Exercises: Variable Costing antonio Jaramillo dayag

Multiple Choice
a 1. Which of the following is NOT a type of absorption costing?
a. Direct costing.
b. Actual costing.
c. Normal costing.
d. None of the above.
b 2. Variable costing is UNACCEPTABLE for
a. managerial accounting.
b. financial accounting.
c. transfer pricing.
d. reporting by product lines for internal purposes.
d 3. A criticism of variable costing for managerial accounting purposes is that it
a. is not acceptable for product line segmented reporting.
b. does not reflect cost-volume-profit relationships.
c. overstates inventories.
d. might encourage managers to emphasize the short term at the expense of the long term.
d 5. Variable costing and absorption costing will show the same incomes when there are no
a. beginning inventories.
b. ending inventories.
c. variable costs.
d. beginning and ending inventories.
c 6. ABC had the same activity in 20X3 as in 20X2 except that production was higher in 20X3 than in 20X2. ABC
will show
a. higher income in 20X3 than in 20X2.
b. the same income in both years.
c. the same income in both years under variable costing.
d. the same income in both years under absorption costing.
b 7. The use of variable costing requires knowing
a. the contribution margin and break-even point for each product.
b. the variable and fixed components of production cost.
c. controllable and noncontrollable components of all costs.
d. the number of units of each product produced during the period.
a 14. Advocates of variable costing for internal reporting purposes do NOT rely on which of the following points?
a. The matching concept.
b. Price-volume relationships.
c. Absorption costing does not include selling and administrative expenses as part of inventoriable cost.
d. Production influences income under absorption costing.
d 15. Calculating income under variable costing does NOT require knowing
a. unit sales.
b. unit variable manufacturing costs.
c. selling price.
d. unit production.
a 16. Inventoriable costs under absorption costing include
a. both fixed and variable production costs.
b. only variable production costs.
c. all production costs plus variable selling and administrative costs.
d. all production costs plus all selling and administrative costs.
b 17. Inventoriable costs under variable costing include
a. fixed and variable production costs.
b. variable production costs.
c. all production costs plus variable selling and administrative costs.
d. all production costs plus all selling and administrative costs.
d 18. Absorption costing and variable costing differ in that
a. income is lower under variable costing.
b. variable costing treats selling costs as period costs.
c. variable costing treats all variable costs as product costs.
d. inventory cost is higher under absorption costing.
c 19. Absorption costing differs from variable costing in that
a. standards can be used with absorption costing, but not with variable costing.
b. absorption costing inventories are more correctly valued.
c. production influences income under absorption costing, but not under variable costing.
d. companies using absorption costing have lower fixed costs.
a 20. Which method gives the lowest inventory cost per unit?
a. Variable costing.
b. Absorption costing using normal activity to set the standard fixed cost.
c. Absorption costing using practical capacity to set the standard fixed cost.
d. Actual absorption costing.
b 21. Which costs are treated differently under absorption costing and variable costing?
a. Variable manufacturing costs.
 b. Fixed manufacturing costs.
c. Variable selling and administrative expenses.
d. Fixed selling and administrative expenses.
a 22. ABC Company had 15,000 units in ending inventory. The total cost of those units under variable costing is
a. less than it is under absorption costing.
b. the same as it is under absorption costing.
c. more than it is under absorption costing.
d. any of the above.
b 23. York Company had $200,000 income using absorption costing. York has no variable manufacturing costs.
Beginning inventory was $15,000 and ending inventory was $22,000. Income under variable costing would
have been
a. $178,000.
b. $193,000.
c. $200,000.
d. $207,000.
d 25. Which variance CANNOT arise under variable costing?
a. variable overhead budget variance.
b. variable overhead efficiency variance.
c. fixed overhead budget variance.
d. fixed overhead volume variance.
c 29. Under variable costing there can be no
a. fixed overhead variances.
b. fixed overhead budget variance.
c. fixed overhead volume variance.
d. no fixed overhead.
c 30. ABC had the same activity in 20X4 as in 20X3 except that production was lower in 20X4 than in 20X3. ABC
will show
a. lower income in 20X4 than in 20X3.
b. the same income in both years.
c. the same income in both years under variable costing.
d. the same income in both years under absorption costing.

True-False
F 1. Absorption costing incomes are always higher than variable costing incomes.
F 2. Income under standard variable costing is not influenced by the total amount of fixed manufacturing costs.
T 3. A multiproduct company using standard absorption costing calculates standard fixed costs for each product
using a standard fixed overhead rate based on an input factor such as direct labor hours.
T 4. A major difference between standard costing and normal costing is that one uses actual hours to apply
overhead and the other uses standard hours.
T 5. Proponents of variable costing for external reporting argue that while fixed production costs benefit production
as a whole, they do not benefit any particular unit of product.
T 6. A company using absorption costing can increase its income by increasing production without increasing sales.
F 7. A company using variable costing can increase its income by increasing production without increasing sales.
F 8. Variable costing must be used for internal reporting.
F 9. According to GAAP, absorption costing must be used for internal reporting.
T 10. According to GAAP, absorption costing must be used for external financial reporting.

Problems

1. Whitehall Company sells a single product for $25. It had no beginning inventories. Operating data follow.

Sales, 27,000 units $675,000

Normal capacity 30,000 units
Production costs:
Variable per unit $13
Fixed production $150,000
Selling and administrative expenses:
Variable per unit sold $2
Fixed selling $20,000
Number of units produced 32,500 units

Assume the actual costs were as budgeted.

a. Find contribution margin per unit.

b. Compute the ending inventory under standard variable costing.

c. Compute the income under standard variable costing.

Assume standard absorption costing using normal capacity as the basis for computing the standard fixed cost
per unit. Compute

d. Standard gross profit per unit.

e. Ending inventory.

f. Volume variance.

g. Income.
SOLUTION:

a. $10 ($25 - $13 -$2)

b. $71,500 [$13 x ending inventory of 5,500 units (32,500 - 27,000)]

c. $100,000 [(27,000 x $10) - ($150,000 + $20,000)]

d. $7 [$25 - $13- ($150,000/30,000)]

e. $99,000 [5,500 x ($13 + $5)]

f. $12,500 F [(32,500 - 30,000) x $5 standard fixed cost per unit]

g. $127,500 [(27,000 x $7) + $12,500 - (27,000 x $2) - $20,000]

2. Lund Company sells a single product for $25. It had no beginning inventories. Operating data follow.

Sales, 55,000 units $1,375,000

Normal capacity 60,000 units
Production costs:
Variable per unit $13
Fixed production $300,000
Selling and administrative expenses:
Variable per unit sold $2
Fixed selling $40,000
Number of units produced 66,000 units

Assume the actual costs were as budgeted.

a. Compute income under standard variable costing.

b. Compute income under standard absorption costing.

SOLUTION:

a. $210,000 [55,000 x ($25 - 13 - 2) - ($300,000 + $40,000)]

b. $265,000 {$1,375,000 - 55,000 x [$13 + ($300,000/60,000)] - 55,000 x $2

- $40,000 + $30,000 volume variance}
3. Maiden Rock Company sells a single product for $25. It had no beginning inventories. Operating data follow.

Sales, 20,000 units $500,000

Normal capacity 30,000 units
Production costs:
Variable per unit $13
Fixed production $150,000
Selling and administrative expenses:
Variable per unit sold $2
Fixed selling $20,000
Number of units produced 32,500 units

Assume the actual costs were as budgeted.

a. Find Maiden Rock’s income under standard variable costing.

b. Find Maiden Rock’s income under standard absorption costing.

SOLUTION:

a. $30,000 [20,000 x ($25 - 13 - 2) - ($150,000 + $20,000)]

b. $92,500 {$500,000 - 20,000 x [$13 + [$150,000/30,000)] - 20,000 x $2

- $20,000 + $12,500 volume variance}

4. Genco Inc. makes a single product that sells for $50. The standard variable manufacturing cost is $32.50 and the
standard fixed manufacturing cost is $7.50, based on producing 20,000 units. During the year Genco produced
22,000 units and sold 21,000 units. Actual fixed manufacturing costs were $157,000; actual variable
manufacturing costs were $735,000. Selling and administrative expenses, all fixed, were $75,000. There were
no beginning inventories.

a. Prepare a standard absorption costing income statement.

b. Prepare a standard variable costing income statement.

SOLUTION:

a. Sales (21,000 x $50) $1,050,000

Cost of Goods Sold (21,000 x $40) $840,000
Variances:
Variable Spending $20,000 Un
Fixed Spending 7,000 Un
Volume (15,000) F 12,000
Adjusted Cost of Goods Sold 852,000
Gross Profit $198,000
Selling & Administrative 75,000
Net Income $123,000
b. Sales $1,050,000
Variable Costs (21,000 x $32.50) $682,500
Variable Spending Variance 20,000 Un
Adjusted Variable Cost of Goods Sold 702,500
Contribution Margin $347,500
Fixed Costs:
Manufacturing $157,000
Selling & Administrative 75,000 232,000
Net Income $115,500

5. Brahms Corp. has the following data:

Normal capacity 25,000

Practical capacity 30,000
Budgeted production 20,000
Actual production 22,000
Actual sales ($25 per unit) 21,000
Standard variable production cost per unit $15
Budgeted fixed production costs $120,000

There were no variable cost variances for the year. Fixed costs incurred were equal to the budgeted amount.
There were no beginning inventories and no selling or administrative expenses.

a. Compute the absorption costing income if fixed costs per unit are determined using normal capacity.

b. Compute the absorption costing income if fixed costs per unit are determined using practical capacity.

c. Compute the absorption costing income if fixed costs per unit are determined using budgeted production.

d. Compute the variable costing income.

SOLUTION:

a. $94,800 [$525,000 - (21,000 x $19.80) - $14,400 volume variance]

Volume variance $14,400 = $120,000/25,000 x 22,000 - $120,000

b. $94,000 [$525,000 - (21,000 x $19) - $32,000 volume variance]

Volume variance $32,000 = $120,000/30,000 x 22,000 - $120,000

c. $96,000 [$525,000 - (21,000 x $21) + $12,000 volume variance]

Volume variance $12,000 = $120,000/20,000 x 22,000 - $120,000

d. $90,000 [$525,000 - (21,000 x $15) - $120,000]

6. Cumberland Company sells a single product for $30. It had no beginning inventories. Operating data follow.

Sales, 12,000 units $360,000

Normal capacity 20,000 units
Production costs:
Variable per unit $15
Fixed production $75,000
Selling and administrative expenses:
Variable per unit sold $5
Fixed selling $25,000
Number of units produced 13,000 units

Assume the actual costs were as budgeted.

a. Find contribution margin per unit.

b. Compute the ending inventory under standard variable costing.

c. Compute the income under standard variable costing.

Assume standard absorption costing using normal capacity as the basis for computing the standard fixed cost per
unit. Compute

d. Standard gross profit per unit.

e. Ending inventory.

f. Volume variance.

g. Income.

SOLUTION:

a. $10 ($30 - $15 - $5)

b. $15,000 [$15 x ending inventory of 1,000 units (13,000 - 12,000)]

c. $20,000 [(12,000 x $10) - ($75,000 + $25,000)]

d. $11.25 [$30 - $15 - ($75,000/20,000)]

e. $18,750 [1,000 x ($15 + $3.75)]

f. $26,250 U [(20,000 - 13,000) x $3.75 standard fixed cost per unit]

g. $23,750 [(12,000 x $11.25) - $26,250 - (12,000 x $5) - $25,000]

7. Acme Company sells a single product for $30. It had no beginning inventories. Operating data follow.

Sales, 12,000 units $360,000

Normal capacity 15,000 units
Production costs:
Variable per unit $17
Fixed production $75,000
Selling and administrative expenses:
Variable per unit sold $5
Fixed selling $25,000
Number of units produced 13,500 units

Assume the actual costs were as budgeted.

a. Compute income under standard variable costing.

b. Compute income under standard absorption costing.

SOLUTION:

a. $(4,000) [(12,000 x ($30 - $17 - $5) - ($75,000 + $25,000)]

b. $3,500 {$360,000 - 12,000 x [$17 + ($75,000/15,000)] - 12,000 x $5

- $25,000 - $7,500 volume variance}

8. Carlson Company sells a single product for $30. It had no beginning inventories. Operating data follow.

Sales, 12,500 units $375,000

Normal capacity 15,000 units
Production costs:
Variable per unit $17
Fixed production $75,000
Selling and administrative expenses:
Variable per unit sold $5
Fixed selling $25,000
Number of units produced 13,000 units

Assume the actual costs were as budgeted.

a. Find Carlson’s income under standard variable costing.

b. Find Carlson’s income under standard absorption costing.

SOLUTION:

a. $ -0- [12,500 x ($30 - $17 - $5) - ($75,000 + $25,000)]

b. $2,500 {$375,000 – 12,500 x [$17 + ($75,000/15,000)] – 12,500 x $5

- $25,000 - $10,000 volume variance}
9. Bach Inc. makes a single product that sells for $40. The standard variable manufacturing cost is $22 and the
standard fixed manufacturing cost is $8, based on producing 30,000 units. During the year Bach produced
28,000 units and sold 26,000 units. Actual fixed manufacturing costs were $235,000; actual variable
manufacturing costs were $595,000. Selling and administrative expenses were $95,000. There were no
beginning inventories.

a. Prepare a standard absorption costing income statement.

b. Prepare a standard variable costing income statement.

SOLUTION:

a. Sales (26,000 x $40) $1,040,000

Cost of Goods Sold (26,000 x $30) $780,000
Variances:
Variable Spending $(21,000) F
Fixed Spending ( 5,000) F
Volume 16,000 Un (10,000)
Adjusted Cost of Goods Sold 770,000
Gross Profit $270,000
Selling & Administrative 95,000
Net Income $175,000

b. Sales $1,040,000
Variable Costs (26,000 x $22) $572,000
Variable Spending Variance (21,000) F
Adjusted Variable Cost of Goods Sold 551,000
Contribution Margin $489,000
Fixed Costs:
Manufacturing 235,000
Selling & Administrative 95,000 330,000
Net Income $159,000

10. Hayden Corp. has the following data:

Normal capacity 40,000

Practical capacity 45,000
Budgeted production 30,000
Actual production 35,000
Actual sales ($20 per unit) 32,000
Standard variable production cost per unit $12
Budgeted fixed production costs $135,000

There were no variable cost variances for the year. Fixed costs incurred were equal to the budgeted amount.
There were no beginning inventories and no selling or administrative expenses.

a. Compute the absorption costing income if fixed costs per unit are determined using normal capacity.

b. Compute the absorption costing income if fixed costs per unit are determined using practical capacity.
 c. Compute the absorption costing income if fixed costs per unit are determined using budgeted production.

d. Compute the variable costing income.

SOLUTION:

a. $131,125 [$640,000 - (32,000 x $15.375) - $16,875 volume variance]

Volume variance $16,875 = $135,000/40,000 x 35,000 - $135,000

b. $130,000 [$640,000 - (32,000 x $15) - $30,000 volume variance]

Volume variance $30,000 = $135,000/30,000 x 35,000 - $135,000

c. $134,500 [$640,000 - (32,000 x $16.50) + $22,500 volume variance]

Volume variance $22,500 = $135,000/30,000 x 35,000 - $135,000

d. $121,000 [$640,000 - (32,000 x $12) - $135,000]

Conversion of Absorption-Cost Data to Variable-Cost Data; Working Backwards

45. Kim, Inc., began business at the start of the current year and maintains its accounting records on
an absorption-cost basis. The following selected information appeared on the company's income
statement and end-of-year balance sheet:

Income-statement data:
Sales revenues (35,000 units x $22) $770,000
Gross margin 210,000
Total sales and administrative expenses 160,000
Balance-sheet data:
Ending finished-goods inventory (12,000 units) 192,000

Kim achieved its planned production level for the year. The company's fixed manufacturing
overhead totaled $141,000, and the firm paid a 10% commission based on gross sales dollars to
its sales force.

Required:
A. How many units did Kim plan to produce during the year.
B. How much fixed manufacturing overhead did the company apply to each unit produced?
C. Compute Kim's cost of goods sold.
D. How much variable cost did the company attach to each unit manufactured?

LO: 1, 2, 3 Type: A, N
Answer:
A. Sales (35,000 units) + ending finished-goods inventory (12,000 units) = production
(47,000 units). Note: There is no beginning finished-goods inventory.

B. Since planned and actual production figures are the same, Kim applied $3 to each unit
($141,000 ÷ 47,000 units).

C. Sales revenue $770,000

Gross margin 210,000
Cost of goods sold $560,000

D. Kim attached $13 to each unit. This figure can be derived by analyzing cost of goods
sold:

Cost of goods sold $560,000

Fixed cost in cost of goods sold (35,000 units x $3) 105,000
Variable cost of goods sold $455,000

$455,000 ÷ 35,000 units = $13

The same $13 figure can be obtained by studying the ending finished-good inventory:

Ending finished-goods inventory $192,000

Fixed cost (12,000 units x $3)     36,000
Variable cost $156,000

$156,000 ÷ 12,000 units = $13

Reconciliation of Absorption- and Variable-Costing Income

46. Houston Company has per-unit fixed and variable manufacturing costs of $40 and $15,
respectively. Variable selling and administrative costs are $9 per unit. Consider the two cases
that follow for the firm.

Case A: Variable-costing net income, $110,000; sales, 6,000 units; production, 6,000 units
Case B: Variable-costing net income, $178,000; sales, 7,500 units; production, 7,100 units

Required:
A. From a product-costing perspective, what is the basic difference between absorption costing
and variable costing?
B. Compute Houston's absorption-costing net income in Case A.
C. Compute Houston's absorption-costing net income in Case B.

LO: 1, 4 Type: RC, A

Answer:
A. The difference between absorption costing and variable costing lies in the treatment of fixed
manufacturing overhead. Under absorption costing, fixed manufacturing overhead is a
product cost and attached to each unit produced. In contrast, under variable costing, it is
written off (expensed) as a period cost.

B. Since the number of units sold equals the number of units produced, variable- and absorption-
income figures are the same: $110,000.

C. With sales of 7,500 units and production of 7,100 units, income computed under absorption
costing includes $16,000 (400 units x $40) of prior-period fixed manufacturing overhead.
Absorption income is therefore $162,000 ($178,000 - $16,000).