Chapter 19
Variable Costing and Performance
Reporting
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
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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
lower cost per unit against a constant selling price will cause gross margin and
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
unit in beginning inventory is the same as that for the period.
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 Arctic Cat should consider before pricing this special
order. First, the selling price should exceed the variable costs of manufacturing
14. Piaggio’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
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QUICK STUDIES
Quick Study 19-1 (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
Variable overhead …………………………………………………………………..……….
4.00
Fixed overhead ($50,000/12,500 units) ……………………………………..……….
4.00
Total production cost per unit ……………………………………………………….
$13.00
2. The manager might produce more than currently be sold if he believes
Quick Study 19-2 (10 minutes)
D’SOUZA 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 19-3 (10 minutes)
D’SOUZA COMPANY
Contribution Margin
Manufacturing margin (from QS 19-2) …………………………………….
$400,000
Variable selling and admin costs (10,000 units x $10 per unit) …
100,000
Contribution margin ………………………………………………………………
$300,000
Quick Study 19-4 (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 19-5 (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
Quick Study 19-6 (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) …………….…….
Var. selling and admin. expense (4,900 x $2) ……..…….
Total variable expenses ………………………………………….
132,300
Contribution margin …………………………………………..…….
308,700
Fixed expenses
Fixed manufacturing overhead …………………………..
Fixed selling and administrative expenses ………..…….
Total fixed expenses ………………………………………..…….
143,200
Net income ……………………………………………………………….
$165,500
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Quick Study 19-7 (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
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.
Quick Study 19-8 (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
Gross profit ……………………………………………………………………………………
$ 660,000
* 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
Quick Study 19-8 (continued)
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
Gross profit ……………………………………………………………………………………
$ 680,000
* 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
Quick Study 19-9 (5 minutes)
If Ramort uses variable costing, there will be no difference in gross margin
Quick Study 19-10 (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
Quick Study 19-11 (5 minutes)
Total fixed costs = $700,000
Quick Study 19-12 (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
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. Diaz’ ending inventory consists of 30,000 units (80,000 units
Quick Study 19-13 (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
Quick Study 19-14 (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
EXERCISES
Exercise 19-1 (20 minutes)
Part 1
Cost per unit of finished goods using absorption costing:
Direct materials ……………………………………………………………………….
$15 per unit
Direct labor ………………………………………………………………………….….
16 per unit
Variable overhead ($80,000/20,000 units) ………………………………….
4 per unit
Fixed overhead ($160,000/20,000 units) …………………………………….
8 per unit
Total cost per unit ………………………………………………………………..….
$43 per unit
Part 2
Cost per unit of finished goods using variable costing:
Direct materials ……………………………………………………………………….
$15 per unit
Direct labor ………………………………………………………………………….….
16 per unit
Variable overhead ($80,000/20,000 units) ………………………………….
4 per unit
Total cost per unit ………………………………………………………………..….
$35 per unit
Part 3
Cost of ending finished goods inventory using absorption costing:
Part 4
Cost of ending finished goods inventory using variable costing:
Exercise 19-2 (25 minutes)
Part 1
SIMS COMPANY
Variable Costing Income Statement
Sales (70,000 units x $350/unit) …………………………..
$24,500,000
Variable expenses
Var. manuf. expense (70,000 units x 130/unit*) …..…….
Var. selling and administrative expense ………………….
Total variable expenses ………………………………………….
9,870,000
Contribution margin …………………………………………..…….
14,630,000
Fixed expenses
Fixed manufacturing expenses …………………………..
Fixed selling and administrative expenses ………..…….
Total fixed expenses ………………………………………..…….
11,250,000
Net income ……………………………………………………………….
$ 3,380,000
* Direct materials ………………….……….
$ 40 per unit
Direct labor ……………………….….
60 per unit
Variable overhead ………………..…………
30 per unit
Total variable manuf. cost …………………..
$130 per unit
Part 2
SIMS 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 3
Exercise 19-3 (15 minutes)
Part 1
KENZI KAYAKING
Variable Costing Income Statement
Sales (800 x $1,050) ……………………………………………….
$840,000
Variable expenses
Variable production costs (800 x $400) ………………..
$320,000
Variable selling and administrative expenses ……...
75,000
Total variable expenses ……………………………………...
395,000
Contribution margin ……………………………………………...
445,000
Fixed expenses
Fixed manufacturing costs ………………………………….
105,000
Fixed selling and administrative expenses …………..
155,000
Total fixed expenses …………………………………………..
260,000
Net income …………………………………………………………….
$185,000
Part 2
The absorption costing income is $25,000 higher than the variable costing
Exercise 19-4 (10 minutes)
Total fixed costs = $160,000 + $200,000 = $360,000
Exercise 19-5 (15 minutes)
Part 1
HAYEK FURNACES
Absorption Costing Income Statement
Sales (225 units x $1,600 per unit) …………………………………………..………..
$360,000
Cost of goods sold (225 units x $775 per unit*) ………………………..…
174,375
Gross profit ……………………………………………………………………………………
185,625
Selling and administrative expense ($14,625 + $75,000) …………..………..
89,625
Net income ……………………………………………………………………………..…….
$ 96,000
* Production cost per unit:
Variable production costs ………………………………..….
$625
Fixed overhead ($56,250 / 375 units) …………………….
150
Total production costs ……………………………………..….
$775
Part 2
The absorption costing income is $22,500 ($96,000 – $73,500) higher than
Exercise 19-6 (25 minutes)
Part 1
OAK MART COMPANY
Variable Costing Income Statement
Sales (118,000 units x $320 per unit) ………………..…….
$37,760,000
Variable expenses
Variable production costs* …………………………….…….
$15,355,000
Variable selling and administrative expenses ……….
1,416,000
Total variable expenses ……………………………………….
16,771,000
Contribution margin ………………………………………..…….
20,989,000
Fixed expenses
Fixed manufacturing costs …………………………….…….
7,400,000
Fixed selling and administrative expenses ……..…….
4,600,000
Total fixed expenses ……………………………………..…….
12,000,000
Net income ……………………………………………………….
$ 8,989,000
*Beginning variable finished goods ……………….……….
$ 405,000
Variable cost of goods manufactured
Direct materials ($40 x 115,000) …………………….…….
4,600,000
Direct labor ($62 x 115,000) …………………………..
7,130,000
Variable overhead ………………………………………..……….
3,220,000
Total variable costs available ……………………….….
15,355,000
Less ending finished goods…………………………..
0
Variable production costs of goods sold ……………….
$15,355,000
Exercise 19-6 (concluded)
Part 2
OAK MART COMPANY
Absorption Costing Income Statement
Sales (118,000 units x $320 per unit) ………………..…….
$37,760,000
Cost of goods sold
Beginning finished goods …………………………………….
$ 645,000
Cost of goods manufactured * ……………………….….
22,350,000
Goods available for sale ………………………………..…….
22,995,000
Less ending finished goods ** ……………………….….
0
Cost of goods sold ………………………………………..…….
22,995,000
Gross margin …………………………………………………..…..
14,765,000
Selling and administrative expenses *** ………………….
6,016,000
Net income ……………………………………………………….
$ 8,749,000
* Direct materials ($40 x 115,000) ………
$ 4,600,000
Direct labor ($62 x 115,000)…………….
7,130,000
Variable overhead ………………………….
3,220,000
Fixed overhead ……………………………..
7,400,000
Total manufacturing costs ……………..
$22,350,000
**Beginning finished goods inventory .
3,000 units
Add units produced ……………………….
115,000 units
Less units sold ……………………………..
(118,000 units)
Ending finished goods inventory ……
0 units
***$1,416,000 + $4,600,000 = $6,016,000
Part 3
Variable costing income is $240,000 ($8,989,000 – $8,749,000) higher than
the absorption costing income. This is equal to the $240,000 of fixed