Exam 8: Variable Costing: A Tool for Management

Variable costing is sometimes referred to as direct costing or marginal costing.

When lean production methods are introduced,the difference in operating income calculated using the absorption and variable costing methods is reduced.

Under variable costing,it may be possible to report a positive operating income even if the company sells less than the break-even volume of sales.

Which of the following are considered to be product costs under variable costing? I.Variable manufacturing overhead. II.Fixed manufacturing overhead. III.Selling and administrative expenses.

Jarvix Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price \ 111 Units in beginning inventory 0 Units produced 8,800 Units sold 8,900 Variable costs per unit: Direct materials \ 34 Direct labour \ 37 Variable manufacturing overhead \ 3 Variable selling and administrative \ 9 Fixed costs: Fixed manufacturing overhead \ 61,600 Fixed selling and administrative \ 169,100 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. -What was the unit product cost for the month under absorption costing?

Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production costs were as follows: Direct materials \ 100,000 Direct labour 75,000 Variable manufacturing overhead 50,000 Fixed manufacturing overhead 75,000 Total sales were $440,000, total variable selling and administrative expenses were $110,000, and total fixed selling and administrative expenses were $45,000. There was no beginning inventory. Assume that direct labour is a variable cost. -What was the operating income under absorption costing?

Qabar Company,which has only one product,has provided the following data concerning its most recent month of operations: Selling price \ 110 Units in beginning inventory 0 Units produced 4,600 Units sold 4,200 Units in ending inventory 400 Variable costs per unit: Direct materials \ 46 Direct labour \ 28 Variable manufacturing overhead \ 5 Variable selling and administrative \ 10 Fixed costs: Fixed manufacturing overhead \ 55,200 Fixed selling and administrative \ 25,200 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 operating income for the month.(Hint: Use the reconciliation method.)

Jarvix Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price \ 111 Units in beginning inventory 0 Units produced 8,800 Units sold 8,900 Variable costs per unit: Direct materials \ 34 Direct labour \ 37 Variable manufacturing overhead \ 3 Variable selling and administrative \ 9 Fixed costs: Fixed manufacturing overhead \ 61,600 Fixed selling and administrative \ 169,100 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. -What was the unit product cost for the month under variable costing?

Gabbert Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price \ 90 Units in beginning inventory 0 Units produced 3,600 Units sold 3,400 Units in ending inventory 200 Variable costs per unit: Direct materials \ 23 Direct labour \ 11 Variable manufacturing overhead \ 2 Variable selling and administrative \ 8 Fixed costs: Fixed manufacturing overhead \ 93,600 Fixed selling and administrative \ 61,200 -What was the total contribution margin for the month under the variable costing approach?

The Hadfield Company manufactures and sells a unique electronic part.The company's plant is highly automated with low variable and high fixed manufacturing costs.Operating results on an absorption costing basis for the first three years of activity were as follows: $\begin{array}{|l|r|r|r|}\hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\hline \text { Sales } & \$ 704,000 & \$ 528,000 & \$ 704,000 \\\hline \text { Cost of goods sold: } & & & \\\hline \begin{array}{l}\text { Beginning inventory }\end{array} & 0 & 0 & 220,000 \\\hline \begin{array}{l}\text { Cost of goods } \\\text { manufactured }\end{array} & \underline{520,000} & \underline{550,000} & \underline{496,000} \\\hline \begin{array}{l}\text { Goods available for } \\\text { sale }\end{array} & 520,000 & 550,000 & 716,000 \\\hline \begin{array}{l}\text { Less ending } \\\text { inventory }\end{array} & 0 & \underline{220,000} & \underline{186,000} \\\hline \text { Cost of goods sold } & 520,000 & 330,000 & 530,000 \\\hline \text { Gross margin } & 184,000 & 198,000 & 174,000 \\\hline \begin{array}{l}\text { Less selling and } \\\text { administrative } \\\text { expense }\end{array} & \underline{180,000} & \underline{160,000} & \underline{180,000} \\\hline \begin{array}{l}\text { Operating income } \\\text { (loss) }\end{array} & \$ 4,000 & \$ 38,000 & \$(6,000) \\\hline\end{array}$ Additional information about the company is as follows: -Variable manufacturing costs (direct labour,direct materials,and variable manufacturing overhead)total $3 per unit,and fixed manufacturing overhead costs total $400,000. -Fixed manufacturing costs are applied to units of product on the basis of the number of units produced each year (i.e.,a new fixed overhead rate is computed each year). -The company uses a FIFO inventory flow assumption. -Variable selling and administrative expenses are $2 per unit sold.Fixed selling and administrative expenses total $100,000. -Production and sales information for the three years is as follows: Year 1 Year 2 Year 3 Production in units 40,000 50,000 32,000 Sales in units 40,000 30,000 40,000 Required: a)Compute operating income for each year under the variable costing approach. b)Prepare a reconciliation from your Operating Income (loss)under variable costing to Absorption Costing operating income for year 3. c)Referring to the absorption costing income statements above,explain why operating income was higher in Year 2 than in Year 1 under absorption costing,in light of the fact that fewer units were sold in Year 2 than in Year 1. d)Referring again to the absorption costing income statements,explain why the company suffered an operating loss in Year 3 but reported a positive operating income in Year 1,although the same number of units was sold in each year. e)If the company had used just-in-time (JIT)during Year 2 and Year 3 and produced only what could be sold,what would have been the company's operating income (loss)for each year under absorption costing.

The Pacific Company manufactures a single product. The following data relate to the year just completed: Variable costs per unit: Production \ 43 Selling and administrative \ 15 Fixed costs in total: Production \ 145,000 Selling and administrative \ 95,000 During the year, 5,000 units were produced and 4,800 units were sold. There were no beginning inventories. -Under absorption costing,what was the cost of goods sold for the year?

During the past year, Carr Company manufactured 25,000 units and sold 20,000 units. Production costs for the year were as follows: Direct materials \ 180,000 Direct labour 120,000 Variable manufacturing overhead 210,000 Fixed manufacturing overhead 250,000 Total sales were $850,000, total variable selling expenses were $110,000, and total fixed selling and administrative expenses were $170,000. There were no units in beginning inventory. Assume that direct labour is a variable cost. Do not round intermediate calculations. -What was the operating income for the year under variable costing as opposed to absorption costing?

The total fixed manufacturing overhead costs of Cay Company are $100,000,and the total variable selling costs are $80,000.Under variable costing,how should these costs be classified? Period Costs Product Costs A) \ 0 \ 180,000 B) 80,000 100,000 C) 100,000 80,000 D) 180,000 0

In the preparation of financial statements using variable costing,fixed manufacturing overhead is treated as a period cost.

Peaceman Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price \ 117 Units in beginning inventory 0 Units produced 4,700 Units sold 4,400 Units in ending inventory 300 Variable costs per unit: Direct materials \ 36 Direct labour \ 38 Variable manufacturing overhead \ 4 Variable selling and administrative \ 11 Fixed costs: Fixed manufacturing overhead \ 89,300 Fixed selling and administrative \ 26,400 -What was the total gross margin for the month?

It is generally true that if production and sales are NOT equal there are income statement differences in terms of operating incomes under absorption costing and variable costing. Required: a)Which elements,if any,of the balance sheet are also likely to be different under absorption and variable costing? Explain.

Last year,Silver Company's total variable production costs were $7,500,and its total fixed manufacturing overhead costs were $4,500.The company produced 3,000 units during the year and sold 2,400 units.There were no units in the beginning inventory.Which of the following statements is true?

Delvin Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price \ 120 Units in beginning inventory 0 Units produced 1,800 Units sold 1,500 Units in ending inventory 300 Variable costs per unit: Direct materials \ 42 Direct labour \ 42 Variable manufacturing overhead \ 2 Variable selling and administrative \ 9 Fixed costs: Fixed manufacturing overhead \ 7,200 Fixed selling and administrative \ 28,500 -What was the total period cost for the month under the absorption costing approach?

Aaker Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price \ 99 Units in beginning inventory 0 Units produced 6,300 Units sold 6,000 Units in ending inventory 300 Variable costs per unit: Direct materials \ 12 Direct labour \ 42 Variable manufacturing overhead \ 6 Variable selling and administrative \ 6 Fixed costs: Fixed manufacturing overhead \ 170,100 Fixed selling and administrative \ 24,000 -What is the total gross margin for the month under the absorption costing approach?

Since variable costing emphasizes costs by behaviour,it works well with cost-volume-profit analysis.