Sec D 1 Absorption and Variable Costing – Calculations Flashcards
Fact Pattern: At the end of its fiscal year, Jubal Manufacturing recorded the data below:
Prime cost $800,000
Variable manufacturing overhead 100,000
Fixed manufacturing overhead 160,000
Variable selling and other expenses 80,000
Fixed selling and other expenses 40,000
Question: 1If Jubal uses variable costing, the inventoriable costs for the fiscal year are
A. $800,000
B. $900,000
C. $980,000
D. $1,060,000
Answer (B) is correct.
The only costs capitalized are the variable costs of manufacturing. Prime costs (direct materials and
direct labor) are variable.
Prime costs (direct materials and direct labor) $800,000
Variable manufacturing overhead 100,000
Total inventoriable costs $900,000
At the end of its fiscal year, Jubal Manufacturing recorded the data below:
Prime cost $800,000
Variable manufacturing overhead 100,000
Fixed manufacturing overhead 160,000
Variable selling and other expenses 80,000
Fixed selling and other expenses 40,000
Question: 2Using absorption (full) costing, Jubal’s inventoriable costs are
A. $800,000
B. $900,000
C. $1,060,000
D. $1,180,000
Answer (C) is correct.
The absorption method is required for financial statements prepared according to GAAP. It charges all
costs of production to inventories. The prime costs of $800,000, variable manufacturing overhead of
$100,000, and the fixed manufacturing overhead of $160,000 are included. They total $1,060,000.
Osawa, Inc., planned and actually manufactured 200,000 units of its single
product during its first year of operations. Variable manufacturing costs were $30 per unit of
product. Planned and actual fixed manufacturing costs were $600,000, and selling and administrative costs totaled $400,000. Osawa sold 120,000 units of product at a selling price of
$40 per unit. Question: 3Osawa’s operating income for the year using variable costing is
A. $200,000
B. $440,000
C. $800,000
D. $600,000
Answer (A) is correct.
The contribution margin from manufacturing (Sales – Variable costs) is $10 ($40 – $30) per unit sold,
or $1,200,000 (120,000 units × $10). The fixed costs of manufacturing ($600,000) and selling and
administrative costs ($400,000) are deducted from the contribution margin to arrive at an operating
income of $200,000.
Osawa, Inc., planned and actually manufactured 200,000 units of its single
product during its first year of operations. Variable manufacturing costs were $30 per unit of
product. Planned and actual fixed manufacturing costs were $600,000, and selling and
administrative costs totaled $400,000. Osawa sold 120,000 units of product at a selling price of
$40 per unit. Question: 4Osawa’s operating income using absorption (full) costing is
A. $200,000
B. $440,000
C. $600,000
D. $840,000
Answer (B) is correct.
Absorption costing net income is computed as follows:
Sales (120,000 units × $40)
$4,800,000
Variable production costs (200,000 units × $30) $6,000,000
Fixed production costs 600,000
Total production costs $6,600,000
Ending inventory (80,000 units × $33) (2,640,000)
Cost of goods sold
(3,960,000)
Gross profit
$ 840,000
Selling and administrative expenses (400,000)
Operating income
$ 440,000
Estimated unit costs for Cole Lab using full absorption costing and operating at a
production level of 12,000 un its per month:
Estimated
Cost Item Unit Cost
Direct material $32
Direct labor 20
Variable manufacturing overhead 15
Fixed manufacturing overhead 6
Variable selling 3
Fixed selling 4
Question: 8Cole Lab’s estimated conversion costs per unit are
A. $35
B. $41
C. $44
D. $48
Answer (B) is correct.
Conversion costs consist of labor plus fixed and variable manufacturing overhead. The total is $41
($20 + $15 + $6).
Estimated unit costs for Cole Lab using full absorption costing and operating at a
production level of 12,000 un its per month:
Estimated
Cost Item Unit Cost
Direct material $32
Direct labor 20
Variable manufacturing overhead 15
Fixed manufacturing overhead 6
Variable selling 3
Fixed selling 4
Question: 9Cole Lab’s estimated prime costs per unit are
A. $73
B. $32
C. $67
D. $52
Answer (D) is correct.
Prime costs consist of direct materials and direct labor. The total is $52 ($32 + $20).
Farber Company employs a normal (nonstandard) absorption cost system. The
following information is from the financial records of the company for the year.
* Total manufacturing costs were $2,500,000.
* Cost of goods manufactured was $2,425,000.
Applied factory overhead was 30% of total manufacturing costs.
Factory overhead was applied to production at a rate of 80% of direct labor cost.
Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31.
Question: 10Total cost of direct material used by Farber Company for the year is
A. $750,000
B. $812,500
C. $937,500
D. $1,150,000
Answer (B) is correct.
Factory overhead is 30% of total manufacturing costs, or $750,000. Direct labor is $937,500 (750,000
÷ 0.8). Thus, raw materials must account for the remaining $812,500 ($2,500,000 – $750,000 –
$937,500).
Farber Company employs a normal (nonstandard) absorption cost system. The
following information is from the financial records of the company for the year.
* Total manufacturing costs were $2,500,000.
* Cost of goods manufactured was $2,425,000.
Applied factory overhead was 30% of total manufacturing costs.
Factory overhead was applied to production at a rate of 80% of direct labor cost.
Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31.
Question: 11The carrying value of Farber Company’s work-in-process inventory at December 31 is
A. $300,000.
B. $225,000.
C. $100,000.
D. $75,000.
Answer (A) is correct.
Cost of goods manufactured ($2,425,000) equals total manufacturing costs ($2,500,000) plus
beginning work-in-process (75% of EWIP) minus ending work-in-process. The ending work-inprocess
is $300,000.
$2,500,000 + .75 EWIP – EWIP = $2,425,000
$2,500,000 – .25 EWIP = $2,425,000
EWIP = $75,000 ÷ .25
EWIP = $300,000
Valyn Corporation employs an absorption costing system for internal reporting purposes; however,
the company is considering using variable costing. Data regarding Valyn’s planned and actual
operations for the calendar year are presented below.
Planned Actual
Activity Activity
Beginning finished goods
inventory 35,000 35,000
Sales 140,000 125,000
Production 140,000 130,000
Planned Planned Actual
Costs Costs Incurred
Per Unit Total Costs Direct materials $12.00 $1,680,000 $1,560,000 Direct labor 9.00 1,260,000 1,170,000 Variable manufacturing 4.00 560,000 520,000 overhead Fixed manufacturing 5.00 700,000 715,000 overhead Variable selling expenses 8.00 1,120,000 1,000,000 Fixed selling expenses 7.00 980,000 980,000 Variable administrative 2.00 280,000 250,000 expenses Fixed administrative 3.00 420,000 425,000 expenses Total $50.00 $7,000,000 $6,620,000 The planned per unit cost figures shown in the above schedule were based on Valyn producing and selling 140,000 units. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of $9.00 per unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting year. The beginning finished goods inventory for absorption costing purposes was valued at the previous year's planned unit manufacturing cost, which was the same as the current year's planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price for the current year was $70.00 per unit. Valyn Corporation's actual manufacturing contribution margin calculated on the variable costing basis was A. $4,910,000 B. $5,625,000 C. $4,375,000 D. $4,935,000
This problem does not specify whether Valyn is using a standard cost system (in which standard, or
planned, costs are used to account for production) or an actual cost system (in which actual costs
are used). However, it does say that Valyn uses a predetermined manufacturing overhead rate for
applying manufacturing overhead to its product. And since the actual, incurred per unit costs for
direct materials, direct labor and variable manufacturing overhead are exactly the same as the
planned per unit costs for those items, we do not need to know whether standard costing or actual
costing is being used in order to answer this question.
The per unit sales price was $70 and the per unit variable production costs were $25 (direct
materials $12, direct labor $9 and variable manufacturing overhead $4). The contribution margin per unit was therefore $70 − $25, or $45; and with 125,000 units sold, this gives a total manufacturing
contribution margin under the variable costing basis of $5,625,000.
19The marketing manager has learned the following about a new product that is being introduced:
Sales of this product are planned at $100,000 for the first year. Sales commission expense is budgeted at 8% of sales
plus the marketing manager’s incentive budgeted at an additional 1/2%. The preparation of a product brochure will
require 20 hours of marketing salaried staff time at an average rate of $100 per hour, and 10 hours at $150 per hour
for an outside illustrator’s effort. The variable marketing cost for this new product will be
A. $8,000
B. $8,500
C. $10,000
D. $10,500
Answer (B) is correct.
The variable marketing costs for the new product consist of sales commissions and the marketing
manager’s incentive ($100,000 × 8.5% = $8,500).
Mill Corporation had the following unit costs for the recently concluded calendar year, which are the
same as its unit costs for the year previous to the recently concluded year.
Variable Fixed
Manufacturing $8.00 $3.00
Nonmanufacturing $2.00 $5.50
Inventory for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on December 31.
Mill Corporation uses the first in-first out cost flow assumption. When compared to variable costing
income, Mill’s absorption costing income is
A. $2,400 higher.
B. $6,800 higher.
C. $6,800 lower.
D. $2,400 lower.
Mill’s inventory decreased during the year from 6,000 units on Jan. 1 to 5,200 units on December
31. Therefore, we know that Mill sold 800 more units than it manufactured during the recently
concluded calendar year. Total fixed manufacturing cost in inventory on Jan. 1 was 6,000 × $3 =
$18,000. Total fixed manufacturing cost in inventory on Dec. 31 was 5,200 × $3, or $15,600. The
difference between $18,000 and $15,600, which is $2,400, was transferred to cost of goods sold as
an expense under absorption costing.
Under variable costing, though, that $2,400 would have been expensed during the previous year as
fixed costs for that year, and thus it would not have been on the recently concluded year’s income
statement, so net income under variable costing would have been $2,400 higher than under
absorption costing. Therefore, net income under absorption costing would be $2,400 lower than it
would be under variable costing.
26The following information relates to a corporation, which produced and sold 50,000 units during a
recent accounting period:
Sales $850,000
Manufacturing costs:
Fixed 210,000
Variable 140,000
Selling and administrative costs:
Fixed 300,000
Variable 45,000
Income tax rate 40%
For the next accounting period, if production and sales are expected to be 40,000 units, the company should
anticipate a contribution margin per unit of
A. $1.86
B. $3.10
C. $7.30
D. $13.30
Answer (D) is correct.
Unit contribution margin is the difference between unit selling price and unit variable cost. Unit selling
price is $17 ($850,000 ÷ 50,000 units), and unit variable cost is $3.70 [($140,000 variable
manufacturing cost + $45,000 variable S&A cost) ÷ 50,000 units sold]. Accordingly, unit contribution
margin is $13.30 ($17 – $3.70).
31Using absorption costing, a company’s income for October was $250,000. The company began the
month with 10,000 units in finished goods inventory that contained $30,000 of fixed manufacturing overhead costs.
During October, the company produced 330,000 units and sold 325,000 units. The fixed manufacturing overhead for
October totaled $990,000. If the company used variable costing, its income for October would be
A. $265,000
B. $250,000
C. $235,000
D. $234,308
Answer (C) is correct.
Under variable costing, fixed manufacturing overhead is treated as a period expense and is expensed in
the period incurred. Each of the units produced under absorption costing carries $3/unit of fixed
manufacturing overhead expense that is incurred when the unit is sold. Therefore, because they
increased their inventory by 5,000 units (330,000 produced – 325,000 sold), an additional $15,000
($5,000 × $3) must be expensed in the current period that would not have been otherwise expensed
until sale under absorption costing, reducing income to $235,000.
35At the start of its fiscal year, a company anticipated producing 300,000 units throughout the year.
The annual budgeted manufacturing overhead was $150,000 for variable costs and $600,000 for fixed costs. In
April, when there was a beginning inventory for finished goods of 5,000 units, the company showed an income of
$40,000 using absorption costing. That same month, ending inventory for finished goods was 7,000 units. What
amount would the company recognize as income for April using variable costing?
A. $35,000
B. $36,000
C. $44,000
D. $45,000
Answer (B) is correct.
The difference between variable costing and absorption costing is the treatment of fixed costs. Under
absorption costing, the fixed portion of manufacturing overhead is included in the cost of each product.
Under variable costing, product cost includes only variable manufacturing costs and fixed costs are
treated as period costs. The rate for assigning fixed overhead costs is $2 per unit ($600,000 budgeted
fixed overhead costs ÷ 300,000 budgeted production units). Since the ending inventory in April is
2,000 units greater than the beginning inventory, the company produced more units than it sold. In
April, under absorption costing, $4,000 ($2 fixed overhead rate per unit × 2,000 units produced and not
sold) of fixed manufacturing overhead costs were still embedded in ending inventory and were not
expensed. Under variable costing, these fixed manufacturing overhead costs of $4,000 were expensed.
Therefore, the operating income under the absorption costing is $4,000 greater than under the variable
costing. Therefore, operating income under variable costing is $36,000 ($40,000 – $4,000).
