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Exam 8: Variable Costing and the Costs of Quality and Sustainability

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Question 1

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Coastal Corporation, which uses throughput costing, began operations at the start of the current year. Planned and actual production equaled 20,000 units, and sales totaled 17,500 units at $95 per unit. Cost data for the year were as follows: $\begin{array}{lr}\begin{array}{l}\text { Direct materials (per unit) } \\\text { Conversion cost: }\end{array} & \$ 18 \\\quad \text { Direct labor } & 160,000 \\\text { Variable manufacturing overhead } & 280,000 \\\quad \text { Fixed manufacturing overhead } & 340,000 \\\text { Selling and administrative costs (total) } & 430,000\end{array}$ Required: A. Compute the company's total cost for the year. B. How much of this cost would be held in year-end inventory under (1) absorption costing and (2) variable costing? C. How much of the company's total cost for the year would appear on the period's income statement under (1) absorption costing and (2) variable costing?

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A. \[\begin{array} { l r } \text { Direct materials } ( 20,000 \text { units } \times ~ \$ 18 ) & \$ 360,000 \\ \text { Direct labor } & 160,000 \\ \text { Variable manufacturing overhead } & 280,000 \\ \text { Fixed manufacturing overhead } & 340,000 \\ \text { Selling and administrative costs } & 430,000 \\ \text { Total } & \$ 1,570,000 \end{array}\] B. The year-end inventory of 2,500 units (20,000 - 17,500) is costed as follows: 11eaa0b3_f1fa_3c62_8fb0_33efed6b5860_TB2486_00 C. The total costs would be allocated between the current period's income statement and the year-end inventory on the balance sheet. Thus: Absorption costing: $1,570,000 - $142,500 = $1,427,500 Variable costing: $1,570,000 - $100,000 = $1,470,000

Question 2

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Which of the following situations would cause variable-costing income to be higher than absorption-costing income?

A) Units sold equaled 39,000 and units produced equaled 42,000.
B) Units sold and units produced were both 42,000.
C) Units sold equaled 55,000 and units produced equaled 49,000.
D) Sales prices decreased by $7 per unit during the accounting period.
E) Selling expenses increased by 10% during the accounting period.

F) A) and E)
G) D) and E)

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Question 3

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Chino began business at the start of the current year. The company planned to produce 25,000 units, and actual production conformed to expectations. Sales totaled 22,000 units at $30 each. Costs incurred were: $\begin{array}{lr}\text { Variable manufacturing overhead per unit } & \$ 8 \\\text { Fixed manufacturing overhead } & 150,000 \\\text { Variable selling and administrative cost per unit } & 2 \\\text { Fixed selling and administrative cost } & 100,000\end{array}$ If there were no variances, the company's absorption-costing income would be:

Consider the following statements about absorption- and variable-costing income: I. Yearly income reported under absorption costing will differ from income reported under variable costing if production and sales volumes differ. II. In the long-run, total income reported under absorption costing will often be close to that reported under variable costing. III. Differences in income under absorption and variable costing can often be reconciled by multiplying the change in inventory (in units) by the variable manufacturing overhead cost per unit. Which of the above statements is (are) true?

Indiana Company incurred the following costs during the past year when planned production and actual production each totaled 20,000 units: $\begin{array} { l r } \text { Direct material used } & \$ 280,000 \\\text { Direct labor } & 120,000 \\\text { Variable manufacturing overhead } & 160,000 \\\text { Fixed manufacturing overhead } & 100,000 \\\text { Variable selling and administrative cost } & 60,000 \\\text { Fixed selling and administrative cost } & 90,000\end{array}$ Indiana's per-unit inventoriable cost under variable costing is:

Which of the following product-costing systems is/are required for tax purposes?

All of the following are inventoried under variable costing except:

Consider the following statements about absorption costing and variable costing: I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis. II. Absorption costing must be used for external financial reporting. III. A number of companies use both absorption costing and variable costing. Which of the above statements is (are) true?

For external-reporting purposes, generally accepted accounting principles require that net income be based on variable costing.

Franz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9; fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and fixed selling and administrative costs, $220,000. The company sells its units for $45 each. Additional data follow. $\begin{array}{lr}\text { Planned production in units } & 10,000 \\\text { Actual production in units } & 10,000 \\\text { Number of units sold } & 8,500\end{array}$ There were no variances. The income (loss) under absorption costing is:

All of the following costs are inventoried under absorption costing except:

Webster, Inc. began operations at the start of the current year, having a production target of 60,000 units. Actual production totaled 60,000 units, and the company sold 95% of its manufacturing output at $50 per unit. The following costs were incurred: $\begin{array}{l}\text { Manufacturing: }\\\begin{array} { l r } \text { Direct materials used } & \$ 240,000 \\\text { Direct labor } & 480,000 \\\text { Variable manufacturing overhead } & 360,000 \\\text { Fixed manufacturing overhead } & 600,000 \\\text { ling and administrative: } & \\\text { Variable } & 180,000 \\\text { Fixed } & 630,000\end{array}\end{array}$ Required: A. Assuming the use of variable costing, compute the cost of Webster's ending finished-goods inventory. B. Compute the company's contribution margin. Would Webster disclose the contribution margin on a variable-costing income statement or an absorption-costing income statement? C. Assuming the use of absorption costing, how much fixed selling and administrative cost would Webster include in the ending finished-goods inventory? D. Compute the company's gross margin.

Costs of determining whether defects exist are called:

Hirsch 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 independent cases that follow for the firm. Case A: Variable-costing income, $110,000; sales, 6,000 units; production, 6,000 units Case B: Variable-costing income, $178,000; sales, 7,500 units; production, 7,100 units Required: A. A. From a product-costing perspective, what is the basic difference between absorption costing and variable costing? B. B. Compute Hirsch's absorption-costing income in Case C. Compute Hirsch's absorption-costing income in Case

Garcia's inventory increased during the year. On the basis of this information, income reported under absorption costing:

The following data relate to Lebeaux Corporation for the year just ended: $\begin{array}{lr}\text { Sales revenue }&\$750,000\\\text { Cost of goods sold: }\\{\text { Variable portion }} & 370,000 \\\text { Fixed portion } & 110,000 \\\text { Variable selling and administrative costs } & 50,000 \\\text { Fixed selling and administrative cost } & 75,000\end{array}$ Which of the following statements is correct?

The difference in income between absorption and variable costing can be explained by the change in finished-goods inventory (in units) multiplied by the standard fixed manufacturing overhead rate. Required: Explain why this calculation accounts for the difference noted.

Roma Corporation has computed the following unit costs for the year just ended: $\begin{array} { l r } \text { Direct material used } & \$ 11 \\\text { Direct labor } & 17 \\\text { Variable manufacturing overhead } & 21 \\\text { Fixed manufacturing overhead } & 23 \\\text { Variable selling and administrative cost } & 5 \\\text { Fixed selling and administrative cost } & 27\end{array}$ Under absorption costing, each unit of the company's inventory would be carried at:

Variable costing of inventory and absorption costing of inventory is relevant for which of the following types of businesses?

Which of the following conditions would cause absorption-costing income to be lower than variable-costing income?