Exam 6: Variable Costing: a Tool for Management

When sales exceeds production for a period,absorption costing net operating income will generally be greater than variable costing net operating income.

Baylor Inc. ,which produces a single product,has provided the following data for its most recent month of operations: There were no beginning or ending inventories.The variable costing unit product cost was:

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: Additional information about the company is as follows: - Variable manufacturing costs (direct labor,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 manufacturing 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: Required: a.Compute net operating income for each year under the variable costing approach. b.Referring to the absorption costing income statements above,explain why net 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. c.Referring again to the absorption costing income statements,explain why the company suffered a loss in Year 3 but reported a profit in Year 1,although the same number of units was sold in each year. d.If the company had used lean production during Year 2 and Year 3 and produced only what could be sold,what would the company's net operating income (loss) have been each year under absorption costing?

Cardwell Corporation manufactures a variety of products.Last year,the company's variable costing net operating income was $63,900 and ending inventory increased by 900 units.Fixed manufacturing overhead cost per unit was $3. Required: Determine the absorption costing net operating income for last year.Show your work!

Walsh Company produces a single product.Last year,the company manufactured 25,000 units and sold 22,000 units.Production costs were as follows: Sales totaled $440,000,variable selling and administrative expenses were $110,000,and fixed selling and administrative expenses were $45,000.There was no beginning inventory.Assume that direct labor is a variable cost. -Under absorption costing,the gross margin would be:

The costs assigned to units in inventory are typically lower under absorption costing than under variable costing.

Erie Company manufactures a single product.Assume the following data for the year just completed: There were no units in inventory at the beginning of the year.During the year 30,000 units were produced and 25,000 units were sold.Each unit sells for $35. -The company's net operating income under variable costing would be:

Gallager Company,which has only one product,has provided the following data concerning its most recent month of operations: -The total gross margin for the month under the absorption costing approach is:

Under the absorption costing method,a company can increase profits by increasing production rather than by increasing sales.

Roberts Company produces a single product.During the year just ended,the company's net operating income under absorption costing was $3,000 lower than under variable costing.The company sold 9,000 units during the year,and its variable costs were $9 per unit,of which $3 was variable selling expense.If production cost is $11 per unit under absorption costing every year,then how many units did the company produce during the year?

When reconciling variable costing and absorption costing net operating income,fixed manufacturing overhead costs released from inventory under absorption costing should be deducted from variable costing net operating income to arrive at the absorption costing net operating income.

Dewiel Corporation manufactures a variety of products.The following data pertain to the company's operations over the last two years: -What was the absorption costing net operating income this year?

Ben Company produces a single product.Last year,the company's net operating income under absorption costing was $4,400 lower than under variable costing.The company sold 8,000 units during the year,and its variable costs were $8 per unit,of which $3 was variable selling expense.Fixed manufacturing overhead was $1 per unit in beginning inventory under absorption costing.How many units did the company produce during the year?

In a manufacturing company using absorption costing,the fixed costs associated with idle production capacity are commonly included as part of the product cost.

Crystal Company produces a single product.The company's variable costing income statement for the month of May appears below: The company produced 80,000 units in May and the beginning inventory consisted of 25,000 units.Variable production costs per unit and total fixed costs have remained constant over the past several months. -Under absorption costing,for the month ended May 31,the company would report a:

Mcgougan Corporation produces a single product and has the following cost structure: -The unit product cost under variable costing is:

Last year,Wardrup Corporation's variable costing net operating income was $67,200.Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $600.What was the absorption costing net operating income last year?

Which of the following costs at a sofa manufacturing company would be treated as a period cost under the variable costing method?

Clubb Company,which has only one product,has provided the following data concerning its most recent month of operations: -The total gross margin for the month under the absorption costing approach is:

Jarmon Company,which has only one product,has provided the following data concerning its most recent month of operations: 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 is the net operating income for the month under absorption costing?