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1. The only difference between absorption costing and variable costing is the way in which fixed
overhead costs are assigned. Under variable costing, fixed overhead is a period cost; under
absorption costing, it is a product cost.
2.
A
bsorption-costing income is greater because some of the period's fixed overhead is placed in
inventory and not recognized as part of Cost of Goods Sold on the absorption-costing income
statement.
5. Ordering costs are the costs of placing and receiving an order. Examples include clerical
costs, documents, insurance, and unloading. Carrying costs are the costs of carrying
inventory. Examples include insurance, taxes, handling costs, and the opportunity cost of
capital tied up in inventory.
8. Reasons for carrying inventory include the following:
(a) to balance setup and carrying costs
(b) to satisfy customer demand
8ABSORPTION AND VARIABLE
COSTING, AND INVENTORY
MANAGEMENT
DISCUSSION QUESTIONS
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
10. The economic order quantity is the amount that should be ordered to minimize the
sum of ordering and carrying costs.
8-1. b
8-2. e
8-8. c ($15
–
$10)(20,000)
–
$75,000
MULTIPLE-CHOICE QUESTIONS
8-2
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
CE 8-13
1. Units Ending Inventory = Units Beginning Inventory + Units Produced –
Units Sold
CE 8-14
1. Units Ending Inventory = Units Beginning Inventory + Units Produced –
Units Sold
3. Value of Ending Inventory = 2,600 units × $92 = $239,200
CE 8-15
1. Direct materials………………………
…
$9
Direct labor……………………………
…
6
2.
Sales ($47 × 9,300)………………………………………………………………
…
$437,100
CORNERSTONE EXERCISES
Osterman Company
Income Statement Under Absorption Costing
For the Most Recent Yea
r
8-3
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
CE 8-16
1. Direct materials………………………… $ 9
Direct labor……………………………… 6
2.
Sales ($47 × 9,300)………………………….……………
…
$437,100
Less: Variable costs……………………………………
…
176,700
CE 8-17
Poinsettias Fruit Trees Total
Sales……………………………………… $ 970,000 $ 3,100,000 $ 4,070,000
Less variable expenses:
V
ariable cost of goods sold………
…
(460,000) (1,630,000) (2,090,000)
Segmented Income Statement
For the Coming Year
Income Statement Under Variable Costing
For the Most Recent Yea
r
Gorman Nurseries Inc.
Osterman Company
8-4
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
CE 8-18
= 16 orders per year
=
=8,000 pounds
500 pounds
1. Number of Orders Annual Number of Pounds Used
Number of Pounds in an Order
8-5
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
CE 8-19
1. EOQ =
EOQ =
√
(2 × 8,000 × $5)/$2
= 200 pounds
4. Total Annual Carrying Cost under the EOQ Policy = ($200/2) × $2
= $200
CE 8-20
Reorder Point = Daily Usage × Lead Time
Reorder Point = 30 × 5 days = 150 pounds
CE 8-21
1. Safety Stock = (Maximum Daily Usage – Average Daily Usage) × Lead Time
Reorder Point = (30 pounds × 5 days ) + 25 pounds = 175 pounds
√2 × D × CO
CC
8-6
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
E 8-22
1. Unit Direct Materials Cost = $80,000/20,000 units = $4.00
2. Unit direct materials cost…………………………………………………
…
$ 4.00
Unit direct labor cost………………………………………………………
…
5.07
3. Ending Inventory in Units = 20,000 – 18,900 = 1,100 units
E 8-23
1. Unit direct materials cost ($123,000/50,000 units)……………………
…
$2.46
2. Variable-Costing Ending Inventory = $5.62 × (50,000 – 47,300) = $15,174
E 8-24
1. Unit direct materials cost ($596,000/80,000 units)……………………
…
$ 7.45
Unit direct labor cost ($104,000/80,000 units)…………………………
…
1.30
2. Unit direct materials cost (596,000/80,000 units)……………………… $7.45
3. Absorption-Costing Ending Inventory = $12.71 × 1,000 units* = $12,710
EXERCISES
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
E 8-25
1. Unit direct materials cost………………………
…
$ 9.95
Unit direct labor cost……………………………
…
2.75
2. Unit direct materials cost………………………
…
$ 9.95
3. Absorption-costing income:
Sales ($32 × 28,700)…………………………………………… $918,400
Less: Cost of goods sold ($16.85 × 28,700)………………
…
483,595
4. Variable-costing income:
Sales ($32 × 28,700)…………………………………………… $918,400
Less variable expenses:
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
E 8-26
1. Unit direct materials cost………………
…
$ 8.00
Unit direct labor cost……………………
…
4.00
2. Unit direct materials cost………………
…
$ 8.00
Unit direct labor cost……………………
…
4.00
E 8-27
1. Absorption-costing income:
Sales ($27 × 23,700)…………………………………………… $639,900
2. Variable-costing income:
Sales ($27 × 23,700)…………………………………………… $639,900
Less variable expenses:
8-9
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
E 8-28
1. Number of Units in Ending Inventory = Units Produced – Units Sold
= 16,000 – 15,200
= 800 units
2. Fixed Overhead Rate = Total Fixed Overhead ÷ Units Normal Production
= $23,000/20,000 units
3. Absorption-costing income…………… 45,000$
V
ariable-costing income………………
…
42,500
Difference……………………….………
…
2,500$
8-10
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
E 8-29
1.
Sweaters Jackets Total
Sales……………………….…………………
…
$ 210,000 $ 450,000 $ 660,000
Less variable expenses:
V
ariable cost of goods sold……………
…
(145,000) (196,000) (341,000)
V
ariable selling expense………………
…
(10,500) (22,500) (33,000)
2. For the company as a whole, an increase of $10,000 in fixed expense will
result in a decrease in operating income to $74,000 ($84,000 – $10,000). If
the equipment is for the sweaters line, then that line’s segment margin will
E 8-30
1. Small
Consumer Business
Computers Computers
Direct materials……………………………… $490 $1,180
and administrative expense.
Knitline Inc.
Segmented Income Statement
For the Coming Year
CHAPTER 8 Absorption and Variable Costing, and Inventory Management
E 8-30 (Continued)
2.
Small
Consumer Business
Computers Computers Total
Sales……………………….………
…
$ 40,960,000 $ 134,000,000 $ 174,960,000
Less variable expenses:
E 8-31
1. Orders per Year = 17,280 units/864 units per order = 20 orders
2. Total Ordering Cost = $10 × 20 orders = $200
Paulson Computers Inc.
Segmented Income Statement
For the Coming Year
