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Chapter 21
Variable Costing
Review Questions
1. What is absorption costing?
Absorption costing is a costing method that considers direct materials, direct labor, variable
2. What is variable costing?
Variable costing is an alternative costing method that considers only variable manufacturing costs
3. How are absorption costing and variable costing the same? How are they different?
Absorption costing and variable costing are similar in that they both include direct materials, direct
4. When units produced equal units sold, how does operating income differ between variable costing
and absorption costing?
5. When units produced exceed units sold, how does operating income differ between variable costing
and absorption costing? Why?
6. When units produced are less than units sold, how does operating income differ between variable
costing and absorption costing? Why?
When units sold exceeds units produced, the operating income will be higher under variable costing.
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7. Explain why the fixed manufacturing overhead cost per unit changes when there is a change in the
number of units produced.
The reason fixed manufacturing overhead cost per unit changes when there is a change in the
8. Explain how increasing production can increase gross profit when using absorption costing.
Increasing production spreads the total fixed costs over more units in absorption costing, which
9. When should a company use absorption costing when setting sales prices? When should it use
variable costing?
Absorption costing considers the full cost of the product over its entire life cycle; therefore,
10. In the long run, all costs are controllable. Is this statement true? Why or why not?
11. Why is it appropriate to use variable costing when planning production in the short term?
Variable costing is appropriate when planning production in the short term because fixed costs are
irrelevant in this situation.
12. What is a business segment? Give some examples.
A business segment is an identifiable part of the company for which financial information is
available. Businesses can be segmented by geography, customer types, products, or salespersons.
13. Explain how sales mix can affect the profitability of a company.
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14. What are the two components that can affect contribution margin? Why is it important to investigate
both?
The two components that affect contribution margin are the number of units sold and the price/cost
margin. Increases in price can decrease the volume of units sold and vice versa.
15. How do service companies differ from manufacturing companies?
16. How can variable costing be used in service companies?
Service companies have both fixed and variable costs, therefore variable costing can be used.
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Short Exercises
S21-1 Classifying costs
Learning Objective 1
Classify each cost by placing an X in the appropriate columns. The first cost is completed as an
example.
SOLUTION
Absorption Costing
Variable Costing
Product Cost
Period Cost
Product Cost
Period Cost
a.
Direct materials
X
X
b.
Direct labor
X
X
c.
Variable manufacturing
overhead
X
X
d.
Fixed manufacturing
overhead
e.
Variable selling and
administrative costs
Fixed selling and
administrative costs
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Use the following information for Short Exercises S21-2 and S21-3.
Burlington Company reports the following information for June:
S21-2 Calculating variable costs
Learning Objective 1
Calculate the contribution margin and operating income for June using variable costing.
SOLUTION
Variable Costing
Sales Revenue
$ 745,000
Variable Costs:
Variable Cost of Goods Sold
Variable S&A Costs
152,000
Contribution Margin
Fixed Cost of Goods Sold
186,000
Fixed S&A Costs
Operating Income
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S21-3 Calculating absorption costs
Learning Objective 1
Calculate the gross profit and operating income for June using absorption costing.
SOLUTION
Absorption Costing
Sales Revenue
$ 745,000
Cost of Goods Sold:
Variable Cost of Goods Sold
Fixed Cost of Goods Sold
186,000
Gross Profit
Selling and Administrative Costs:
Variable S&A Costs
152,000
Fixed S&A Costs
Operating Income
Use the following information for Short Exercises S21-4 and S21-5.
Matthew Company had the following costs:
S21-4 Computing unit product cost, absorption costing
Learning Objective 1
Calculate the unit product cost using absorption costing. Round your answer to the nearest cent.
SOLUTION
Absorption
Costing
Direct materials
$ 67.00
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
($6,200 / 310 units)
Total product cost per unit
S21-5 Computing unit product cost, variable costing
Learning Objective 1
Calculate the unit product cost using variable costing. Round your answer to the nearest cent.
SOLUTION
Variable
Costing
Direct materials
Direct labor
Variable manufacturing overhead
Total product cost per unit
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S21-6 Computing absorption cost per unit
Learning Objective 2
Abrey, Inc. has the following cost data for Product X:
Calculate the unit product cost using absorption costing when production is 250 units, 500 units, and
2,500 units.
SOLUTION
250 Units
500 Units
2,500 Units
Note: Short Exercise S21-6 must be completed before attempting Short Exercise S21-7.
S21-7 Computing absorption costing gross profit
Learning Objective 2
Refer to your answers to Short Exercise S21-6. Product X sells for $175 per unit. Calculate the gross
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SOLUTION
a.
Absorption Costing
Gross Profit
b.
Absorption Costing
Cost of Goods Sold
(250 units × $119 per unit)
Gross Profit
c.
Absorption Costing
Cost of Goods Sold
(250 units × $111 per unit)
Gross Profit
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S21-8 Computing inventory balances
Learning Objective 2
Wong Company reports the following data:
Calculate the product cost per unit and the total cost of the 2,100 units in ending inventory using
absorption costing and variable costing.
SOLUTION
Absorption
Costing
Variable
Costing
Variable manufacturing costs
$ 65.00
$ 65.00
Fixed manufacturing overhead
Total product cost per unit
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S21-9 Analyzing profitability
Learning Objective 3
Camron Company has divided its business into segments based on sales territories: East Coast, Midland,
and West Coast. Following are financial data for 2016:
Prepare an income statement for Camron Company for 2016 using the contribution margin format
assuming total fixed costs for the company were $445,000. Include columns for each business segment
and a column for the total company.
SOLUTION
CAMRON COMPANY
Contribution Margin Income Statement
For the Year Ended December 31, 2016
East Coast
Midland
West Coast
Total
Units Sold
Sales Price per Unit
Variable Cost per Unit
Contribution Margin
Fixed Costs
Operating Income
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Note: Short Exercise S21-9 must be completed before attempting Short Exercise S21-10.
S21-10 Analyzing profitability
Learning Objective 3
Refer to Short Exercise S21-9. Which business segment provided the greatest total contribution margin?
Which business segment had the highest contribution margin ratio?
SOLUTION
The Midland business segment provided the greatest total contribution margin.
S21-11 Analyzing profitability analysis, service company
Learning Objective 4
Andover Internet Services is an Internet service provider for commercial and residential customers. The
company provided the following data for its two types of customers for the month of August:
For each type of customer, determine both the contribution margin per customer and the contribution
margin ratio. Round to two decimal places. Which type service is more profitable?
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SOLUTION
Business Segment
Total contribution margin / Nbr. of customers
CM per customer
Business Segment
Contribution margin / Net sales revenue
Contribution margin ratio
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Exercises
E21-12 Using absorption and variable costing
Learning Objectives 1, 2
2. CM $46,640
Moffett Company reports the following information for March:
Requirements
1. Calculate the gross profit and operating income for March using absorption costing.
2. Calculate the contribution margin and operating income for March using variable costing.
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SOLUTION
Requirement 1
MOFFETT COMPANY
Income Statement
For the Month Ending March 31
Sales Revenue
$ 72,500
Cost of Goods Sold:
Variable
Fixed
Gross Profit
Selling and Administrative Costs:
Variable
Fixed
Operating Income
$ 28,140
Requirement 2
MOFFETT COMPANY
Contribution Margin Income Statement
For the Month Ending March 31
Sales Revenue
$ 72,500
Variable Costs:
Manufacturing
Selling & Administrative Costs
Contribution Margin
Fixed Costs:
Manufacturing
Selling & Administrative Costs
Operating Income
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Use the following information for Exercises E21-13 and E21-14.
Organic, Inc. has collected the following data for November (there are no beginning inventories):
E21-13 Computing absorption costing operating income
Learning Objectives 1, 2
1. $171.50
Refer to the information for Organic, Inc.
Requirements
1. Using absorption costing, calculate the unit product cost.
2. Prepare an income statement using the traditional format.
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SOLUTION
Requirement 1
Absorption
Costing
Direct materials
$ 53.00
Variable manufacturing overhead
Total unit product cost
$ 171.50
Requirement 2
ORGANIC, INC.
Income Statement
For the Month Ending November 30
Sales Revenue
($275/unit × 300 units)
Gross Profit
Operating Income
E21-14 Computing variable costing operating income
Learning Objectives 1, 2
2. CM $29,400
Refer to the information for Organic, Inc.
Requirements
1. Using variable costing, calculate the unit product cost.
2. Prepare an income statement using the contribution margin format.
SOLUTION
Requirement 1
Variable
Costing
Direct materials
$ 53.00
Total unit product cost
$ 157.00
Requirement 2
ORGANIC, INC.
Contribution Margin Income Statement
For the Month Ending November 30
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E21-15 Preparing variable costing income statements, production exceeds sales
Learning Objectives 1, 2
2. FG $30,000
RefreshAde produced 15,000 cases of powdered drink mix and sold 12,000 cases in April 2016. The
sales price was $30, variable costs were $13 per case ($10 manufacturing and $3 selling and
administrative), and total fixed costs were $70,000 ($45,000 manufacturing overhead and $25,000
selling and administrative). The company had no beginning Finished Goods Inventory.
Requirements
1. Prepare the April income statement using variable costing.
2. Determine the product cost per unit and the total cost of the 3,000 cases in Finished Goods Inventory
as of April 30.
SOLUTION
Requirement 1
REFRESHADE
Contribution Margin Income Statement
For the Month Ending April 30, 2016
Requirement 2
Unit cost = Variable manufacturing cost = $10
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Note: Exercise E21-15 must be completed before attempting Exercise E21-16.
E21-16 Preparing absorption costing income statements, production exceeds sales
Learning Objectives 1, 2
1. OI $143,000
Refer to Exercise E21-15.
Requirements
1. Prepare the April income statement using absorption costing.