Exam 12: Absorption Versus Variable Costing

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 COGS for both absorption and variable costing, assuming no variances were recorded. Explain the difference between the two systems.

Determining the numerator and denominator when calculating the budgeted fixed-MOH rate

Practical capacity

When using variable costing and absorption costing, fixed manufacturing costs are treated as

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the Fixed MOH volume variance for year 2.

Stivrins Company is in the process of negotiating a new union contract. If the new contract goes into effect, there could be a significant decrease in the company's production output. More vacation time and shorter shifts will cause several production lines to be inoperable for a short period of time. The normal capacity of the company is set at 93,000 units. Nicklin, the manager, put together the following chart that incorporates the new contract. Budgeted monthly fixed-MOH costs are expected to be $250,000 with budgeted variable manufacturing costs of $6 per unit. The selling price per unit would be $14, and the company plans to sell 94,000 units per month. Instructions a.Calculate the denominator level in units for the theoretical and practical capacity levels for one month. b.Calculate the budgeted fixed MOH rate of each of the three levels. (Round to the nearest cent.) c.If the company's actual production was 97,000 units for the current month, calculate the fixed-MOH volume variance for each denominator level. Be sure to notate the sign of the variance. d.Assuming there are no price or efficiency variances, and the company's policy is to write off any variances directly to COGS, prepare a partial income statement through gross margin for each denominator level.

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the adjusted COGS for year 1.

An example of activity capacity that is acquired but not used and will not provide future benefits is

When the units produced is greater than the units sold,

Vasquez Supply Company hired Adrianna as its accountant to replace a retiree. She comes with experience in various industries and can prepare financial statements that use standard costing within an absorption costing system. However, Vasquez would like to prepare its financial statements using variable costing for its internal reports. Adrianna has gathered the following information for the last 2 years of operation Adrianna noted there were no price or efficiency variances for either year. It's the company's policy to write off any fixed-MOH volume variances directly to COGS. Instructions a.Determine the per-unit cost that would be capitalized under each costing system. b.Calculate the ending FG Inventory balance under each costing system for 2026. c.Calculate the Fixed-MOH volume variance for (1) 2025 and (2) 2026. List amount and sign. d.Prepare an income statement for both years under absorption costing. e.Prepare an income statement for both years under variable costing. f. Calculate the difference in operating income (if any) between the two methods for (1) 2025 and (2) 2026. Explain any differences with calculations. g. Which method would you recommend for internal performance evaluation purposes and why? h. Which method would you recommend when preparing your financial statements to obtain a loan and why?

Income statements, using absorption costing, are sometimes difficult to interpret because they

Theoretical capacity

The following information applies to Hawks Corporation: Using variable costing, what will Hawks record as contribution margin if the units were sold for $95 each and assuming no variances were reported?

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, what will be reported as the ending inventory value?

The type of available capacity that signals the potential for growth opportunities or policy changes 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 practical capacity, what is the denominator level?

An example of activity capacity that is acquired but not used but could be converted for future benefits is

Tercero Company sold 42,000 units in 2025. The manager did not find any variable cost variances and actual production equaled budgeted production of 40,000 units. Beginning inventory for the year was 3,500 units and last period's inventory carried the same cost per unit as this period's production. The company's income statement used for internal reporting shows the following: The CEO of Tercero wants to determine operating income under absorption costing. Prepare an absorption costing income statement for 2025.

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information: There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the gross margin for year 1.

When comparing variable costing to absorption costing, which of the following would be a potential advantage of using variable costing?