Chapter 8 – Absorption and Variable Costing, and Inventory Management
Figure 8-10.
Nauman Company has the following information pertaining to its two divisions for last year:
Division X
Division Y
Variable selling and admin. expenses
$ 70,000
$ 90,000
Direct fixed expenses
35,000
100,000
Sales
200,000
400,000
Direct fixed selling and admin. expenses
30,000
70,000
Variable expenses
40,000
100,000
Common expenses are $24,000 for the year.
75. Refer to Figure 8-10. What is the segment margin for Division Y?
$310,000
$210,000
$240,000
$40,000
76. Refer to Figure 8-10. What is the income for Nauman Company?
$65,000
$325,000
$300,000
$41,000
Figure 8-11.
Tyler Company has the following information pertaining to its two product lines for last year:
Product A
Product B
Variable selling and admin. expenses
$38,000
$31,000
Direct fixed expenses
19,500
34,500
Sales
250,000
210,000
Direct fixed selling and admin. expenses
38,000
22,000
Variable expenses
42,000
31,000
Operating income
$112,500
$91,500
Common expenses are $105,000 for the year.
Chapter 8 – Absorption and Variable Costing, and Inventory Management
77. Refer to Figure 8-11. What is the segment margin for Product B?
$155,000
$105,000
$85,000
$91,500
78. Refer to Figure 8-11. What is the income for Tyler Company?
$101,000
$120,500
$99,000
$102,500
$112,500 + $91,500 – $105,000 = $99,000
Figure 8-12.
Assume the following information for a product line:
Sales
$700,000
Variable expenses
185,000
Direct fixed expenses
115,000
Variable selling and administrative expenses
70,000
Direct fixed selling and admin. expenses
90,000
79. Refer to Figure 8-12. What is the contribution margin of the product line?
$400,000
$525,000
$445,000
$515,000
80. Refer to Figure 8-12. What is the segment margin of the product line?
$200,000
$325,000
$350,000
$240,000
81. The two major costs associated with inventory are
Chapter 8 – Absorption and Variable Costing, and Inventory Management
ordering costs and setup costs.
setup costs and stockout costs.
stockout costs and carrying costs.
ordering costs and carrying costs.
None of these.
82. The inventory cost that can include insurance, inventory taxes, and obsolescence is called
ordering cost.
carrying cost.
stockout cost.
setup cost.
storing cost.
83. The inventory cost that can include processing costs, cost of insurance for shipping, and unloading is called
ordering cost.
carrying cost.
stockout cost.
setup cost.
storing cost.
84. The inventory cost that can include lost sales, cost of expediting, and cost of interrupted production is called
ordering cost.
carrying cost.
stockout cost.
setup cost.
storing cost.
85. Which of the following is not a traditional reason for carrying inventory?
to satisfy customer demand
to avoid shutting down manufacturing facilities
to buffer against unreliable production processes
to hedge against future price increases
all of these are traditional reasons for carrying inventory
86. The formula for ordering cost is the
number of orders per year × cost of placing an order.
number of orders per year / cost of placing an order.
average number of units in inventory × cost of carrying one unit in inventory.
average number of units in inventory / cost of carrying one unit in inventory.
ordering cost + carrying cost.
Chapter 8 – Absorption and Variable Costing, and Inventory Management
87. The formula for total carrying cost is
number of orders per year × cost of placing an order.
number of orders per year / cost of placing an order.
average number of units in inventory × cost of carrying one unit in inventory.
average number of units in inventory / cost of carrying one unit in inventory.
ordering cost + carrying cost.
88. The economic order quantity (EOQ) is the quantity that
minimizes total ordering cost.
maximizes total profit.
minimizes total inventory-related costs.
maximizes carrying costs.
maximizes ease of ordering.
89. Carter Company orders 250 units at a time, and places 15 orders per year. Total ordering cost is $1,600 and total
carrying cost is $1,250. Which of the following statements is true?
The economic order quantity (EOQ) is 250.
The economic order quantity (EOQ) is more than 250.
The economic order quantity (EOQ) is less than 250.
Total inventory-related cost is lower than it would be at the economic order quantity (EOQ).
None of these.
90. Carter Company orders 250 units at a time, and places 15 orders per year. Total ordering cost is $1,100 and total
carrying cost is $1,750. Which of the following statements is true?
The economic order quantity (EOQ) is 250.
The economic order quantity (EOQ) is more than 250.
The economic order quantity (EOQ) is less than 250.
Total inventory-related cost is lower than it would be at the economic order quantity (EOQ).
None of these.
91. Carter Company orders 250 units at a time, and places 15 orders per year. Total ordering cost is $1,100 and total
carrying cost is $1,100. Which of the following statements is true?
The economic order quantity (EOQ) is 250.
The economic order quantity (EOQ) is more than 250.
The economic order quantity (EOQ) is less than 250.
Total inventory-related cost is lower than it would be at the economic order quantity (EOQ).
Chapter 8 – Absorption and Variable Costing, and Inventory Management
None of these.
92. When the economic order quantity (EOQ) model is applied to units produced within the company, ordering costs
become
setup costs.
stockout costs.
carrying costs.
safety-stock costs.
production costs.
93. Under a JIT system,
customer demand pulls units through the production line.
safety stock is set at relatively high levels.
stockouts are never a problem.
inventory levels are set at 10% of total production levels.
production is set at a level to maximize factory output.
94. JIT responds to the problems traditionally solved by carrying inventories by
ensuring that sufficient inventory is on hand to prevent stockouts.
purchasing extra materials when price discounts are offered.
negotiating long-term contracts with supplier to lock in low prices.
selecting an inventory level that minimizes the total of ordering and carrying costs.
choosing a wide number of suppliers to increase the chance of receiving quantity discounts.
Figure 8-3.
Martin Company uses 625 units of a part each year. The cost of placing one order is $8; the cost of carrying one unit in
inventory for a year is $4.
95. Refer to Figure 8-3. Martin has decided to begin ordering 40 units at a time. What is the average annual carrying cost
of Martin’s new policy?
$80
$60
$160
$4
$90
Annual carrying cost = (40 / 2) × $4 = $80
96. Refer to Figure 8-3. Martin has decided to begin ordering 40 units at a time. What is the average annual ordering cost
of Martin’s new policy?
Chapter 8 – Absorption and Variable Costing, and Inventory Management
$190
$150
$125
$100
$145
Average annual order cost = (625 / 40) × $8 = $125
97. Refer to Figure 8-3. What is the EOQ for Martin?
100
50
45
30
20
98. Last year, Baker Company produced 30,000 units and sold 28,000 units. Beginning inventory was zero. During the
period, the following costs were incurred:
Indirect labor (variable)
$ 60,000
Indirect materials (variable)
30,000
Other variable overhead
90,000
Fixed manufacturing overhead
180,000
Fixed administrative expenses
150,000
Fixed selling expenses
120,000
Variable selling expenses, per unit
40
Direct labor, per unit
80
Direct materials, per unit
20
Required: Compute the dollar amount of ending inventory using:
A.
Absorption costing
B.
Variable costing
A.
Variable costs:
Direct materials
Direct labor
Indirect labor ($60,000 / 30, 000)
Indirect materials ($30,000 / 30,000)
Other variable overhead ($90,000 / 30,000)
Variable product costs per unit
$ 106.00
Fixed manufacturing overhead ($180,000 / 30,000)
Total product costs per unit
$ 112.00
Inventory units
B.
Variable product costs per unit
$ 106.00
Inventory units
Chapter 8 – Absorption and Variable Costing, and Inventory Management
99. During the most recent year, Boston Corp. had the following data:
Beginning inventory in units
–
Units produced
15,400
Units sold ($125 per unit)
8,200
Variable costs per unit:
Direct materials
$ 13
Direct labor
$ 16
Variable overhead
$ 8
Fixed costs:
Fixed overhead per unit produced
$ 23
Fixed selling and administrative
$ 185,000
Required:
A. How many units are in ending inventory?
B. Using absorption costing, calculate the per-unit product cost. What is the value of ending inventory?
C. Using variable costing, calculate the per-unit product cost. What is the value of ending inventory?
D. Prepare an income statement using absorption costing.
E. Prepare an income statement using variable costing.
Direct materials
Direct labor
Variable overhead
Fixed overhead per unit produced
Total product cost
Ending inventory value = $60 × 7,200 =
Direct materials
Direct labor
Variable overhead
Total product cost
Ending inventory value = $37 × 7,200 =
Sales (8,200 × $125)
Less: Cost of goods sold (8,200 × $60)
Gross margin
Less: Selling and administrative expenses
Operating income
Inventory value
$212,000
Chapter 8 – Absorption and Variable Costing, and Inventory Management
100. The variable costing income statement for Jackson Company for last year is as follows:
Sales (5,000 units)
$100,000
Variable expenses:
Cost of goods sold
$30,000
Selling (10% of sales)
10,000
40,000
Contribution margin
$ 60,000
Fixed expenses:
Manufacturing overhead
$24,000
Administrative
14,400
38,400
Operating income
$ 21,600
Selected data for last year concerning the operations of the company are as follows:
Beginning inventory
-0- units
Units produced
8,000 units
Manufacturing costs:
Direct labor
$3.00 per unit
Direct materials
1.60 per unit
Variable overhead
1.40 per unit
Required: Prepare an absorption costing income statement for last year.
Sales
Less cost of goods sold:
{5,000 × [$3.00 + $1.60 + $1.40 + ($24,000 / 8,000)]}
Gross profit
Less operating expenses:
Selling expenses
$10,000
Administrative expenses
24,400
Operating income
101. Information pertaining to Mario Co. is as follows:
Leather jackets
Suede jackets
Sales
$450,000
$542,000
Variable cost of goods sold
134,000
213,000
Direct fixed overhead
29,000
38,000
Sales (8,200 × $125)
Less: Cost of goods sold (8,200 × $37)
Gross margin
Less fixed expenses:
Overhead (15,400 × $23)
Selling and administrative expenses
Operating income
Chapter 8 – Absorption and Variable Costing, and Inventory Management
A sales commission of 2% of sales is paid for each of the two product lines. Direct fixed selling and administrative
expense was estimated to be $32,000 for the leather jackets and $66,000 for the suede jackets. Common fixed overhead
for the factory was estimated to be $83,000 and common selling and administrative expense was estimated to be $14,000.
Required: Prepare a segmented income statement for Mario Co. for the coming year, using variable costing.
Sales
Variable cost of goods sold
134,000
Variable selling expense
Contribution margin
Less direct fixed expenses:
Direct fixed overhead
38,000
Direct selling and administrative
Segment margin
Less common fixed expenses:
Common fixed overhead
Common selling and administrative
Operating income
102. Buttons Company produces three products: LMC, DMC, and KPC. For the coming year, they expect to produce
160,000 units. Of these, 65,000 will be LMC; 40,000 will be DMC; and 55,000 will be KPC. The following information
was provided for the coming year:
LMC
DMC
KPC
Price
$ 550
$ 860
$ 625
Unit direct materials
250
405
300
Unit direct labor
180
210
205
Unit variable overhead
60
72
55
Unit variable selling expense
45
60
58
Total direct fixed overhead
240,000
425,000
400,000
Common fixed overhead is $984,000 and fixed selling and administrative expenses for Mario Co. is $881,000 per year.
Required:
A. Calculate the unit variable cost under variable costing.
B. Calculate the unit variable product cost.
C. Prepare a segmented variable-costing income statement for next year.
D. Should Buttons Company keep all product lines?
Unit direct materials
Unit direct labor
Unit variable overhead
Unit variable selling expense
Total variable cost
Chapter 8 – Absorption and Variable Costing, and Inventory Management
103. Ellie Manufacturing Company produces three products: A, B, and C. The income statement for the most recent year
is as follows:
Sales
$200,000
Less: Variable cost
127,000
Contribution margin
$ 73,000
Less fixed cost:
Manufacturing
$20,000
Selling and administrative
14,000
34,000
Operating income
$ 39,000
The sales, contribution margin ratios, and direct fixed expenses for the three types of products are as follows:
A
B
C
Sales
$60,000
$40,000
$100,000
Contribution margin ratio
35%
30%
40%
Direct fixed expenses of products
$8,000
$5,000
$4,000
Required: Prepare income statements segmented by products. Include a column for the entire firm in the statement.
A
B
C
Sales
$60,000
$40,000
$100,000
$200,000
Less: Variable expenses
39,000
28,000
60,000
127,000
Contribution margin
$21,000
$12,000
$ 40,000
$ 73,000
Less: Direct fixed expenses
4,000
17,000
Product margin
$13,000
$ 36,000
$ 56,000
Less: Common expenses
17,000
$ 39,000
104. Laird Company uses 405 units of a part each year. The cost of placing one order is $5; the cost of carrying one unit in
Unit direct materials
Unit direct labor
Unit variable overhead
Total unit variable product cost
Sales
Variable cost of goods sold
Variable selling expense
Contribution margin
Less: direct fixed overhead
Segment margin
Less common fixed expenses:
Common fixed overhead
Common selling and administrative
Operating income
Chapter 8 – Absorption and Variable Costing, and Inventory Management
inventory for a year is $2. Laird currently orders 81 units at a time.
A.
The annual ordering cost of Laird’s current policy is $__________________.
B.
The annual carrying cost of Laird’s current policy is $__________________.
C.
The total cost of Laird’s current policy is $__________________.
D.
What is the EOQ for Laird?
E.
What is the total inventory-related cost at the EOQ?
A.
Annual ordering cost = (405 / 81) × $5 = $25
B.
Annual carrying cost = (81 / 2) × $2 = $81
C.
Total cost of Laird’s current policy = $25 + $81= $106
E.
Total inventory-related cost = ($5 × 9) + [(45 / 2) × $2] = $90
105. Simon Company sells 900 units of its deluxe product each year. The cost of setting up for one production run is
$150; the cost of carrying one unit in inventory for a year is $3.
A.
What is the economic order quantity?
B.
What is the annual setup cost of the EOQ policy?
C.
What is the annual carrying cost of the EOQ policy?
D.
What is the total inventory-related cost of the EOQ policy?
B.
Annual setup cost = (900 / 300) × $150 = $450
C.
Annual carrying cost = (300 / 2) × $3 = $450
D.
Total cost of the EOQ policy = $450 + $450 = $900
106. Simon Company sells 900 units of its deluxe product each year. The cost of setting up for one production run is
$150; the cost of carrying one unit in inventory for a year is $3. Simon currently produces 100 deluxe units in one
production run.
A.
What is the annual setup cost of the current policy?
B.
What is the annual carrying cost of the current policy?
C.
What is the total inventory-related cost of the current policy?
D.
Do you suppose that the current production run is smaller or larger than the EOQ? Why?
A.
Annual setup cost = (900 / 100) × $150 = $1,350
B.
Annual carrying cost = (100 / 2) × $3 = $150
C.
Total cost of the current policy = $1,350 + $150 = $1,500
107. Rudd Company uses 40,000 micro-chips each year in its production of digital cameras. The cost of placing an order
Chapter 8 – Absorption and Variable Costing, and Inventory Management
is $75. The cost of holding one unit of inventory for one year is $8. Currently Rudd places 20 orders of 2,000 units per
order.
Required:
A. Compute the annual ordering cost.
B. Compute the annual carrying cost.
C. Compute the total cost of Rudd’s current inventory policy.
D. Compute the economic order quantity.
E. Compute the order cost and the carrying cost for the EOQ.
F. How much money does using the EOQ policy save the company over the policy of purchasing 2,000 micro-chips per
order?
108. McKay Company produces curling irons. The plastic handles used to produce the curling irons are purchased from
an outside supplier. Each year, 45,000 handles are used at the rate of 150 handles per day. Some days as many as 180
handles are used. On average it takes 4 days after an order is placed for the inventory to arrive at McKay Company.
Required:
A. Calculate the reorder point without safety stock.
B. Calculate the amount of safety stock.
C. Calculate the reorder point with safety stock.
600 + 120 = 720
109. What is the difference between absorption-costing income and variable-costing income?
You decide
110. You have just become the controller for Artisan Industries. Artisan produces three different products and upon
Chapter 8 – Absorption and Variable Costing, and Inventory Management
review of their internal reports you notice that they have never prepared a segmented income statement. Explain to the
vice president what a segmented income statement consists of and why it can be useful in decision making.
111. List three problems inventory was meant to solve. How does the JIT producer handle these problems?
Match the type of income statement to the costs it includes.
a.
Variable costing income statement
b.
Absorption costing income statement
c.
Both types of income statements
112. Direct materials for units sold
113. Direct labor for units sold
114. Variable overhead for units sold
115. Fixed factory overhead for the period
116. Only fixed factory overhead for units sold
Chapter 8 – Absorption and Variable Costing, and Inventory Management
117. Variable selling expense
118. Fixed selling expense
119. Administrative expense
Match each statement with the correct item below.
a.
the costs of not having a product available when demanded by a customer
b.
the costs of carrying inventory
c.
approach that maintains goods should be pulled through the system by present demand
d.
the number of units in the order quantity that minimizes the total cost
e.
the costs of placing and receiving an order
120. Carrying costs
121. Economic order quantity
122. Just-in-time
123. Ordering costs
124. Stockout costs