Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Chapter 19
Variable Costing and Analysis
QUESTIONS
1. Variable costing includes direct materials, direct labor, and variable overhead as
product costs. Fixed overhead is treated as a period cost and is not included as a
product cost.
2. Absorption costing includes direct materials, direct labor, variable overhead and fixed
3. When units produced exceed units sold for a reporting period, income under variable
costing would be less than income determined under absorption costing. This is
4. a. Gross margin is computed as sales minus cost of goods sold. Cost of goods sold
includes full absorption cost of products, which includes direct materials, direct
5. For short-run pricing decisions (such as special orders) absorption costing may not be
6. For variable costing to achieve correct short-run pricing decisions, the price should
exceed variable costs, there should be no additional fixed costs incurred, and the
company should have excess capacity.
7. Generally, variable and fixed manufacturing costs are controllable at different levels of
management. Production managers may be able to control the direct materials used in
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
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 operating
9. Variable costing may violate the matching principle, in that all manufacturing costs must
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 units of
11. Reporting contribution margin by segment is useful in assessing the profitability of
each segment. It allows managers to analyze operations and make recommendations as
to how to direct their efforts.
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 them – the
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
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
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QUICK STUDIES
Quick Study 19-1 (10 minutes)
Cost per unit using absorption costing
Per unit
Direct materials ……………………………………………………………………………….
Direct labor ……………………………………………………………………………………
Variable overhead ……………………………………………………………………………
Fixed overhead ($160,000/20,000 units) …………………………………………….
Total product cost per unit ……………………………………………………….
Quick Study 19-2 (10 minutes)
Cost per unit using variable costing
Per unit
Direct materials ……………………………………………………………………………….
Direct labor ……………………………………………………………………………………
Variable overhead ……………………………………………………………………………
Total product cost per unit ……………………………………………………….
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
Total variable expenses ………………………………………….
Contribution margin …………………………………………………
Fixed expenses
Fixed selling and administrative expenses ………………
Total fixed expenses ………………………………………………
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Quick Study 19-4 (10 minutes)
ACES INC.
Absorption Costing Income Statement
$441,000
186,200
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*) …………………………..
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
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
Quick Study 19-7 (15 minutes)
RAMORT COMPANY
Contribution margin
Sales (20,000 units x $60/unit) …………………………………..
$1,200,000
Variable expenses
Var. selling and admin. expense (20,000 x $2/unit) ………
Quick Study 19-8 (5 minutes)
If Ramort uses variable costing, there will be no difference in contribution
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Quick Study 19-9 (10 minutes)
D’SOUZA COMPANY
Manufacturing Margin
Sales (10,000 units x $80 per unit) ………………………………………….
$800,000
Variable product costs (10,000 units x $40 per unit) ………………..
Quick Study 19-10 (10 minutes)
D’SOUZA COMPANY
Contribution Margin
Sales (10,000 units x $80 per unit) ………………………………………….
$800,000
Variable product costs (10,000 units x $40 per unit) ………………..
Variable selling and admin. costs (10,000 units x $10 per unit) ..
Quick Study 19-11 (15 minutes)
(1)
DIAZ COMPANY
Absorption Costing Income Statement
$3,000,000
Gross margin …………………………………………………………………………..
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Quick Study 19-11 (continued)
(2)
The dollar difference in variable costing income and absorption costing
income = 30,000 units x $4 fixed overhead per unit, or $120,000.
Quick Study 19-12 (5 minutes)
Variable costing income ……………………………………………………….
$772,200
Fixed overhead in ending inventory (5,200 x $3.00) …………………..
Fixed overhead in beginning inventory (7,800 x $3.00) ………………
Quick Study 19-13 (5 minutes)
Variable costing income ……………………………………………………….
$250,000
Fixed overhead in ending inventory (48,000 x $0.75) …………………
Fixed overhead in beginning inventory (50,000 x $0.75) …………….
$248,500
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Quick Study 19-14 (5 minutes)
Variable costing income ……………………………………………………….
$386,100
Fixed overhead in ending inventory (3,900 x $4.00) …………………..
Fixed overhead in beginning inventory (2,600 x $4.00) ………………
$391,300
Quick Study 19-15 (5 minutes)
Variable costing income ……………………………………………………….
$130,000
Fixed overhead in ending inventory (4,900 x $2.50) …………………..
Fixed overhead in beginning inventory (1,200 x $2.50) ………………
$139,250
Quick Study 19-16 (10 minutes)
1. The total product cost per unit if 12,500 units are produced is:
Per unit
Direct materials ……………………………………………………………………………….
$3
Variable overhead ……………………………………………………………………………
Fixed overhead ($50,000/12,500 units) ………………………………………………
Total product cost per unit ……………………………………………………….
2. If production is greater than sales, cost of goods sold under absorption
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Quick Study 19-17 (10 minutes)
Per unit
Direct materials ……………………………………………………………………………….
$50
Variable overhead ……………………………………………………………………………
Fixed overhead ………………………………………………………………………………..
Total product cost using absorption costing …………………………………….
Quick Study 19-18 (10 minutes)
Yes, the order should be accepted.
Explanation: The suggested selling price for the special order ($68 per unit)
Quick Study 19-19 (5 minutes)
Per unit
Direct materials ……………………………………………………………………………….
$ 3
Variable hazardous waste disposal costs …………………………………………
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Quick Study 19-20 (5 minutes)
Per unit
Direct materials ……………………………………………………………………………….
$ 3
Direct labor ……………………………………………………………………………………
2
Variable overhead ……………………………………………………………………………
4
Variable hazardous waste disposal costs …………………………………………
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
EXERCISES
Exercise 19-1 (15 minutes)
1. Cost per unit of finished goods using absorption costing:
Direct materials ……………………………………………………………………….
$15 per unit
Variable overhead ……………………………………………………………………
Fixed overhead ($160,000/20,000 units) …………………………………….
Total product cost per unit ……………………………………………………….
$43 per unit
2.
3.
Cost of goods sold using absorption costing:
Exercise 19-2 (15 minutes)
1. Cost per unit of finished goods using variable costing:
Direct materials ……………………………………………………………………….
$15 per unit
Variable overhead ……………………………………………………………………
Total product cost per unit ……………………………………………………….
$35 per unit
2.
3.
Cost of goods sold inventory using variable costing:
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Exercise 19-3 (25 minutes)
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*) …………
$9,100,000
Var. selling and administrative expense ………………….
Total variable expenses ………………………………………….
Fixed expenses
Fixed manufacturing expenses …………………………..
Fixed selling and administrative expenses ………………
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 …………………………………………………………………………….
5,020,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Exercise 19-4 (15 minutes)
1.
KENZI KAYAKING
Variable Costing Income Statement
Sales (800 x $1,050) ……………………………………………….
$840,000
Variable expenses
Fixed expenses
2. The absorption costing income is $25,000 higher than the variable
costing income. This difference is equal to 250 units in ending
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Exercise 19-5 (25 minutes)
a.
REY COMPANY
Absorption Costing Income Statement
Sales (20,000 units x $216 per unit) ………………………………………….
$4,320,000
Cost of goods sold (20,000 units x $62 per unit*) ………………………
1,240,000
Gross margin …………………………………………………………………………..
560,000
b.
REY COMPANY
Variable Costing Income Statement
Sales (20,000 units x $216/unit) …………………………..
$4,320,000
Variable expenses
Var. manuf. expense (20,000 units x $54/unit*) …………
$1,080,000
Var. selling and administrative expense ………………….
1,440,000
Contribution margin …………………………………………………
Fixed expenses
Fixed overhead……………………………………………………….
Fixed selling and administrative expenses ………………
360,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 19
Exercise 19-6 (15 minutes)
1.
HAYEK BIKES
Absorption Costing Income Statement
Sales (225 units x $1,600 per unit) …………………………………………………….
$360,000
Gross profit ……………………………………………………………………………………
2. The absorption costing income is $22,500 ($96,000 – $73,500) higher
than the variable costing income. This difference is equal to 150 units in
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Exercise 19-7 (25 minutes)
1.
OAK MART COMPANY
Variable Costing Income Statement
Sales (118,000 units x $320 per unit) ………………………
$37,760,000
Variable expenses
Variable product costs* ………………………………………..
$15,355,000
Variable selling and administrative expenses ……….
Total variable expenses ……………………………………….
16,771,000
Fixed expenses
Fixed manufacturing costs …………………………………..
Fixed selling and administrative expenses ……………
Total fixed expenses ……………………………………………
12,000,000
*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 …………………………..…………………….
Total variable costs available …………………………..
Less ending finished goods…………………………..
Variable product costs of goods sold …………………….
$15,355,000
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Exercise 19-7 (concluded)
2.
OAK MART COMPANY
Absorption Costing Income Statement
Sales (118,000 units x $320 per unit) ………………………
$37,760,000
Cost of goods sold
Gross margin ……………………………………………………….
6,016,000
* 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 ……………………………..
Add units produced ……………………….
Less units sold ……………………………..
3. The dollar difference in variable costing income and absorption costing
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Exercise 19-8 (20 minutes)
1.
POLARIX
Income Statement—Consumer ATV Department (Contribution margin format)
For Year Ended December 31
Sales ………………………………………………………………………………
$646,000
Variable expenses
Cost of goods sold (170 ATVs* × $1,830 per ATV) ………….
$311,100
Administrative expenses (40% × $59,500) ……………………..
380,800
Fixed expenses
Administrative expenses (60% × $59,500) ……………………..
124,800
2.
The company sold 170 ATVs and its contribution margin totals $265,200 for
the year. Consequently, the contribution of each ATV toward covering fixed
costs and toward earning income was $1,560 ($265,200 ÷ 170 ATVs). We
can also compute the $1,560 as follows.
Variable expenses
Cost per ATV ……………………………………………………………….
Administrative expenses [(40%×$59,500) ÷ 170 ATVs] ………