Variable Costing and Absorption costing: A Tool for Management

Q.1.Pacher Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ............................................... $155
Units in beginning inventory ..................... 100
Units produced .......................................... 4,500
Units sold ................................................... 4,300
Units in ending inventory .......................... 300
Variable costs per unit:
Direct materials ...................................... $28
Direct labor ............................................. $49
Variable manufacturing overhead .......... $7
Variable selling and administrative ........ $7
Fixed costs:
Fixed manufacturing overhead ............... $175,500
Fixed selling and administrative ............ $81,700
The company produces the same number of units every month, although the sales in
units vary from month to month. The company's variable costs per unit and total fixed
costs 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 the
variable costing method.
c. Without preparing an income statement, determine the absorption costing net
operating income for the month. (HintUse the reconciliation method.)
Answer:
a. Variable costing unit product cost
Direct materials ........................................... $28
Direct labor .................................................. 49
Variable manufacturing overhead ............... 7
Unit product cost ......................................... $84
b. Variable costing income statement
Sales .............................................................. $666,500
Less variable expenses:
Variable cost of goods sold:
Beginning inventory ............................... $ 8,400
Add variable manufacturing costs .......... 378,000
Goods available for sale ......................... 386,400
Less ending inventory ............................ 25,200
Variable cost of goods sold ....................... 361,200
Variable selling and administrative ........... 30,100 391,300
Contribution margin ..................................... 275,200
Less fixed expenses:
Fixed manufacturing overhead .................. 175,500

Fixed selling and administrative ............... 81,700 257,200

Net operating income ................................... $ 18,000
c. Computation of absorption costing net operating income
Fixed manufacturing overhead per unit ........................... $39.00
Change in inventories (units) .......................................... 200
Variable costing net operating income ............................ $18,000
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing ............................. 7,800
Absorption costing net operating income ........................ $25,800
Q.2. Qasimi Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ............................................... $121
Units in beginning inventory ..................... 0
Units produced .......................................... 4,300
Units sold ................................................... 4,000
Units in ending inventory .......................... 300
Variable costs per unit:
Direct materials ...................................... $44
Direct labor ............................................. $35
Variable manufacturing overhead .......... $7
Variable selling and administrative ........ $5
Fixed costs:
Fixed manufacturing overhead ............... $34,400
Fixed selling and administrative ............ $72,000
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 the
variable costing method.
c. Without preparing an income statement, determine the absorption costing net
operating income for the month. (Hint: Use the reconciliation method.)
Answer:
a. Variable costing unit product cost
Direct materials ........................................... $44
Direct labor .................................................. 35
Variable manufacturing overhead ............... 7
Unit product cost ......................................... $86
b. Variable costing income statement
Sales .............................................................. $484,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory ............................... $ 0
Add variable manufacturing costs .......... 369,800
Goods available for sale ......................... 369,800
Less ending inventory ............................ 25,800
Variable cost of goods sold ....................... 344,000

Variable selling and administrative ........... 20,000 364,000

Contribution margin ..................................... 120,000
Less fixed expenses:
Fixed manufacturing overhead .................. 34,400
Fixed selling and administrative ............... 72,000 106,400
Net operating income ................................... $ 13,600
c. Computation of absorption costing net operating income
Fixed manufacturing overhead per unit ........................... $8.00
Change in inventories (units) .......................................... 300
Variable costing net operating income ............................ $13,600
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing ............................. 2,400
Absorption costing net operating income ........................ $16,000
Q.3.Italia Espresso Machina Inc. produces a single product. Data concerning the
company's operations last year appear below:
Units in beginning inventory ................................. 0
Units produced ...................................................... 2,000
Units sold ............................................................... 1,900
Selling price per unit ............................................. $100
Variable costs per unit:
Direct materials .................................................. $30
Direct labor ......................................................... $10
Variable manufacturing overhead ...................... $5
Variable selling and administrative .................... $2
Fixed costs in total:
Fixed manufacturing overhead ........................... $40,000
Fixed selling and administrative ........................ $60,000
Required:
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 between
absorption and variable costing for the year.
Answer:
a. Variable
costing
Absorption
costing
Direct materials ................................................... $30 $30
Direct labor .......................................................... 10 10
Variable manufacturing overhead ....................... 5 5
Fixed manufacturing overhead
($40,000 2,000 units) .................................... - 20
Unit product cost ................................................. $45 $65
b. Sales ................................................................................ $190,000

Less cost of goods sold:

Beginning inventory ........................................................ $ 0
Add cost of goods manufactured @ $65 ......................... 130,000
Goods available for sale .................................................. 130,000
Less ending inventory @ $65 .......................................... 6,500 123,500
Gross margin ................................................................... 66,500
Less selling and administrative expenses* ...................... 63,800
Net operating income ...................................................... $ 2,700
* 1,900 units $2 per unit variable plus $60,000 fixed.
c. Sales ................................................................................. $190,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory .................................................. $ 0
Add variable manufacturing costs @ $45 ................. 90,000
Goods available for sale ............................................ 90,000
Less ending inventory @ $45 .................................... 4,500
Variable cost of goods sold .......................................... 85,500
Variable selling & admin. @ $2 ................................... 3,800 89,300
Contribution margin ........................................................ 100,700
Less fixed expenses:
Fixed manufacturing overhead ..................................... 40,000
Fixed selling & admin. ................................................. 60,000 100,000
Net operating income ...................................................... $ 700
d. Variable costing net operating income ............................ $ 700
Add fixed factory overhead deferred in inventory under
absorption costing (100 units $20 per unit) .............. 2,000
Absorption costing net operating income ....................... $2,700
Q.4. Netro Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ........................................................... $91
Units in beginning inventory ................................. 100
Units produced ...................................................... 1,800
Units sold ............................................................... 1,400
Units in ending inventory ...................................... 500
Variable costs per unit:
Direct materials .................................................. $49
Direct labor ......................................................... $13
Variable manufacturing overhead ...................... $2
Variable selling and administrative .................... $7
Fixed costs:
Fixed manufacturing overhead ........................... $14,400
Fixed selling and administrative ........................ $7,000
The company produces the same number of units every month, although the sales in
units vary from month to month. The company's variable costs per unit and total fixed
costs have been constant from month to month.
Required:

a. Prepare an income statement for the month using the contribution format and the
variable costing method.
b. Prepare an income statement for the month using the absorption costing method.
Answer:
a. Variable costing income statement
Sales ....................................................................... $127,400
Less variable expenses:
Variable cost of goods sold:
Beginning inventory ........................................ $ 6,400
Add variable manufacturing costs ................... 115,200
Goods available for sale .................................. 121,600
Less ending inventory ...................................... 32,000
Variable cost of goods sold ................................. 89,600
Variable selling and administrative .................... 9,800 99,400
Contribution margin ............................................... 28,000
Less fixed expenses:
Fixed manufacturing overhead ........................... 14,400
Fixed selling and administrative ......................... 7,000 21,400
Net operating income ............................................. $ 6,600
b. Absorption costing income statement
Sales ....................................................................... $127,400
Less cost of goods sold:
Beginning inventory .............................................. $ 7,200
Add cost of goods manufactured ........................... 129,600
Goods available for sale ......................................... 136,800
Less ending inventory ............................................ 36,000 100,800
Gross margin .......................................................... 26,600
Less selling and administrative expenses:
Variable selling and administrative ....................... 9,800
Fixed selling and administrative ............................ 7,000 16,800
Net operating income ............................................. $ 9,800
Oakford Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price ........................................................... $143
Units in beginning inventory ................................. 0
Units produced ...................................................... 1,200
Units sold ............................................................... 1,000
Units in ending inventory ...................................... 200
Variable costs per unit:
Direct materials .................................................. $33
Direct labor ......................................................... $52
Variable manufacturing overhead ...................... $1
Variable selling and administrative .................... $7
Fixed costs:
Fixed manufacturing overhead ........................... $38,400

Fixed selling and administrative ........................ $4,000

Required:
a. Prepare an income statement for the month using the contribution format and the
variable costing method.
b. Prepare an income statement for the month using the absorption costing method.
Answer:
a. Variable costing income statement
Sales ....................................................................... $143,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory ........................................ $ 0
Add variable manufacturing costs ................... 103,200
Goods available for sale .................................. 103,200
Less ending inventory ..................................... 17,200
Variable cost of goods sold ................................ 86,000
Variable selling and administrative .................... 7,000 93,000
Contribution margin .............................................. 50,000
Less fixed expenses:
Fixed manufacturing overhead ........................... 38,400
Fixed selling and administrative ........................ 4,000 42,400
Net operating income ............................................ $ 7,600
b. Absorption costing income statement
Sales ....................................................................... $143,000
Less cost of goods sold:
Beginning inventory .............................................. $ 0
Add cost of goods manufactured ........................... 141,600
Goods available for sale ........................................ 141,600
Less ending inventory ........................................... 23,600 118,000
Gross margin ......................................................... 25,000
Less selling and administrative expenses:
Variable selling and administrative ....................... 7,000
Fixed selling and administrative ............................ 4,000 11,000
Net operating income ............................................ $ 14,000