Variable Costing

Pierce Company had the following costs:

Units                                                                produced

500 units                                     Manufacturing costs:

Direct                                                               materials

$ 25 per unit                                               Direct labor

45 per unit             Variable manufacturing overhead

15 per unit                   Fixed manufacturing overhead

5,000 per year         Selling and administrative costs:

Variable selling and administrative costs

30       per unit Fixed selling and administrative costs

3,200 per year

Calculate the unit product cost using absorption costing and variable costing

Hayden Company has 50 units in Finished Goods Inventory at the beginning of the accounting period. During the accounting period, Hayden produced 150 units and sold 200 units for \(150 each. All units incurred \)80 in variable manufacturing costs and \(20 in fixed manufacturing costs. Hayden also incurred \)7,500 in Selling and Administrative Costs, all fixed. Calculate the operating income for the year using absorption costing and variable costing.

The Stark Company manufactures a product that is expected to incur \(20 per unit in variable production costs and sell for \)40 per unit. The sales commission is 10% of the sales price. Due to intense competition, Stark actually sold 200 units for \(38 per unit. The actual variable production costs incurred were \)23.75 per unit. Calculate the total contribution margin and contribution margin ratio at the expected price/costs and the actual price/costs. How might management use this information?

Question: Chaney Company provides lawn care services. Following are data for a recent week: 

Service Revenue                               \(1,300 

Variable Costs                                    \)780              

Contribution Margin                               $520                                                                   Chaney provided service to 25 customers during the week. Determine the average amount the company charged each customer, the variable cost per customer, and the contribution margin ratio.

What is absorption costing?

Explain why the fixed manufacturing overhead cost per unit changes when there is a change in the number of units produced.

When units produced are less than units sold, how does operating income differ between variable costing and absorption costing? Why

When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? Why?

When units produced equal units sold, how does operating income differ between variable costing and absorption costing?

 How are absorption costing and variable costing the same? How are they different?

Classifying costs Classify each cost by placing an X in the appropriate columns. The first cost is completed as an example.

Absorption Costing                     Variable Costing                                                                                                                                                 Product Cost Period Cost          Product Cost Period cost                                   

1. Direct materials
2. Direct labor 
3. Variable manufacturing overhead 
4. Fixed manufacturing overhead 
5. Variable selling and administrative costs
6. Fixed selling and administrative cost

 Computing unit product cost, absorption costing Calculate the unit product cost using absorption costing. Round your answer to the nearest cent.

Use the following information for Short Exercises S21-2 and S21-3. 

Martin Company had the following costs: 

Units produced                                                      320 units                                                              Direct materials                                                   $ 71 per unit                                                               Direct labor                                                            40 per unit                                                               Variable manufacturing overhead                        13 per unit                                                               Fixed manufacturing overhead                             7,360 per year                                                           Variable selling and administrative costs           22 per unit                                                        

Fixed selling and administrative costs                1,920 per year

 Explain how the sales mix can affect the profitability of a company.

Question:What is a business segment? Give some examples.

How can variable costing be used in service companies?

What are the two components that can affect contribution margin? Why is it important to investigate both?

What is variable costing?

Why is it appropriate to use variable costing when planning production in the short term?

 In the long run, all costs are controllable. Is this statement true? Why or why not?

Explain how increasing production can increase gross profit when using absorption costing.

Computing unit product cost, variable costing Calculate the unit product cost using variable costing. Round your answer to the nearest cent.

Use the following information for Short Exercises S21-2 and S21-3. 

Martin Company had the following costs: 

Units produced                                                      320 units                                                                       Direct materials                                                  $ 71 per unit                                                               Direct labor                                                            40 per unit                                                                 Variable manufacturing overhead                        13 per unit                                                                Fixed manufacturing overhead                             7,360 per year                                                              Variable selling and administrative costs           22 per unit                                                        Fixed selling and administrative costs                1,920 per year

Calculating contribution margin and operating income, variable costing 

Calculate the contribution margin and operating income for June using variable costing.

Use the following information for Short Exercises S21-4 and S21-5. 

Dracut Company reports the following information for June:

Net Sales Revenue                                            $ 755,000                                             Variable Cost of Goods Sold                               240,000                                                 Fixed Cost of Goods Sold                                   198,000                                                       Variable Selling and Administrative Costs        168,000                                  Fixed Selling and Administrative Costs             79,000

Calculating gross profit and operating income, absorption costing Calculate the gross profit and operating income for June using absorption costing

Use the following information for Short Exercises S21-4 and S21-5. 

Dracut Company reports the following information for June:

Net Sales Revenue                                            $ 755,000                                             Variable Cost of Goods Sold                               240,000                                                  Fixed Cost of Goods Sold                                   198,000                                                       Variable Selling and Administrative Costs        168,000                                  Fixed Selling and Administrative Costs             79,000

Computing absorption cost per unit and variable cost per unit 

Adamson, Inc. has the following cost data for Product X:                                                                                                                                

Direct materials                                            $ 41 per unit                                                               Direct labor                                                    57 per unit                                                                 Variable manufacturing overhead                 7 per unit                                                                Fixed manufacturing overhead                 20,000 per year       

Calculate the unit product cost using absorption costing and variable costing when production is 2,000 units, 2,500 units, and 5,000 units.                        

Computing absorption costing gross profit 

Refer to your answers to Short Exercise S21-6. Product X sells for \(175 per unit. Assume no beginning inventories. Calculate the gross profit using absorption costing when Adamson: 

1. Produces and sells 2,000 units.
2. Produces 2,500 units and sells 2,000 units.
3. Produces 5,000 units and sells 2,000 units.    

S21-6 Direct materials                                   \) 41 per unit                                                                   Direct labor                                                     57 per unit                                                                 Variable manufacturing overhead               7 per unit                                                                Fixed manufacturing overhead                    20,000 per ye

Computing variable costing contribution margin

Refer to your answers to Short Exercise S21-6. Product X sells for \(175 per unit. Assume no beginning inventories. Calculate the contribution margin using variable costing when Adamson: 

1. Produces and sells 2,000 units. 
2. Produces 2,500 units and sells 2,000 units 
3. Produces 5,000 units and sells 2,000 units.

S21-6 Direct materials                                            \) 41 per unit                                                                       Direct labor                                                     57 per unit                                                                 Variable manufacturing overhead                7 per unit                                                               Fixed manufacturing overhead                 20,000 per year        

Computing inventory balances 

Zeng Company reports the following data: 

Finished Goods Inventory: 

Beginning balance, in units                  300 Units 

Produced                                              2,900 

Units sold                                            (1,600) 

Ending balance, in units                     1,600 

Production Costs: Variable manufacturing costs per unit $ 57

Total fixed manufacturing costs 26,100 

Calculate the product cost per unit and the total cost of the 1,600 units in ending inventory using absorption costing and variable costing.                                                       

 Analyzing profitability 

Camden Company has divided its business into segments based on sales territories: East Coast, Midland, and West Coast. Following are financial data for 2018:

Prepare an income statement for Camden Company for 2018 using the contribution margin format assuming total fixed costs for the company were \)435,000. Include columns for each business segment and a column for the total company.                                                      

Analyzing profitability Refer to Short Exercise S21-10. Which business segment provided the greatest total contribution margin? Which 

business segment had the highest contribution margin ratio?                                                       

Camden Company has divided its business into segments based on sales territories: East Coast, Midland, and West Coast. Following are financial data for 2018: 

 Analyzing profitability analysis, service company Burlington Internet Services is an Internet service provider for commercial and residential customers. The company provided the following data for its two types of customers for the month of August:

For each type of customer, determine both the contribution margin per customer and the contribution margin ratio. Round to two decimal places. 

Which type of service is more profitable?                                                       

How do service companies differ from manufacturing companies?

When should a company use absorption costing when setting sales prices? When should it use variable costing?

Using absorption and variable costing 

Meyer Company reports the following information for March:

Net Sales Revenue $ 45,300 

Variable Cost of Goods Sold 12,500 

Fixed Cost of Goods Sold 11,800 

Variable Selling and Administrative Costs 14,000 

Fixed Selling and Administrative Costs 5,400 

Requirements: 

1. Calculate the gross profit and operating income for March using absorption costing. 
2. Calculate the contribution margin and operating income for March using variable costing.

Question: Computing absorption costing operating income 

Refer to the information for Concord, Inc. 

Requirements 

1. Using absorption costing, calculate the unit product cost. 
2. Prepare an income statement using the traditional format.

Use the following information for Exercises E21-14 and E21-15. 

Concord, Inc. has collected the following data for November (there are no beginning inventories): 

Units produced and sold                                500 units                                                                                                                              Sales price                                                       $ 450 per unit                                                                                                                         Direct materials                                               64 per unit                                                                                                                                      Direct labor                                                       68 per unit                                                                                                                                   Variable manufacturing overhead                 26 per unit                                                                                                                                       Fixed manufacturing overhead                     7,500 per month                                                                                                           Variable selling and administrative costs    15 per unit                                                                                                                Fixed selling and administrative costs          4,400 per month                                                                                            

Question: Computing variable costing operating income Refer to the information for Concord, Inc. 

Requirements:

1. Using variable costing, calculate the unit product cost. 
2. Prepare an income statement using the contribution margin format.

Use the following information for Exercises E21-14 and E21-15. 

Concord, Inc. has collected the following data for November (there are no beginning inventories): 

Units produced and sold                                500 units                                                                                                                             Sales price                                                       $ 450 per unit                                                                                                                        Direct materials                                               64 per unit                                                                                                                                     Direct labor                                                      68 per unit                                                                                                                                  Variable manufacturing overhead                 26 per unit                                                                                                                                       Fixed manufacturing overhead                7,500 per month                                                                                                            Variable selling and administrative costs    15 per unit                                                                                                                Fixed selling and administrative costs          4,400 per month                                                                                            

Question: Preparing variable costing income statements, production exceeds sales 

ReVitalAde produced 13,000 cases of powdered drink mix and sold 12,000 cases in April 2018. The sales price was \(29, variable costs were \)12 per case (\(9 manufacturing and \)3 selling and administrative), and total fixed costs were \(100,000 (\)91,000 manufacturing overhead and $9,000 selling and administrative). The company had no beginning Finished Goods Inventory. 

Requirements: 

1. Prepare the April income statement using variable costing. 
2. Determine the product cost per unit and the total cost of the 1,000 cases in Finished Goods Inventory as of April 30.

Question: Preparing absorption costing income statements, production exceeds sales 

Refer to Exercise E21-16.

Requirements:

1. Prepare the April income statement using absorption costing. 
2. Determine the product cost per unit and the total cost of the 1,000 cases in Finished Goods Inventory as of April 30. 
3. Is the April 30 balance in Finished Goods Inventory higher or lower than variable costing? Explain why

Comparing variable and absorption costing Refer to Exercises E21-16 and E21-17. 

Requirements: 

1. Which costing method produces the highest operating income? Explain why. 
2. Which costing method produces the highest April 30 balance in Finished Goods Inventory? Explain why

Question: Preparing variable costing income statements, production less than sales 

Refer to your answers to Exercise E21-16. In May 2018, ReVitalAde produced 22,000 cases of powdered drink mix and sold 23,000 cases, of which 1,000 were produced in April. The sales price was \(29, variable costs were \)12 per case (\(9 manufacturing and \)3 selling and administrative), and total fixed costs were \(100,000 (\)91,000 manufacturing and $9,000 selling and administrative). 

Requirements 

1. Prepare the May income statement using variable costing. 
2. Determine the balance in the Finished Goods Inventory as of May 31.

Question: Preparing absorption costing income statements, production less than sales 

Refer to Exercise E21-19. 

Requirements 

1. Prepare the May income statement using absorption costing. 
2. Is operating income using absorption costing higher or lower than variable costing income? Explain why. 
3. Determine the balance in Finished Goods Inventory as of May 31.

Setting sales prices The Sweet Treats Company manufactures candy that is sold to food distributors. The company produces at full capacity for six months each year to meet peak demand during the “candy season” from Halloween through Valentine’s Day. During the other six months of the year, the manufacturing facility operates at 75% of capacity. The Sweet Treats Company provides the following data for the year: 

Cases of candy produced and sold 1,800,000 cases Sales price $ 37.00 per case Variable manufacturing costs 20.00 per case Fixed manufacturing costs 6,400,000 per year Variable selling and administrative costs 2.00 per case Fixed selling and administrative costs 3,500,000 per year The Sweet Treats Company receives an offer to produce 13,000 cases of candy for a special event. This is a one-time opportunity during a period when the company has excess capacity. What is the minimum sales price The Sweet Treats Company should accept for the order? Explain why

Analyzing profitability Sampler Company sells two products, Sigma and Zeta, with a sales mix of 70% and 30%, respectively. Sigma has a contribution margin per unit of \(26, and Zeta has a contribution margin per unit of \)21. The company sold 700 total units in September. Calculate the total amount each product contributed to the coverage of fixed costs and the total contribution margin for the company.

: Analyzing profitability Refer to Exercise E21-22. Assume the sales mix shifted to 50% for each product. Calculate the total amount each product contributed to the coverage of fixed costs and the total contribution margin for the company.

Question: Analyzing profitability Sampler Company sells two products, Sigma and Zeta, with a sales mix of 70% and 30%, respectively. Sigma has a contribution margin per unit of \(26, and Zeta has a contribution margin per unit of \)21. The company sold 700 total units in September. Calculate the total amount each product contributed to the coverage of fixed costs and the total contribution margin for the company.

Using variable costing, service company Henry’s Helpers provides locksmith services. One type of service call is to evaluate private residences for security concerns and make recommendations for a safety plan. Use the data below to determine the company’s total contribution margin, contribution margin per service call, and contribution margin ratio when 220 service calls are made in the month of June. 

Service Revenue                                          $ 170 per service call        

Variable Costs                                                   68 per service call            

Fixed Costs                                                         21,040 per month

Using variable costing, service company Sherman Company provides carpet cleaning services to commercial and residential customers. Using the data below, determine the contribution margin ratio for each business segment, rounded to two decimal places:

Using variable costing, service company Refer to Exercise E21-25. The commercial business segment provided services to 200 customers. The residential business segment provided services to 400 customers. Determine the average amount Sherman Company charged each type of customer for services, the average variable cost per customer, and the average contribution margin per customer, rounded to two decimal places. What caused the difference in contribution margin in the two segments?

Preparing variable and absorption costing income statements Linda’s Foods produces frozen meals that it sells for \(7 each. The company computes a new monthly fixed manufacturing overhead allocation rate based on the planned number of meals to be produced that month. Assume all costs and production levels are exactly as planned. The following data are from Linda’s Foods’s first month in business:

January 2018                     

Units produced and sold:                                                                                           

Sales                                                                                       1,000 meals 

Production                                                                             1,200 meals                       

Variable manufacturing cost per meal                                  \) 3                                         

Sales commission cost per meal                                              1                                          

Total fixed manufacturing overhead                                      660                                     

Total fixed selling and administrative costs    500                          

Requirements:

1. Compute the product cost per meal produced under absorption costing and under variable costing. 
2. Prepare income statements for January 2018 using: a. absorption costing. b. variable costing. 
3. Is operating income higher under absorption costing or variable costing in January?

Question: Preparing variable and absorption costing income statements 

Game Store manufactures video games that it sells for \(38 each. The company uses a fixed manufacturing overhead allocation rate of \)3 per game. Assume all costs and production levels are exactly as planned. The following data are from Game Store’s first two months in business during 2018: 

                                                                                October             November                

Sales                                                                     1,500 units          2,900 units 

Production                                                            2,800 units         2,800 units 

Variable manufacturing cost per game                \( 16                    \) 16                       

Sales commission cost per game                             8                         8                       

Total fixed manufacturing overhead                   8,400                   8,400                               

Total fixed selling and administrative costs     8,000                    8,000 Requirements 

1. Compute the product cost per game produced under absorption costing and under variable costing. 

2. Prepare monthly income statements for October and November, including columns for each month and a total column, using these costing methods: 

a. absorption costing. 

b. variable costing. 

3. Is operating income higher under absorption costing or variable costing in October? In November? Explain the pattern of differences in operating income based on absorption costing versus variable costing. 

4. Determine the balance in Finished Goods Inventory on October 31 and November 30 under absorption costing and variable costing. Compare the differences in inventory balances and the differences in operating income. Explain the differences in inventory balances based on absorption costing versus variable costing.

Analyzing profitability 

Relative Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the furniture follow:

                                                         Tables              Chairs              

Sales Price                                                                      \( 1,400               \) 50 

Variable manufacturing costs                                          1,148                  21                   

Sales commission (8%)                                                     112                    4 

Relative Furniture has three sales representatives: Abe, Brett, and Corrin. Abe sold 50 tables with 4 chairs each. Brett sold 110 tables with 6 chairs each. Corrin sold 90 tables with 8 chairs each. 

Requirements:

1. Calculate the total contribution margin and the contribution margin ratio for each sales representative (round to two decimal places). 
2. Which sales representative has the highest contribution margin ratio? Explain why.

Using variable and absorption costing, making decisions 

The 2018 data that follow pertain to Mike’s Magnificent Eyewear, a manufacturer of swimming goggles. (Mike’s Magnificent Eyewear had no beginning Finished Goods Inventory in January 2018.) 

Number of goggles produced                                              245,000                      

Number of goggles sold                                                       230,000                                   

Sales price per unit                                                                 \( 28                                   

Variable manufacturing cost per unit                                      10                                    

Sales commission cost per unit                                                 2                                 

Fixed manufacturing overhead                                         1,960,000                                    

Fixed selling and administrative costs                              260,000                     

Requirements:

1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Mike’s Magnificent Eyewear for the year ended December 31, 2018.
2. Which statement shows the higher operating income? Why?
3. Mike’s Magnificent Eyewear’s marketing vice president believes a new sales promotion that costs \)40,000 would increase sales to 235,000 goggles. Should the company go ahead with the promotion? Give your reasoning.