Chapter 5
Variable Costing
QUESTIONS
2. When production exceeds sales, part of fixed manufacturing overhead will remain in
ending inventory. In variable costing, the entire amount of fixed manufacturing
3. Variable costing facilitates C-V-P analysis since fixed and variable costs are separated
4. Companies using JIT generally have low levels of work in process and finished goods
5. Under full costing, ending inventory includes direct material, direct labor, variable
manufacturing overhead, and fixed manufacturing overhead. Under variable costing,
6. The full costing method will result in higher income. In this method, part of fixed
7. The variable costing method will result in higher income. In this method, the beginning
8. Under variable costing, fixed manufacturing overhead costs are expensed in the year
9. The resulting number represents the difference in net income under full costing and
variable costing.
10. Fixed production costs per unit are calculated by dividing total fixed production costs by
the number of units produced. Each unit in ending inventory then receives this amount
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EXERCISES
E1. [LO 2] The income statement produced using variable costing provides a contribution
E2. [LO 2] Increasing production will increase profit since more fixed manufacturing
overhead will be buried in ending inventory rather than expensed in cost of goods sold.
For example, if the company produced and sold 50,000 items, the entire $24,000,000 of
E3. [LO 1]
Full Costing Method:
Direct Material Cost $ 500,000
Direct Labor Cost 400,000
E4. [LO 1]
Variable cost per unit $450
E5. [LO 1]
E6. LO [1]
E7. [LO 1]
E8. [LO 1]
Sales ($1,800 × 1,200 pairs) $2,160,000
E9. [LO 1]
Sales ($1,800 × 1,200 pairs) $2,160,000
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E10. [LO 1, 2]
E11. [LO 1]
Fixed Manufacturing Overhead $180,000
Divided by units produced 50,000
Fixed Manufacturing Overhead per unit $3.60
E12. [LO 1]
Direct Material per unit $ 5
Direct Labor per unit 4
E13. [LO 1, 2]
Shovels produced 50,000
E14. [LO 1]
Fixed Manufacturing Overhead $180,000
Divided by units produced 50,000
E15. [LO 1]
Direct Material per unit $ 5.00
E16. [LO 1]
Sales ($30 × 45,000 units) $1,350,000
E17. [LO 1]
Sales ($30 × 45,000 units) $1,350,000
E 18. [LO 1, 2]
Fixed Manufacturing Overhead $180,000
Divided by units produced 50,000
Fixed Manufacturing Overhead per unit $ 3.60
P1. [LO 1, 2]
a.
2017 2018 2019
($187.50 x 20,000) 3,750,000
b. Even though sales are the same in each period, profit fluctuates. That results because
c.
2017 2018 2019
Units sold 20,000 20,000 20,000
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d. Profit does not fluctuate each period because fixed manufacturing overhead is treated
as a period cost and expensed each year even if more units are produced than sold.
P2. [LO 1, 2]
a.
2017 2018 2019
Fixed production overhead $50,000 $50,000 $50,000
Less cost of goods sold:
Ending inventory
b. In 2018, the company produced more units than it sold. As a result, the fixed
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c.
2017 2018 2019
Less variable cost of goods sold:
($75 x 5,000) 375,000 375,000 375,000
Ending inventory
(Note: The $20 difference in total income across the three years between part a and part c is
due to rounding.)
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P3. [LO 1, 2]
a.
2017 2018 2019
Fixed manufacturing overhead $30,000,000 $30,000,000 $30,000,000
Sales
($2,500 × 30,000 units) $75,000,000
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b.
2017 2018 2019
Fixed manufac. overhead $30,000,000 $30,000,000 $30,000,000
Variable manufac. costs per unit $1,000 $1,000 $1,000
c. Under full costing, management could manipulate profit in 2018 by overproducing
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P4. [LO 1, 2]
a.
2017 2018 2019
Units sold 10,000 9,000 8,000
Sales
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b.
2017 2018 2019
Fixed manufacturing overhead $350,000 $350,000 $350,000
c. Sampson’s management increased net income in 2018 under full costing by
P5. [LO 1, 2]
a.
2017 2018
Fixed manufacturing overhead $ 2,400,000 $ 2,400,000
Divided by units produced 12,000 8,000
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b. Company performance is really not worse in 2018—note that the company had the
c.
2017 2018
Fixed manufacturing overhead $2,400,000 $2,400,000
d. Variable costing presents a more realistic view of firm performance in that income is
P6. [LO 1, 2]
a.
2017 2018
Units sold 18,000 18,000
Units produced 21,000 15,000
b. The company had higher profit in 2017 than in 2018, but its performance was not
c.
2017 2018
Fixed manufacturing overhead $630,000 $630,000
d. Variable costing presents a more realistic view of the firm’s performance in these