inventory was zero. During the period, the following costs were incurred:
Direct labour per unit
£40
Direct materials per unit
10
Variable selling expense per unit
20
Fixed administrative expenses
75,000
Fixed manufacturing overhead
90,000
Fixed selling expenses
60,000
Indirect labour (all variable)
30,000
Indirect materials (all variable)
15,000
Other variable overhead
45,000
Required:
Compute the monetary amount of ending inventory using:
a.
absorption costing.
b.
variable costing.
Direct materials
Sales
£100,000
Less cost of goods sold:
{5,000 [£3.00 + £1.60 + £1.40 + (£24,000/8,000)]}
Gross profit
Less operating expenses:
Selling expenses
Administrative expenses
Net income
4. The variable costing income statement for Hensley Company for this quarter is as follows:
The Hensley Company
Variable Costing Income Statement
For the current quarter
Sales (5,000 units)
£500,000
Cost of Goods Sold (variable)
£150,000
Variable selling (10% of sales)
__50,000
_200,000
Contribution Margin
£300,000
Fixed manufacturing overhead
£120,000
Fixed administrative expenses
__72,000
_192,000
Net income
£108,000
Selected data for the quarter concerning the operations of the company are as follows:
Beginning inventory
0 units
Units produced
8,000 units
Direct manufacturing labour
£15 per unit
Direct manufacturing materials
8 per unit
Variable manufacturing overhead
7 per unit
Required:
Prepare an absorption costing income statement for the quarter.
Direct labour
Indirect labour
Indirect materials
Other variable overhead
____1.50
Variable product costs per unit:
Variable product costs per unit
Fixed manufacturing overhead
Total product costs per unit
Total product costs per unit
Inventory value
£112,000
Variable product costs per unit
Inventory value
£106,000
5. Jensen Company produced 10,000 cases of cookies this year. It sold 9,500 cases for £10 each. There
were no beginning inventories. Variable manufacturing costs were £30,000, and fixed manufacturing
expenses were £50,000. Selling and administrative expenses were £10,000, all fixed.
Required:
a.
Prepare income statements using the variable costing and absorption costing.
b.
Reconcile the net income under absorption and variable costing.
Sales (9,500 units)
Cost of Goods Sold (variable)
Contribution Margin
Fixed manufacturing overhead
Fixed administrative expenses
Net income
Sales (9,500 units)
Cost of Goods Sold (variable)
Cost of Goods Sold (fixed)
Gross Margin
Fixed administrative expenses
Net income
b.
Sales
Cost of Goods Sold*
Gross Profit
Selling Expenses
Administrative Expenses
Net Income
6. Griffiths Industries began operations on January 1. The company sells a single product for £75 per
unit. During the year, 9,000 units were produced and 8,600 units were sold. There was no
work-in-process inventory at December 31.
The company uses an actual cost system for product costing, and actual costs for the year were as
follows:
Fixed Costs
Variable Costs
Direct materials
-0-
£22.00 per unit produced
Direct labour
-0-
£16.00 per unit produced
Manufacturing overhead
£90,000
£5.00 per unit produced
Selling and administrative
expenses
£50,000
£3.00 per unit sold
Required:
a.
Determine the cost per unit using absorption costing.
b.
Determine the cost per unit using variable costing.
c.
Determine the finished goods inventory cost at December 31 using absorption costing.
d.
Determine the finished goods inventory cost at December 31 using variable costing.
e.
Determine absorption-costing income.
f.
Determine variable-costing income.
£53
Cost per unit using absorption costing:
Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
(£90,000/9,000 units)
Cost per unit
b.
£43
Cost per unit using variable costing:
Direct materials
Direct labour
Variable manufacturing overhead
Cost per unit
(9,000 – 8,600) £53
(9,000 – 8,600) £43
Variable costing net income
Increase in units in inventory
Absorption costing net income
7. Ivy, SA., produces a single product that sells for £60 per unit. There were no inventories of work in
process or finished goods. Costs for the year were as follows:
Variable costs:
Direct materials
£8 per unit
Direct labour
£12 per unit
Manufacturing overhead
£5 per unit
Selling expenses
£3 per unit
Fixed costs:
£113,400
Sales (£75 8,600)
Cost of goods sold:
Beginning inventory
Cost of goods manufactured
(£53 9,000)
Goods available for sale
Less: Ending inventory
(£53 400)
Gross margin
Less selling and administrative expenses:
Fixed
Variable (£3 8,600)
Net income
£109,400
Sales (£75 8,600)
Less variable expenses:
Cost of goods sold:
Beginning inventory
Cost of goods manufactured
(£43 9,000)
Goods available for sale
(£43 400)
Variable selling expenses
(£3 8,600)
Total variable expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling and administrative
Total fixed expenses
Net income
Manufacturing overhead
£36,000 per month
Selling and administrative
£15,000 per month
During the first three months of the year, production and sales in units were as follows:
Production
Sales
January
4,000
4,000
February
4,000
3,500
March
_4,000
_4,500
Total
12,000
12,000
The company uses an actual cost system. There were no work-in-process inventories at the end of any
month, and the company uses FIFO costing.
Required:
a.
Determine the unit cost of production under variable costing for each of the three months.
b.
Determine the unit cost of production under absorption costing for each of the three
months.
c.
Determine income under variable costing for each of the three months.
d.
Determine income under absorption costing for each of the three months.
Direct materials
Direct labour
Variable manufacturing overhead
Total manufacturing cost per unit
b.
Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
(£36,000/4,000)
Total manufacturing cost per unit
January, £77,000; February, £61,000; March, £93,000
Sales
Less variable expenses:
Beginning inventory
Cost of goods manufactured
(£25 4,000)
Goods available for sale
Less: Ending inventory
Cost of goods sold
Selling expenses (£3 per unit)
Total variable expenses
Contribution margin
8. Jensen Company produced 10,000 cases of cookies this year. It sold 9,500 cases for £10 each. There
were no beginning inventories. Variable manufacturing costs were £30,000, and fixed manufacturing
expenses were £50,000. Selling and administrative expenses were £10,000, all fixed.
Required:
a.
Prepare income statements using the variable costing and absorption costing.
b.
Reconcile the net income under absorption and variable costing.
Sales (9,500 units)
Cost of Goods Sold (variable)
Contribution Margin
Fixed manufacturing overhead
Fixed administrative expenses
Net income
ESSAY
1. Explain how variable costing is useful in evaluating the performance of managers.
2. Explain the differences between variable and absorption costing.