Exam 12: Absorption Versus Variable Costing

Malena is working on budgeting for the next fiscal year. The company recently upgraded their equipment purchases to increase capacity. The new equipment, with the current workforce can produce 225 units per hour, working 365 days per year. The operations currently run 24 hours a day. Malena estimates a more realistic goal is 210 units per hour. She also believes the company will be closed 15 days during the year for maintenance and holidays. She is also accounting for setups and inspection of 3 hours per day that will temporarily stop production. The current system produces 1,300,000 units per year and is tied to demand. If the budgeted fixed MOH costs are $2,100,000 for the upcoming year, what would be the fixed MOH rate using the normal capacity?

When using ____________ costing, management may be tempted to produce more units than demand when trying to increase operating income.

Angels R Us is currently operating at 100% capacity and incurred the following costs during the first month of operations: If the company has ending inventory of 1,600 units for the month, how much inventory would be reported on the balance sheet using variable costing?

Mariah is compiling annual financial statements for her business. She uses absorption costing, as per GAAP. Budgeted variable manufacturing costs are $10 per unit and variable operating costs are $2 per unit. Budgeted fixed MOH is $50,000, and budgeted operating costs are $20,000. If she plans to produce 10,000 units, how much cost should be capitalized to inventory for each unit produced?

Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year: The company produced 25 units per year for 2025, 2026, and 2027. The company sold 22 units in 2025, 20 units in 2026, and 26 units in 2027. It reported no volume variances for the three-year period. For 2027,

Which of the following costs are charged to the product when using variable costing?

All the following are true regarding normal capacity except:

During 2025, inventory increased by 7,000 units. The following information for the company is available: If the company uses absorption costing rather than variable costing, the effect on operating income would be a

Knuckles is trying to determine a denominator level for the company's budgeted production that will accurately portray the fixed-MOH cost per unit. The level should provide a solid gross margin and operating income. The company wants to set an achievable denominator so employees are not discouraged, but that will also motivate the employees to work harder to reach the goal. Knuckles has come up with three fixed-MOH capacity options with fixed-MOH expected to be $240,000 next year. Instructions a.Calculate the budgeted fixed MOH rate of each level. (Round to the nearest cent.) b.Which level will generate the highest estimated gross margin per unit? c.Which level will generate the highest operating income in total? Explain your answer. d.Which level will best achieve Knuckles' goal of improving employee motivation? Why? e.Which level represents the most accurate measurement of the fixed-MOH cost per unit? Why?

Boyd Manufacturing opened for business on January 1, 2025. During 2025, the company budgeted for 12,000 units with fixed manufacturing costs of $78,000 but only produced 10,000 units and incurred fixed productions costs of $64,000 and fixed operating expenses of $23,000. The variable cost to produce each unit was $22 with $6 of variable operating expenses per unit. The company prepares its income statement using absorption costing. Boyd uses standard costing within its absorption costing system. There were no price or efficiency variances this year, and any other variances are written off directly to COGS. Instructions a.Calculate the cost per unit that Boyd will capitalize into inventory this year. b.Calculate Boyd's fixed MOH volume variance for 2025. (Identify amount and sign) c.If Boyd sold 9,500 units at $45 per unit, prepare the company's income statement in good form. d.Determine the FG Inventory balance to be reported on the balance sheet at the end of 2025.

Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year: The company produced 25 units per year for 2025, 2026, and 2027. The company sold 22 units in 2025, 20 units in 2026, and 26 units in 2027. It reported no volume variances for the three-year period. For the three years, 2025 - 2027,

Hall Enterprises has budgeted variable and fixed manufacturing costs of $90,000 and $51,000, respectively. The budgets are based on producing 3,000 units. For the same budget period, variable and fixed operating expenses were budgeted at $12,000 and $24,000, respectively. Hall Enterprises currently uses variable costing. Assuming no beginning inventory for the period, all 3,000 units were produced, and the company sold 2,700 units, how much in COGS did the company report for the year? How much inventory cost will be on the balance sheet at year end?

Perla Industries produced 30,000 units and sold 29,000 units in 2025 with no beginning inventory. During the year, the following costs were incurred: Calculate the ending inventory balance using both absorption costing and variable costing. Which method would you recommend Perla use for external purposes? Which method should be used to evaluate the managers of the company? Be sure to state your reason why.

Dylan, manager of Burkley Company, is using a variable costing system to evaluate the company's performance. The company uses standard costing and budgeted to produce 5,000 units with a budgeted cost of $25,000 of fixed MOH and $20 per unit of variable manufacturing costs. Because of supply chain issues, the company was only able to produce 3,500 units with fixed MOH incurred of $17,850. However, they did sell all the units produced, plus the 600 units in beginning inventory. Assuming no changes in costs from last year to this year, how much will Dylan show on Burkley Company's report for its COGS this year? How much will be recognized for a fixed MOH volume variance?

Juanita prepared her company's variable costing income statement for internal planning. The income statement was as follows: She was planning to compare the results to the prior period and to plan for the upcoming fiscal year. However, she expects the results to be lower than last year. The company produced 9,200 units, which was 400 units more than budgeted and sold 9,000 units. Juanita did not discover any price or efficiency variances within the standard costing system for the current period, and the variable operating costs per unit were $6. Instructions a. Is there a fixed-MOH volume variable hiding within the variable costing income statement? If so, how much and what is the sign, and where is it hidden? b.If Juanita used absorption costing for the current period, would she have reported a fixed-MOH volume variance? If so, how much and what is the sign, and where would it be reported? c.If the company writes off standard variances directly to COGS, prepare the company's current year absorption costing income statement. d.Explain the operating income difference or no difference between the two methods.

The formula for budgeted fixed manufacturing overhead rate is

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company's production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000. She has put together the following information to plan for the coming policy: Using theoretical capacity, what is the denominator level?

When comparing inventory under absorption and variable costing there are two stable truths. What are they?

Operating income, using variable costing, is contribution margin less

When calculating the budgeted number of units to be produced, all the following are options except: