Chapter 19
Variable Costing and Analysis
QUESTIONS
1. Variable costing includes direct materials, direct labor, and variable overhead as
2. Absorption costing includes direct materials, direct labor, variable overhead and
3. When units produced exceed units sold for a reporting period, income under
variable costing would be less than income determined under absorption costing.
4. a. Gross margin is computed as sales minus cost of goods sold. Cost of goods
b. Contribution margin is computed as sales minus variable expenses. Variable
5. For short-run pricing decisions (such as special orders) absorption costing may not
6. For variable costing to achieve correct short-run pricing decisions, the price should
7. Generally, variable and fixed manufacturing costs are controllable at different levels
of management. Production managers may be able to control the direct materials
8. Absorption costing can lead to over-production for two reasons:
a. Fixed overhead cost per unit costs fall as production increases. Matching a
b. If production exceeds sales, then portions of fixed overhead are stored in
Variable costing avoids this problem, because all units have a cost equal to the
9. Variable costing may violate the matching principle, in that all manufacturing costs
10. If units produced equals units sold, no conversion is necessary. If production
exceeds sales, absorption costing income can be determined by adding (increase in
11. Reporting contribution margin by segment is useful in assessing the profitability of
12. The contribution margin format income statement has the cost-volume-profit data
13. There are several factors that Apple should consider before pricing this special
order. First, the selling price should exceed the variable costs of manufacturing
14. Samsung’s selling prices must cover the cost of the items sold, as well as all selling
and administrative expenses. Obviously, a selling price must exceed the cost of
manufacturing the item. But Samsung might have other variable costs related to the
QUICK STUDIES
Quick Study 19-1 (10 minutes)
Cost per unit using absorption costing
Per unit
Direct materials……………….………………..……………………..…………………..….$10.00
Direct labor………………..……………….…………………….…………………..…..…….20.00
Quick Study 19-2 (10 minutes)
Cost per unit using variable costing
Per unit
Direct materials……………….………………..……………………..…………………..….$10.00
Direct labor………………..……………….…………………….…………………..…..…….20.00
Quick Study 19-3 (15 minutes)
ACES 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
Quick Study 19-4 (10 minutes)
ACES 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
Quick Study 19-5 (10 minutes)
Assuming 20,000 units produced and 20,000 units sold:
RAMORT COMPANY
Gross Margin
Sales (20,000 units x $60/unit)……………….………………….……………………….$1,200,000
Cost of goods sold (20,000 units x $27 per unit*)………..…….…….…….….. 540,000
Quick Study 19-6 (15 minutes)
Assuming 40,000 units produced and 20,000 units sold:
RAMORT COMPANY
Gross Margin
Sales (20,000 units x $60/unit)……………….………………….………………….…..$1,200,000
Cost of goods sold (20,000 units x $26 per unit*)………….…………………… 520,000
From QS 19-5, gross margin is $660,000 when 20,000 units are produced
and 20,000 units are sold. Gross margin increases by $20,000, computed
Quick Study 19-7 (15 minutes)
RAMORT COMPANY
Contribution margin
Sales (20,000 units x $60/unit)……………….……………….…. $1,200,000
Variable expenses
Var. manuf. expense (20,000 units x 25/unit*)……….…….....$500,000
Quick Study 19-8 (5 minutes)
If Ramort uses variable costing, there will be no difference in contribution
margin from that in QS 19-7, since fixed costs are expensed in total and not
Quick Study 19-9 (10 minutes)
D’SOUZA COMPANY
Manufacturing Margin
Sales (10,000 units x $80 per unit)…………………………….…….……... $800,000
Quick Study 19-10 (10 minutes)
D’SOUZA COMPANY
Contribution Margin
Sales (10,000 units x $80 per unit)…………………………….…….……... $800,000
Variable production costs (10,000 units x $40 per unit)............... 400,000
Quick Study 19-11 (15 minutes)
Part 1
DIAZ 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
**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
Quick Study 19-11 (continued)
Part 2
The difference in income equals $120,000, computed as $990,000 –
$870,000. Diaz’s ending inventory consists of 30,000 units (80,000 units
Quick Study 19-12 (5 minutes)
Variable costing income……………………….……………..…….…….……... $772,200
Fixed overhead in ending inventory (5,200 x $3.00)…..…….……..... 15,600
Quick Study 19-13 (5 minutes)
Variable costing income……………………….……………..…….…….……... $250,000
Quick Study 19-14 (5 minutes)
Variable costing income……………………….……………..…….…….……... $386,100
Fixed overhead in ending inventory (3,900 x $4.00)…..…….……..... 15,600
Quick Study 19-15 (5 minutes)
Variable costing income……………………….……………..…….…….……... $130,000
Fixed overhead in ending inventory (4,900 x $2.50)…..…….……..... 12,250
Quick Study 19-16 (10 minutes)
1. The total production cost per unit if 12,500 units are produced is:
Per unit
Direct materials……………….………………..……………………..…………………..….$3.00
Direct labor………………..……………….…………………….…………………..…..…….2.00
2. The manager might produce more than currently be sold if he believes