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Exam 19: Variable Costing and Performance Reporting

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Question 41

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_______________ and _______________ are product costs which can be directly traced to the product.

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Question 42

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Swisher, Incorporated reports the following annual cost data for its single product. $\begin{array} { l l } \text { Normal production level } & 30,000 \text { units } \\\text { Direct materials } & \$ 6.40 \text { per unit } \\\text { Direct labor } & \$ 3.93 \text { per unit } \\\text { Variable overhead } & \$ 5.80 \text { per unit } \\\text { Fixed overhead } & \$ 150,000 \text { in total }\end{array}$ This product is normally sold for $48 per unit. If Swisher increases its production to 50,000 units, while sales remain at the current 30,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing?

A) $60,000 decrease.
B) $90,000 decrease.
C) There is no change in gross margin.
D) $90,000 increase.
E) $60,000 increase.

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Question 43

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Vision Tester, Inc., a manufacturer of optical glass, began operations on February 1 of the current year. During this time, the company produced 900,000 units and sold 800,000 units at a sales price of $12 per unit. Cost information for this year is shown below. $\begin{array}{l}\text { Production costs }\\\text { Direct materials } & \$ .80 \text { per unit } \\\text { Direct labor } & \$ .70 \text { per unit } \\\text { Variable overhead } & \$ 500,000 \text { in total } \\\text { Fixed overhead } & \$ 450,000 \text { in total }\\\text { Non-production costs }\\\text { Variable selling and administrative }&\$ 30,000 \text { in total }\\\text { Fixed selling and administrative }&\$ 490,000 \text { in total }\end{array}$ Given this information, which of the following is true?

To convert variable costing net income to absorption costing net income, ____________________ the fixed production cost in ending inventory and _______________________ the fixed production cost in beginning inventory.

To convert variable costing income to absorption costing income, management will need to change the way fixed overhead costs are treated.

Digby Company manufactured and sold 37,000 units of its product at a price of $93 per unit. Total variable cost per unit is $60, consisting of $58 in variable production cost and $2 in variable selling and administrative cost. Fixed costs of manufacturing are $350,000. (a) Compute the manufacturing margin for the company under variable costing. (b) Compute the contribution margin based on this data. (c) Compute the gross margin under absorption costing.

Sea Company reports the following information regarding its production cost. $\begin{array} { l l } \text { Units produced } & 42,000 \text { units } \\\text { Direct labor } & \$ 35 \text { per unit } \\\text { Direct materials } & \$ 28 \text { per unit } \\\text { Variable overhead } & \$ 17 \text { per unit } \\\text { Fixed overhead } & \$ 105,000 \text { in total }\end{array}$ Compute production cost per unit under absorption costing.

Under absorption costing a company had the following unit costs when 10,000 units were produced. The total production cost per unit under absorption costing if 25,000 units had been produced would be $11.

A company reports the following information regarding its production cost. Required: Perform the following independent calculations. $\begin{array} { l l } \text { Units produced } & 14,000 \text { units } \\\text { Direct labor } & \$ 13 \text { per unit } \\\text { Direct materials } & \$ 3 \text { per unit } \\\text { Variable overhead } & ? \text { in total } \\\text { Fixed overhead } & \$ 56,000 \text { in total }\end{array}$ (a.) Compute total variable overhead cost if the production cost per unit under variable costing is $73. (b.) Compute total variable overhead cost if the production cost per unit under absorption costing is $73.

If a company has excess capacity, increases in production level will increase variable production costs but not fixed production costs.

Income under absorption costing will always be different than income under variable costing.

What is a contribution margin report?

A company is currently operating at 70% capacity producing 8,000 units. Cost information relating to this current production is shown in the table below. $\begin{array} { | l | r | } \hline & \text { Per Unit } \\\hline \text { Sales price } & \$ 15 \\\hline \text { Direct material } & \$ 3.20 \\\hline \text { Direct labor } & \$ 7.10 \\\hline \begin{array} { l } \text { Variable } \\\text { overhead }\end{array} & \$ 0.05 \\\hline \text { Fixed overhead } & \$ 0.60 \\\hline\end{array}$ The company has been approached by a customer with a request for a special order for 1,500 units. The sales price per unit for this special order is $10. Should the company accept the special order?

Cool Pools, a manufacturer of above ground pools, began operations on January 1 of the current year. During this time, the company produced 45,000 units and sold 44,000 units at a sales price of $60 per unit. Cost information for this year is shown below. $\begin{array}{l}\text { Production costs }\\\text { Direct materials } & \$ 11.25 \text { per unit } \\\text { Direct labor } & \$ 3.20 \text { per unit } \\\text { Variable overhead } & \$ 315,000 \text { in total } \\\text { Fixed overhead } & \$ 39,600 \text { in total }\\\text { Non-production costs }\\\text { Variable selling and administrative } & \$ 2,000 \text { in total } \\\text { Fixed selling and administrative } & \$ 6,000 \text { in total }\\\end{array}$ -Given the Cool Pools Company data, what is net income using absorption costing?

Stonehenge Inc., a manufacturer of landscaping blocks, began operations on April 1 of the current year. During this time, the company produced 750,000 units and sold 720,000 units at a sales price of $9 per unit. Cost information for this period is shown below. (a.) Prepare Stonehenge's December 31^st income statement for the current year under absorption costing. (b.) Prepare Stonehenge's December 31^st income statement for the current year under variable costing.

Identify the treatment of each of the following costs under variable costing and absorption costing. $\begin{array} { | l | l | l | l | l | } \hline & { \text { Variable Costing } } &&{ \text { Absorption Costing } } \\\hline & \begin{array} { c } \text { Product } \\\text { Cost }\end{array} & \begin{array} { c } \text { Period } \\\text { Cost }\end{array} & \begin{array} { c } \text { Product } \\\text { Cost }\end{array} & \begin{array} { c } \text { Period } \\\text { Cost }\end{array} \\\hline \text { 1. Direct materials } & & & & \\\hline \text { 2. Direct labor } & & & & \\\hline \text { 3. Variable manufacturing overhead } & & & & \\\hline \text { 4. Fixed manufacturing overhead } & & & & \\\hline \text { 5. Variable selling } & & & & \\\hline \text { 6. Fixed selling } & & & & \\\hline \text { 7. Variable administrative } & & & & \\\hline \text { 8. Fixed administrative } & & & & \\\hline\end{array}$

________________________ is the exact point where revenues equal expenses.

Decko Industries reported the following monthly data. $\begin{array} { l l } \text { Units produced } & 52,000 \text { units } \\\text { Sales price } & \$ 33 \text { per unit } \\\text { Direct materials } & \$ 1.50 \text { per unit } \\\text { Direct labor } & \$ 2.50 \text { per unit } \\\text { Variable overhead } & \$ 3.50 \text { per unit } \\\text { Fixed overhead } & \$ 234,000 \text { in total }\end{array}$ What is the company's contribution margin for this month if 50,000 units were sold?

Blackbird, Incorporated reports the following information regarding its production cost. $\begin{array} { l l } \text { Units produced } & 39,000 \text { units } \\\text { Direct labor } & \$ 13 \text { per unit } \\\text { Direct materials } & \$ 17 \text { per unit } \\\text { Variable overhead } & \$ 7,800,000 \text { in total } \\\text { Fixed overhead } & \$ 9,750,000 \text { in total }\end{array}$ (a.) Compute production cost per unit under variable costing. (b.) Compute production cost per unit under absorption costing.

Advanced Company reports the following information for the current year. All beginning inventory amounts equaled $0 this year. $\begin{array} { l l } \text { Units produced this year } & 25,000 \text { units } \\\text { Units sold this year } & 15,000 \text { units } \\\text { Direct materials } & \$ 9 \text { per unit } \\\text { Direct labor } & \$ 11 \text { per unit } \\\text { Variable overhead } & \$ 75,000 \text { in total } \\\text { Fixed overhead } & \$ 137,500 \text { in total }\end{array}$ -Given Advanced Company's data, compute cost of finished goods in inventory under absorption costing.