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Exam 19: Variable Costing and Performance Reporting

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Question 1

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Which of the following statements is true regarding variable costing?

A) It is a traditional costing approach.
B) Only manufacturing costs that change in total with changes in production level are included in product costs.
C) It is not permitted to be used for managerial reporting.
D) It treats overhead in the same manner as absorption costing.
E) It makes it easier to manipulate earnings with changes in production levels.

F) A) and E)
G) A) and C)

Correct Answer

verified

B

Question 2

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Under absorption costing, the product unit cost consists of direct labor, direct materials, variable overhead and _______________________.

Correct Answer

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Fixed overhead

Question 3

Multiple Choice

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Swola Company reports the following annual cost data for its single product. $\begin{array} { l l } \text { Normal production level } & 75,000 \text { units } \\\text { Direct materials } & \$ 1.25 \text { per unit } \\\text { Direct labor } & \$ 2.50 \text { per unit } \\\text { Variable overhead } & \$ 3.75 \text { per unit } \\\text { Fixed overhead } & \$ 300,000 \text { in total }\end{array}$ This product is normally sold for $25 per unit. If Swola increases its production to 200,000 units, while sales remain at the current 75,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing?

Variable costing treats fixed overhead cost as a period cost.

Star Services, Inc., a manufacturer of telescopes, began operations on October 1 of the current year. During this time, the company produced 50,000 units and sold 35,000 units at a sales price of $500 per unit. Cost information for this year is shown below. $\begin{array}{l}\text { Production costs }\\\text { Direct materials } & \$ 85 \text { per unit } \\\text { Direct labor } & \$ 65 \text { per unit } \\\text { Variable overhead } & \$ 200,000 \text { in total } \\\text { Fixed overhead } & \$ 350,000 \text { in total }\\\text { Non-production costs }\\\text { Variable selling and administrative }&\$ 90,000 \text { in total }\\\text { Fixed selling and administrative }&\$ 500,000 \text { in total }\\\end{array}$ -Given the Star Services, Inc. data, what is net income using absorption costing?

A company reports the following information for its first year of operations. $\begin{array} { l l } \text { Units produced this year } & 43,000 \text { units } \\\text { Units sold this year } & 39,000 \text { units } \\\text { Direct materials } & \$ 0.57 \text { per unit } \\\text { Direct labor } & \$ 0.83 \text { per unit } \\\text { Variable overhead } & \$ 26,660 \text { in total } \\\text { Fixed overhead } & ? \text { in total }\end{array}$ If the company's cost per unit of finished goods using variable costing is $2.02, what is the amount of total fixed overhead?

A company normally sells a product for $20 per unit. Variable per unit costs for this product are: $2 direct materials, $4 direct labor, and $1.50 variable overhead. The company is currently operating at 70% of capacity producing 14,000 units per year. Total fixed costs are $42,000 per year. The company should not accept a special order for 2,000 units which would be sold for $10 per unit because there would be an incremental loss on the order.

Scavenger Company, a manufacturer of recycling bins, began operations on January 1 of the current year. During this time, the company produced 60,000 units and sold 55,000 units at a sales price of $15 per unit. Cost information for this year is shown below. $\begin{array}{l}\text { Production costs }\\\text { Direct materials } & \$ 2.50 \text { per unit } \\\text { Direct labor } & \$ 3.00 \text { per unit } \\\text { Variable overhead } & \$ 45,000 \text { in total } \\\text { Fixed overhead } & \$ 240,000 \text { in total }\\\text { Non-production costs }\\\text { Variable selling and administrative } & \$ 10,000 \text { in total } \\\text { Fixed selling and administrative } & \$ 50,000 \text { in total }\\\end{array}$ -Given the Scavenger Company data, what is net income using variable costing?

Contribution margin is the excess of sales over total variable costs.

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 variable costing?

Under absorption costing, a company had the following unit costs when 8,000 units were produced. $\begin{array} { l l } \text { Direct labor } & \$ 8.50 \text { per unit } \\\text { Direct material } & \$ 9.00 \text { per unit } \\\text { Variable overhead } & \$ 6.75 \text { per unit } \\\text { Fixed overhead } ( \$ 60,000 / 8,000 \text { units } ) & \$ 7.50 \text { per unit } \\\quad \text { Total production cost } &\$ 31.75 \text { per }\text { unit } \end{array}$ Compute the total production cost per unit under variable costing if 20,000 units had been produced.

The traditional income statement format used for financial reporting is called the contribution margin format.

The data needed for cost-volume-profit analysis is readily available if the income statement is prepared using a contribution format.

Red and White Company reported the following monthly data. $\begin{array} { l l } \text { Units produced } & 2,000 \text { units } \\\text { Sales price } & \$ 25 \text { per unit } \\\text { Direct materials } & \$ 1 \text { per unit } \\\text { Direct labor } & \$ 2 \text { per unit } \\\text { Variable overhead } & \$ 3 \text { per unit } \\\text { Fixed overhead } & \$ 8,000 \text { in total }\end{array}$ -What is the Red and White's contribution margin for this month if 980 units were sold?

A company normally sells a product for $25 per unit. Variable per unit costs for this product are: $3 direct materials, $5 direct labor, and $2 variable overhead. The company is currently operating at 100% of capacity producing 30,000 units per year. Total fixed costs are $75,000 per year. The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs.

Home Base, Inc. reports the following production cost information. $\begin{array} { l l } \text { Units produced } & 97,000 \text { units } \\\text { Units sold } & 92,000 \text { units } \\\text { Direct labor } & \$ 17 \text { per unit } \\\text { Direct materials } & \$ 34 \text { per unit } \\\text { Variable overhead } & \$ 2,522,000 \text { in total } \\\text { Fixed overhead } & \$ 1,940,000 \text { in total }\end{array}$ (a.) Compute production cost per unit under variable costing. (b.) Compute production cost per unit under absorption costing. (c.) Determine the cost of ending inventory using variable costing. (d.) Determine the cost of ending inventory using absorption costing.

Producing too much can lead to lost sales and customer dissatisfaction.

When units produced equal units sold, reported income is identical under absorption costing and variable costing.

Assume a company had the following production costs. Under absorption costing, the total production cost per unit when 4,000 units are produced would be $22.50. $\begin{array} { l l } \text { Direct labor } & \$ 20,000 \\\text { Direct material } & \$ 30,000 \\\text { Variable overhead } & \$ 40,000 \\\text { Fixed overhead } & \$ 50,000\end{array}$

Product costs consist of direct labor, direct materials and overhead.