Variable Costing and Absorption costing: A Tool for Management

Q.1.Pacher Company, which has only one product, has provided the following dataconcerning its most recent month of operations:Selling price ............................................... $155Units in beginning inventory ..................... 100Units produced .......................................... 4,500Units sold ................................................... 4,300Units in ending inventory .......................... 300Variable costs per unit:Direct materials ...................................... $28Direct labor ............................................. $49Variable manufacturing overhead .......... $7Variable selling and administrative ........ $7Fixed costs:Fixed manufacturing overhead ............... $175,500Fixed selling and administrative ............ $81,700The company produces the same number of units every month, although the sales inunits vary from month to month. The company's variable costs per unit and total fixedcosts have been constant from month to month.Required:a. What is the unit product cost for the month under variable costing?b. Prepare an income statement for the month using the contribution format and thevariable costing method.c. Without preparing an income statement, determine the absorption costing netoperating income for the month. (HintUse the reconciliation method.)

Answer:a. Variable costing unit product costDirect materials ........................................... $28Direct labor .................................................. 49Variable manufacturing overhead ............... 7Unit product cost ......................................... $84b. Variable costing income statementSales .............................................................. $666,500Less variable expenses:Variable cost of goods sold:Beginning inventory ............................... $ 8,400Add variable manufacturing costs .......... 378,000Goods available for sale ......................... 386,400Less ending inventory ............................ 25,200Variable cost of goods sold ....................... 361,200Variable selling and administrative ........... 30,100 391,300Contribution margin ..................................... 275,200Less fixed expenses:Fixed manufacturing overhead .................. 175,500

Fixed selling and administrative ............... 81,700 257,200Net operating income ................................... $ 18,000c. Computation of absorption costing net operating incomeFixed manufacturing overhead per unit ........................... $39.00Change in inventories (units) .......................................... 200Variable costing net operating income ............................ $18,000Add fixed manufacturing overhead costs deferred ininventory under absorption costing ............................. 7,800Absorption costing net operating income ........................ $25,800

Q.2. Qasimi Company, which has only one product, has provided the following dataconcerning its most recent month of operations:Selling price ............................................... $121Units in beginning inventory ..................... 0Units produced .......................................... 4,300Units sold ................................................... 4,000Units in ending inventory .......................... 300Variable costs per unit:Direct materials ...................................... $44Direct labor ............................................. $35Variable manufacturing overhead .......... $7Variable selling and administrative ........ $5Fixed costs:Fixed manufacturing overhead ............... $34,400Fixed selling and administrative ............ $72,000Required:a. What is the unit product cost for the month under variable costing?b. Prepare an income statement for the month using the contribution format and thevariable costing method.c. Without preparing an income statement, determine the absorption costing netoperating income for the month. (Hint: Use the reconciliation method.)

Answer:a. Variable costing unit product costDirect materials ........................................... $44Direct labor .................................................. 35Variable manufacturing overhead ............... 7Unit product cost ......................................... $86b. Variable costing income statementSales .............................................................. $484,000Less variable expenses:Variable cost of goods sold:Beginning inventory ............................... $ 0Add variable manufacturing costs .......... 369,800Goods available for sale ......................... 369,800Less ending inventory ............................ 25,800Variable cost of goods sold ....................... 344,000

Variable selling and administrative ........... 20,000 364,000Contribution margin ..................................... 120,000Less fixed expenses:Fixed manufacturing overhead .................. 34,400Fixed selling and administrative ............... 72,000 106,400Net operating income ................................... $ 13,600c. Computation of absorption costing net operating incomeFixed manufacturing overhead per unit ........................... $8.00Change in inventories (units) .......................................... 300Variable costing net operating income ............................ $13,600Add fixed manufacturing overhead costs deferred ininventory under absorption costing ............................. 2,400Absorption costing net operating income ........................ $16,000

Q.3.Italia Espresso Machina Inc. produces a single product. Data concerning thecompany's operations last year appear below:Units in beginning inventory ................................. 0Units produced ...................................................... 2,000Units sold ............................................................... 1,900Selling price per unit ............................................. $100Variable costs per unit:Direct materials .................................................. $30Direct labor ......................................................... $10Variable manufacturing overhead ...................... $5Variable selling and administrative .................... $2Fixed costs in total:Fixed manufacturing overhead ........................... $40,000Fixed selling and administrative ........................ $60,000Required:a. Compute the unit product cost under both absorption and variable costing.b. Prepare an income statement for the year using absorption costing.c. Prepare an income statement for the year using variable costing.d. Prepare a report reconciling the difference in net operating income betweenabsorption and variable costing for the year.

Answer:a. VariablecostingAbsorptioncostingDirect materials ................................................... $30 $30Direct labor .......................................................... 10 10Variable manufacturing overhead ....................... 5 5Fixed manufacturing overhead($40,000 ÷ 2,000 units) .................................... - 20Unit product cost ................................................. $45 $65b. Sales ................................................................................ $190,000

Less cost of goods sold:Beginning inventory ........................................................ $ 0Add cost of goods manufactured @ $65 ......................... 130,000Goods available for sale .................................................. 130,000Less ending inventory @ $65 .......................................... 6,500 123,500Gross margin ................................................................... 66,500Less selling and administrative expenses* ...................... 63,800Net operating income ...................................................... $ 2,700* 1,900 units × $2 per unit variable plus $60,000 fixed.c. Sales ................................................................................. $190,000Less variable expenses:Variable cost of goods sold:Beginning inventory .................................................. $ 0Add variable manufacturing costs @ $45 ................. 90,000Goods available for sale ............................................ 90,000Less ending inventory @ $45 .................................... 4,500Variable cost of goods sold .......................................... 85,500Variable selling & admin. @ $2 ................................... 3,800 89,300Contribution margin ........................................................ 100,700Less fixed expenses:Fixed manufacturing overhead ..................................... 40,000Fixed selling & admin. ................................................. 60,000 100,000Net operating income ...................................................... $ 700d. Variable costing net operating income ............................ $ 700Add fixed factory overhead deferred in inventory underabsorption costing (100 units × $20 per unit) .............. 2,000Absorption costing net operating income ....................... $2,700

Q.4. Netro Company, which has only one product, has provided the following dataconcerning its most recent month of operations:Selling price ........................................................... $91Units in beginning inventory ................................. 100Units produced ...................................................... 1,800Units sold ............................................................... 1,400Units in ending inventory ...................................... 500Variable costs per unit:Direct materials .................................................. $49Direct labor ......................................................... $13Variable manufacturing overhead ...................... $2Variable selling and administrative .................... $7Fixed costs:Fixed manufacturing overhead ........................... $14,400Fixed selling and administrative ........................ $7,000The company produces the same number of units every month, although the sales inunits vary from month to month. The company's variable costs per unit and total fixedcosts have been constant from month to month.Required:

a. Prepare an income statement for the month using the contribution format and thevariable costing method.b. Prepare an income statement for the month using the absorption costing method.

Answer:a. Variable costing income statementSales ....................................................................... $127,400Less variable expenses:Variable cost of goods sold:Beginning inventory ........................................ $ 6,400Add variable manufacturing costs ................... 115,200Goods available for sale .................................. 121,600Less ending inventory ...................................... 32,000Variable cost of goods sold ................................. 89,600Variable selling and administrative .................... 9,800 99,400Contribution margin ............................................... 28,000Less fixed expenses:Fixed manufacturing overhead ........................... 14,400Fixed selling and administrative ......................... 7,000 21,400Net operating income ............................................. $ 6,600b. Absorption costing income statementSales ....................................................................... $127,400Less cost of goods sold:Beginning inventory .............................................. $ 7,200Add cost of goods manufactured ........................... 129,600Goods available for sale ......................................... 136,800Less ending inventory ............................................ 36,000 100,800Gross margin .......................................................... 26,600Less selling and administrative expenses:Variable selling and administrative ....................... 9,800Fixed selling and administrative ............................ 7,000 16,800Net operating income ............................................. $ 9,800

Oakford Company, which has only one product, has provided the following dataconcerning its most recent month of operations:Selling price ........................................................... $143Units in beginning inventory ................................. 0Units produced ...................................................... 1,200Units sold ............................................................... 1,000Units in ending inventory ...................................... 200Variable costs per unit:Direct materials .................................................. $33Direct labor ......................................................... $52Variable manufacturing overhead ...................... $1Variable selling and administrative .................... $7Fixed costs:Fixed manufacturing overhead ........................... $38,400

Fixed selling and administrative ........................ $4,000Required:a. Prepare an income statement for the month using the contribution format and thevariable costing method.b. Prepare an income statement for the month using the absorption costing method.Answer:a. Variable costing income statementSales ....................................................................... $143,000Less variable expenses:Variable cost of goods sold:Beginning inventory ........................................ $ 0Add variable manufacturing costs ................... 103,200Goods available for sale .................................. 103,200Less ending inventory ..................................... 17,200Variable cost of goods sold ................................ 86,000Variable selling and administrative .................... 7,000 93,000Contribution margin .............................................. 50,000Less fixed expenses:Fixed manufacturing overhead ........................... 38,400Fixed selling and administrative ........................ 4,000 42,400Net operating income ............................................ $ 7,600

b. Absorption costing income statementSales ....................................................................... $143,000Less cost of goods sold:Beginning inventory .............................................. $ 0Add cost of goods manufactured ........................... 141,600Goods available for sale ........................................ 141,600Less ending inventory ........................................... 23,600 118,000Gross margin ......................................................... 25,000Less selling and administrative expenses:Variable selling and administrative ....................... 7,000Fixed selling and administrative ............................ 4,000 11,000Net operating income ............................................ $ 14,000