ch05 (2)

CHAPTER 5Variable Costing

Summary of Questions by Objectives and Bloom’s Taxonomy

Item SO BT Item SO BT Item SO BT Item SO BT Item SO BTTrue-False Statements

1. 3 C 6. 5 K 11. 5 K 16. 3 K 21. 3 C2. 3 K 7. 3 K 12. 3 C 17. 3 K 22. 3 C3. 3 C 8. 1 K 13. 3 C 18. 3 C 23. 4 K4. 1 K 9. 2 C 14. 2 C 19. 3 K 24. 5 K5. 2, 3 C 10. 1 K 15. 3 C 20. 3 K 25. 5 K

Multiple Choice Questions26. 1 K 43. 2 C 60. 3 AP 77. 2,3 AP 94. 3 AP27. 1 K 44. 2 AP 61. 3 AP 78. 3 AP 95. 3 AP28. 1 K 45. 3 AP 62. 3 C 79. 3 AP 96. 3 AP29. 1 K 46. 3 AP 63. 3 C 80. 3 AP 97. 3 AP30. 3 K 47. 2 AP 64. 3 C 81. 3 AP 98. 3 AP31. 1 K 48. 2 AP 65. 3 AP 82. 3 AP 99. 3 AP32. 1 K 49. 2 AP 66. 3 AP 83. 3 AP 100. 3 AP33. 1 K 50. 2 AP 67. 4 K 84. 3 AP 101. 3 AP34. 1 K 51. 2 AP 68. 3 AP 85. 3 AP 102. 3 AP35. 1 AP 52. 2 AP 69. 5 K 86. 3 AP 103. 3 AP36. 1 AP 53. 2, 3 AP 70. 1 K 87. 3 AP 104. 3 AP37. 1 AP 54. 3 AP 71. 3 AP 88. 3 AP 105. 3 AP38. 1 AP 55. 3 C 72. 3 AP 89. 3 AP 106. 3 AP39. 2, 3 AP 56. 3 C 73. 3 AP 90. 3 AP 107. 3 AP40. 2 K 57. 3 AP 74. 3 AP 91. 3 AP 108. 3 AP41. 2 C 58. 3 AP 75. 2 AP 92. 3 AP 109. 3 AP42. 2 C 59. 3 AP 76. 3 AP 93. 3 AP

Exercises110. 2,3 AP 113. 2 AP 116. 1-3 AP 119. 1-3 AP 122. 3 AP111. 1,2 AP 114. 2,3 AP 117. 1-3 AP 120. 3 AP 123. 1-3 AN112. 2 AP 115. 2 AP 118. 1-3 AP 121. 3 AP 124. 1-3 AP

Challenge Exercises125. 1-3 SY 126. 1-4 AN

Short-Answer Essays127. 1 C 128. 5 C 129. 3 AN 130. 3,5 AN 131. 4 C

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

TRUE-FALSE

1. The cost of ending inventory using variable costing is always greater than or equal to full costing ending inventory.

2. The cost of goods sold is always greater using variable costing than when full costing is used.

3. During pPeriods in which inventory levels increase, sales revenue will be larger when using full costing than if variable costing is used.

4. Absorption costing is another name for variable costing.

5. If a company has no fixed costs, variable costing income will equal full costing income, regardless of any increase or decrease in inventory levels during the period.

6. Variable costing income is more useful for decision making because costs are separated by function.

7. Absorption costing is required for external reporting under generally accepted accounting principles.

8. Under full costing, all fixed costs of production are included in Finished Goods Inventory and remain there until all inventory units are sold.

9. The total amount reported on an income statement for selling and administrative expense, reported on the income statement, adds to is the same amount using regardless if variable of full costing is used. as determined if by using full costing is used.

10. In variable costing, fixed manufacturing overhead is considered a period cost.

11. Income statements of manufacturing firms prepared for external purposes use variable costing because it provides higher profits for making decisions.

12. Under full costing, ending inventory includes both fixed and variable manufacturing and nonmanufacturing costs.

13. Under variable costing, ending inventory reported on a company’s balance sheet includes variable production costs and variable selling and administrative costs.

14. Contribution margin is reported on an absorption costing income statement.

15. If the number of units sold is equal to the number of units produced, then contribution margin will equal gross margin.

16. Full costing income can be increased by decreasing production even though the additional inventory items will not be sold during the current period.

17. When the number of units produced exceeds the number of units sold, variable costing yields a lower net income than if full costing had been used.

18. Under variable costing, net income can be increased by increasing production without increasing sales.

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Chapter 5 Variable Costing

19. The inventoriable cost per unit can be reduced, under variable costing, by decreasing the number of units produced.

20. When the number of units produced is greater than the number of units sold, variable costing yields higher income than full costing.

21. A full costing income statement will display a higher net income than variable costing as long as inventory levels continue to increase.

22. If a company increases production levels without increasing its units sold, both its full costing income and cash flows will be larger than if production were at a lower level.

23. Just-in-time (JIT) inventory management systems cause the difference between variable costing income and full costing income to be much greater than if standard inventory levels had been maintained by the company.

24. The use of variable costing encourages management of earnings by adjusting production volume.

25. Variable costing facilitates CVP analysis.

Answers

1 F 6 F 11 F 16 F 21 T2 F 7 T 12 F 17 T 22 F3 F 8 F 13 F 18 F 23 F4 F 9 T 14 F 19 F 24 F5 T 10 T 15 F 20 F 25 T

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MULTIPLE CHOICE

26. Full costingA. is another name for variable costing.B. considers fixed manufacturing overhead as an inventory cost.C. often provides the information needed for CVP analysis.D. considers fixed production cost as period cost..

27. Which of the following is accounted for differently in full costing compared to variable costing?A. Direct materialB. Fixed manufacturing overheadC. Direct laborD. Variable manufacturing overhead

28. Which of the following is accounted for as a product cost in variable costing?A. Product delivery costs to customersB. Variable manufacturing overheadC. Fixed manufacturing overheadD. Product advertising costs

29. Which of the following is treated as a product cost in full costing?A. Sales commissionsB. Product advertisingC. Depreciation on factory machinesD. Security at corporate headquarters

30. Full costing isA. more useful for decision making than variable costing because it treats all costs of

production as an inventory cost.B. required for financial reporting under generally accepted accounting principles.C. less likely to enable managers to manipulate income by increasing production.D. based on cost behavior.

31. In variable costing, when does fixed manufacturing overhead become an expense?A. NeverB. In the period when the product is soldC. In the period when the expense is incurredD. At the time when units are produced

32. In full costing, when does fixed manufacturing overhead become an expense?A. In the period when all other fixed costs are expensedB. In the period when the product is soldC. In the period when the expense is incurredD. At the time units when are produced

33. In variable costing, which of the following will be included as part of inventory on a company’s balance sheet?A. Fixed production costB. Variable selling costC. Fixed selling costsD. None of the answer choices will be part of inventory in variable costing.

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34. In full costing, which of the following will be included as part of inventory on a company’s balance sheet?A. Fixed production costB. Variable selling costC. Fixed selling costsD. None of the answer choices will be in inventory in full costing.

35. Rango Enterprises’ manufacturing costs for 2014 are as follows:

Direct materials $ 65,000Direct labor 118,000Manufacturing supplies 9,000Depreciation of factory equipment 22,000Other fixed manufacturing overhead 43,000

What amount should be considered as product costs for external reporting purposes?A. $183,000B. $192,000C. $257,000D. $248,000

36. Sticker Creations’ fixed manufacturing overhead costs totaled $68,000 and its variable selling costs totaled $45,000. Under full costing, how should these costs be classified?

Period Costs Product CostsA. $68,000 $45,000B. $113,000 $0C. $0 $113,000D. $45,000 $68,000

37. Diecast Tools’ manufacturing costs for 2014 are as follows:

Direct materials $100,000Direct labor 120,000Depreciation of factory equipment 30,000Production supervisor’s salary 72,000Other fixed manufacturing overhead 50,000

What amount should be considered product costs for external reporting purposes?A. $220,000B. $293,000C. $402,000D. $372,000

38. Robley Company’s fixed manufacturing overhead costs totaled $235,000 and fixed corporate operating costs totaled $116,000. Under full costing, how should these costs be classified?

Period Costs Product CostsA. $235,000 $116,000B. $0 $351,000C. $351,000 $0D. $116,000 $235,000

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39. Cold City Blowers produces snow blowers. The selling price per snow blower is $80. Costs involved in production are:

Direct material per unit $ 22Direct labor per unit 15Variable manufacturing overhead per unit 6Fixed manufacturing overhead per year 206,400

In addition, the company has fixed selling and administrative costs of $88,000 per year. During the year, Cold City Blowers produced 8,600 snow blowers and sold 8,000 snow blowers. There is no beginning inventory. Ignoring taxes, how much will full costing net income differ from variable costing net income?A. $15,480B. $14,400C. $206,400D. $192,000

40. Which of the following items appears on a variable costing income statement but not on a full costing income statement?A. SalesB. Gross marginC. Net incomeD. Contribution margin

41. Variable costing income is a function ofA. only units sold.B. only units produced.C. both units sold and units produced.D. neither units sold nor units produced.

42. Which of the following items on a variable costing income statement will change in direct proportion to a change in sales?A. Sales, contribution margin, and net incomeB. Sales, variable costs, and contribution marginC. Sales, variable costs, contribution margin, fixed costs, and net incomeD. Sales, variable costs, and fixed costs

43. If a company’s income is positive and fixed costs exist, which of the following items will increase or decrease at a greater rate than the change in the amount of sales on a variable costing income statement?A. Variable costsB. Fixed costsC. Contribution marginD. Net income

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44. Ranger Productions experienced the following costs in 2014:Direct materials $1.50 per unitDirect labor $2.60 per unitVariable manufacturing overhead $1.20 per unitVariable selling costs $4.40 per unitFixed manufacturing overhead $84,000Fixed selling costs $32,000Fixed administrative costs $15,000

During 2014, the company manufactured 65,000 units and sold 62,000 units. The unit cost is the same throughout the year. Beginning inventory is zero. How much will the company report as total variable product costs on its 2014 contribution income statement? A. $328,600B. $601,400C. $344,500D. $630,500

45. Anders Supply experienced the following costs in May:

Direct materials $6.50 per unitDirect labor $2.20 per unitManufacturing overhead costs

Variable $3.10 per unitFixed $44,000

Selling & administrative costsVariable selling costs $1.50 per unitFixed selling costs $21,000Fixed administrative costs $16,000

During May, the company manufactured 22,000 units and sold 24,000 units. Beginning inventory totaled 3,400 units. If the average selling price per unit was $28, how much is the company’s contribution margin?A. $327,400B. $352,800C. $323,400D. $344,800

46. Roger Excavating Company experienced the following costs in 2014:

Direct materials $1.75 per unitDirect labor $2.00 per unitVariable manufacturing overhead $2.50 per unitVariable selling $0.75 per unitFixed manufacturing overhead $50,000Fixed selling $15,000Fixed administrative $5,000

During 2014, the company manufactured 100,000 units and sold 80,000 units. If the average selling price per unit was $22.65, what is the amount of the company’s contribution margin per unit?A. $16.40B. $15.65C. $18.90D. $13.65

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47. Data from Rannier Metals for 2014 is as follows:

Sales $20 per unitVariable cost of goods sold ??Fixed manufacturing overhead $85,000Variable selling & administrative costs ??Fixed selling & administrative costs $150,000

The company produced 145,000 units during the year and sold 130,000 units. Variable production costs per unit and fixed costs have remained constant all year. Net income for the year was $1,000,000. How much was the company’s contribution margin?A. $765,000B. $1,235,000C. $1,365,000D. Not enough information is provided to determine the answer

48. During the past year, Waxman Electronics manufactured 25,000 speakers during 2014 and sold 26,000 speakers. Production costs during the year were as follows:

Fixed manufacturing overhead $546,000Variable manufacturing overhead 234,000Direct labor 312,000Direct materials 780,000

Sales totaled $3,120,000, variable selling and administrative costs totaled $182,000, and fixed selling and administrative costs totaled $114,000. There were 2,200 speakers in beginning inventory. How much is the contribution margin per unit?A. $48.00B. $69.00C. $62.00D. None of these answer choices are correct.



In addition, the company has fixed selling and administrative costs of $9,360 per year. During the year, Cold City Blowers produced 780 snow blowers and sold 800 snow blowers. Beginning inventory consisted of 50 snow blowers. How much is variable cost of goods sold?A. $34,400B. $33,540C. $29,600D. None of these answer choices are correct.

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In addition, the company has fixed selling and administrative costs of $9,360 per year. During the year, Cold City Blowers produced 780 snow blowers and sold 800 snow blowers. Beginning inventory consisted of 50 snow blowers. How much is net income using variable costing?A. $11,700B. $12,240C. $12,840D. $45,600

51. The following information relates to Charlin Industries for the year ending December 31, 2014, the company’s first year of operations:

Units produced 100,000Units sold 80,000Units in ending inventory 20,000Fixed manufacturing overhead $650,000

How much fixed manufacturing overhead would be expensed in 2014 using variable costing?A. $520,000B. $130,000C. $650,000D. $0

52. Sol Enterprises’ contribution income statement utilizing variable costing appears below:

Sol EnterprisesIncome Statement

For the Year ended December 31, 2014Sales ($12 per unit) $240,000Less variable costs:

Cost of goods sold $100,000Selling & administrative costs 18,000 118,000

Contribution margin 122,000Less fixed costs:

Manufacturing overhead 60,900Selling & administrative costs 15,000 75,900

Net income $ 46,100

Sol produced 21,000 units during the year. Variable costs per unit and fixed production costs have remained constant the entire year. There were no beginning inventories. How much is the dollar value of the ending inventory using variable costing?A. $5,000B. $7,900C. $8,800D. $2,900

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53. Acosta Supplies experienced the following costs in 2014:

Direct materials $1.50 per unitDirect labor $4.50 per unitVariable manufacturing overhead $2.00 per unitVariable selling $1.00 per unitFixed manufacturing overhead $70,000Fixed selling and administrative $80,000

During 2014, the company manufactured 4,000 units and sold 4,200 units. Assume the same unit costs in all years. Beginning inventory consists of 800 units. How much are total variable costs on the company’s 2014 contribution margin income statement?A. $37,800B. $36,000C. $33,600D. $32,000

54. Beiber Boxers contribution income statement utilizing variable costing for 2014 appears below:

Sales ($12 per unit) $78,000Less variable costs:

Cost of goods sold $26,000Selling & administrative 9,750 35,750


Manufacturing overhead 12,600Selling & administrative costs 14,950 27,550

Net income $ 14,700

The company produced 7,000 units during the year. Variable and fixed production costs have remained constant the entire year. There were no beginning inventories. How much is the dollar value of the ending inventory using full costing?A. $2,000B. $2,900C. $3,850D. None of these answer choices are correct.

55. When the number of units sold is equal to the number of units produced, the net income be using absorption costing will beA. greater than net income using variable costing.B. equal to net income using variable costing.C. less than net income using variable costing.D. None of the answer choices is always correct.

56. If the number of units sold is greater than the number of units produced,A. full costing and variable costing will yield the same net income.B. variable costing will assign some fixed manufacturing costs to the units in ending inventory.C. net income will be higher under variable costing than under full costing.D. inventory levels will increase.

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57. Meow Foods had 2,000 25-pound bags of cat food in beginning inventory. During 2014, the company manufactured 16,000 bags and sold 15,000 units. Assume the same unit costs in all years. Each bag of food is sold for $17. The company experienced the following costs:


If the company uses full costing, how much will be reported as inventory on the December 31, 2014 balance sheet?A. $9,000B. $25,500C. $28,500D. $34,500

58. Meow Foods had 2,000 25-pound bags of cat food in beginning inventory. During 2014, the company manufactured 16,000 bags and sold 15,000 units. Each bag of food is sold for $17. Assume the same unit costs in all years. The company experienced the following costs:


If the company uses variable costing, at what amount is the ending inventory for the year valued?A. $25,500B. $28,500C. $34,500D. $9,000

59. Macho Enterprises experienced the following costs in 2014:


During the year, the company manufactured 47,000 units and sold 40,000 units. How much is the unit product cost using full costing?A. $7.70B. $9.70C. $8.85D. $10.85

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60. Ranger Roadsters experienced the following costs in 2014 (Assume the same unit costs in all years):

Direct materials $4.85 per unitDirect labor $2.10 per unitManufacturing overhead costs


Selling & administrative costsVariable selling $0.95 per unitFixed selling $8,000Fixed administrative $2,000

There were 6,000 units in beginning inventory. During the year, the company manufactured 45,500 units and sold 48,000 units. If net income using variable costing was $82,500, how much is net income using full costing?A. $78,375B. $86,625C. $76,725D. $88,275

61. The Crab Shack experienced the following costs in 2014 (Assume the same unit costs in all years):Direct materials $2.25 per unitDirect labor $1.50 per unitManufacturing overhead costs


Selling & administrative costsVariable selling $0.80 per unitFixed selling $9,000Fixed administrative $13,000

There were 1,800 units in beginning inventory. During the year, the company manufactured 24,000 units and sold 25,000 units. If net income using variable costing was $76,250, how much is net income using full costing?A. $5,880B. $79,250C. $73,750D. $74,350

62. If a company’s levels of total fixed costs and unit variable costs remain unchanged from one year to the next, under which costing method is it possible for managers to manipulate net income through production?A. Variable costingB. Full costingC. Both variable and full costingD. Neither variable nor full costing

63. Full costing income is a function ofA. units sold only.B. units produced only.C. both units sold and units produced.D. neither units sold nor units produced.

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64. Which of the following is true when units produced exceed units sold?A. Full costing and variable costing will yield the same net income.B. Full costing will assigns some a portion of the fixed manufacturing costs to the units in

ending inventory.C. Net income will be higher under variable costing than under full costing.D. Inventory levels will decrease.

65. Futon Delight experienced the following costs in 2014 (Assume the same unit costs in all years):

Direct materials $2.00 per unitDirect labor $1.00 per unitManufacturing Overhead Costs:


There were 600 units in beginning inventory. During the year, the company manufactured 18,000 units and sold 17,600 units. If net income for the year was $54,000 using full costing, how much will net income be if the company uses variable costing?A. $53,000B. $50,000C. $55,000D. More information is needed to determine the answer.

66. Radial Fuel Cells experienced the following costs in 2014 (Assume the same unit costs in all years):

Direct materials $4 per unitDirect labor $8 per unitManufacturing Overhead Costs

Variable $2 per unitFixed $150,000

Selling & Administrative CostsFixed selling $30,000Variable selling $1 per unitFixed administrative $20,000

During the year, the company manufactured 50,000 units and sold 45,000 units. Beginning inventory is zero. If net income for the year was $265,000 using full costing, what would net income be if the company used variable costing?A. $250,000B. $265,000C. $270,000D. $450,000

67. If a company employs JIT inventory techniques, which statement is true?A. Variable and full costing income will differ very little since there is almost no inventory on

hand.B. Variable and full costing income will differ very little since there are almost no fixed costs

incurred on production.C. Variable and full costing income will differ greatly since actual costs are difficult to

determine. D. Variable and full costing income will differ greatly since there will be a large difference

between gross margin and contribution margin.

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68. Waterloo Skyline experienced the following costs in 2014:

Direct materials $3.15 per unitDirect labor $2.80 per unitVariable manufacturing overhead $1.45 per unitFixed manufacturing overhead $12.60 per unit

There was no beginning inventory. During the year, the company sold 190,000 units. If net income using full and variable costing was $939,020 and $905,000, respectively, how many units did the company produce in 2014?A. 192,700B. 2,700C. 187,300D. 46,951

69. Which is most consistent with cost-volume-profit analysis?A. Variable costingB. Full costingC. Absorption costingD. JIT

70. Which method provides an incentive for managers to produce more units in order to increase income for performance evaluations?A. Full costingB. Variable costingC. Both full costing and variable costingD. Neither full costing nor variable costing

71. Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units. What is Brand Products’ net income using variable costing?A. $125,960B. $149,960C. $169,740D. $124,240

72. Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units. What is Brand Products’ net income using full costing?A. $124,240B. $125,960C. $169,740D. $149,960

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73. Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units. Brand Products uses variable costing. How much will the company’s contribution margin increase if sales increase 10%?A. $16,974B. $23,000C. $14,996D. $12,420

74. Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units. Brand Products uses full costing. How much will the company’s gross margin increase if sales increase 10%?A. Less than 10%B. More than 10%C. 10%D. It depends on other factors not given.

75. Affinity makes a single product, pool pumps. Information for 2014 appears below:

Sales in units 5,800Production in units 6,200Beginning inventory 1,500Variable production cost per unit $46.00Variable selling cost per unit $6.00Fixed production cost per year $31,000Fixed selling and administrative cost per year $24,000Selling price per unit $75.00

How much is the contribution margin per unit of inventory?A. $29.00B. $24.00C. $23.00D. $18.00

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76. Affinity makes a single product, pool pumps. Information for 2014 appears below (Assume the same unit costs in all years):


How much is the full cost per unit of inventory?A. $46.00B. $51.00C. $57.00D. $52.00



How much is net income for the year under variable costing?A. $78,400B. $87,600C. $80,400D. None of these answer choices are correct.



How much is net income for the year under full costing?A. $78,400B. $80,400C. $87,600D. None of these answer choices are correct.

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Under which method will net income be larger?A. Variable costingB. Full costingC. Net income under both the variable and full costing methods will be the same.D. The answer cCannot be determined from the information provided.



How much will be reported for inventory on the balance sheet if variable costing is used?A. $87,400B. $96,900C. $108,300D. $118,400

81. Leesburg Bags produces backpacks. The costs and prices for the backpacks follow (Assume the same unit costs in all years):

Selling price $23.00 per backpackVariable costs:

Production $11.00 per backpackSelling $2.00 per backpack

Fixed Costs:Production $900,000 per yearSelling and administrative $540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much is the cost of ending inventory under variable costing?A. $550,000B. $650,000C. $730,000D. $1,450,000

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Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition5-18






Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much is the cost of ending inventory under full costing?A. $730,000B. $550,000C. $650,000D. $938,000





Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much is net income under variable costing?A. $740,000B. $848,000C. $560,000D. $2,000,000

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Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much is net income under full costing?A. $560,000B. $380,000C. $340,000D. $740,000





Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much higher or lower will variable costing be than full costing income?A. $180,000 higherB. $320,000 higherC. $320,000 lowerD. $180,000 lower

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Fixed costs:Production $900,000 per yearSelling and administrative $540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. What would be the difference in income between variable costing income and full costing income if the company had produced 215,000 backpacks instead of 250,000? A. $62,791B. $54,000C. $46,400D. $77,400

87. WebFlicks is an online DVD company that produces its own DVD copies of first-run movies that it sells for $8.00 each. The following information is available (Assume the same unit costs in all years):

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Variable costs:Product royalty fees $3.30 per DVDDVD production $1.20 per DVDSelling and admin costs $0.80 per DVD

Fixed costs:Production $128,000 per monthSelling and administration $130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in beginning inventory. How much is net income per month under variable costing?A. $143,600B. $130,800C. $130,640D. None of these answer choices are correct.

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Variable costs:Product royalty fees $3.30 per DVDDVD production $1.20 per DVDSelling and admin costs $0.80 per DVD

Fixed Costs:Production $128,000 per monthSelling and administration $130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in beginning inventory. How much is net income per month under full costing?A. $143,600B. $130,640C. $130,800D. None of these answer choices are correct.


Variable costs:Product royalty fees $3.30 per DVDDVD production $1.20 per DVD Selling and admin costs $0.80 per DVD


During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in beginning inventory. How much is inventory at the end of the month under variable costing?A. $72,000B. $148,500C. $174,900D. $84,800

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Variable costs:Product royalty fees $3.30 per DVDDVD production $1.20 per DVD Selling and admin costs $0.80 per DVD


During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in beginning inventory. How much is inventory at the end of the month under full costing?A. $72,000B. $148,500C. $174,900D. $84,800

91. Aerotrino produces and sells popular t-shirts. Following is information about its t-shirts for 2014:

Selling price $15.00 per t-shirtVariable costs:

Production (manufacturing costs) $3.00 per t-shirtSelling & administration $1.00 per t-shirt

Fixed costs:Production (manufacturing costs) $1,000,000 per yearSelling & administration $2,000,000 per year

During 2014, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there was no beginning inventory. How much is the net income under variable costing?A. $975,000B. $1,400,000C. $850,000D. $2,250,000





During 2014, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there was no beginning inventory. How much is the net income under full costing?A. $975,000B. $1,400,000C. $850,000D. $2,250,000

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During 2014, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there was no beginning inventory. How much is the inventory under variable costing at December 31, 2014?A. $150,000B. $275,000C. $200,000D. $325,000





During 2014, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there was no beginning inventory. How much is the inventory under full costing at December 31, 2014?A. $150,000B. $275,000C. $200,000D. $325,000

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95. Brislin Gifts makes ceramic mugs and has the following amounts for 2014 (Assume the same unit costs in all years):

Selling price $9.00 per mugVariable production cost $2.50 per mugVariable selling cost $1.10 per mugFixed production cost $100,000 per monthFixed selling and administrative cost $60,000 per month

Production and sales in units for the first three months of 2014 are as follows:Year Production SalesJanuary 50,000 44,000February 40,000 45,000March 44,000 46,000

Inventory at January 1, 2014 consisted of 1,000 mugs. How much is net income for January using variable costing?A. $89,600B. $77,600C. $67,480D. None of these answer choices are correct.

96. Brislin Gifts makes ceramic mugs and has the following amounts during 2014 (Assume the same unit costs in all years):



Inventory at January 1, 2014 consisted of 1,000 mugs. How much is net income for February using full costing?A. $70,500B. $83,000C. $183,000D. None of these answer choices are correct.

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Inventory at January 1, 2014 consisted of 1,000 mugs. During which months will ending inventory be the same if variable costing is used?A. January and FebruaryB. February and MarchC. January and MarchD. No two months would have the same ending inventory

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Inventory at January 1, 2014 consisted of 1,000 mugs. Which two months would have the same net income under full costing?A. January and FebruaryB. February and MarchC. January and MarchD. No two months would have the same net income.

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Selling price $9.00 per mugVariable production cost $2.50 per mugVariable selling cost $1.10 per mugFixed production cost $100,000 per yearFixed selling and administrative cost $60,000 per year


Inventory at January 1, 2014 consisted of 1,000 mugs. How many units will remain in inventory at the end of February?A. 2,000B. 0C. 7,000D. 6,000

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Inventory at January 1, 2014 consisted of 1,000 mugs. How much is the inventory cost per unit under full costing during March?A. $4.50B. $4.00C. $2.50D. $5.10

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Inventory at January 1, 2014 consisted of 1,000 mugs. How much is the inventory cost per unit under variable costing during March?A. $4.50B. $3.60C. $2.50D. $5.60

102. A company with fixed manufacturing costs of $500,000 produces 100,000 units in 2014 and 125,000 units in 2015. The company sells 90,000 units each in both years. Other costs and selling price are unchanged for 2014 and 2015. Assume that there was no beginning inventory in 2014. Which of the following is true?A. Variable costing income will be greater in 2014 than in 2015.B. The dollar amount of ending inventory will be greater in 2014 than in 2015.C. Variable costing income will be the same in 2015 and 2014. D. All of these answer choices are correct.

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103. Zintec has fixed manufacturing costs of $400,000 and produces 10,000 and sells 8,000 wagons during the year. There is no beginning inventory. Which of the following conclusions can be drawn?A. Variable costing income will be $80,000 higher than full costing income.B. Full costing income will be $80,000 higher than variable costing income.C. Variable and full costing income will be the same.D. There is not enough information to draw a conclusion.

104. Boulder Blowers produces snow blowers. The selling price per snow blower is $100. Costs involved in production are:


In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no beginning inventory. What is the value of ending inventory using full costing?A. $679,500B. $630,000C. $652,500D. $780,000



In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no beginning inventory. What is the value of ending inventory using variable costing?A. $679,500B. $630,000C. $652,500D. $780,000



In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no beginning inventory. How much is the cost of goods sold using full costing?A. $1,359,000B. $1,260,000

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C. $2,038,500D. $1,408,500



In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no beginning inventory. How much is net income using full costing?A. $1,641,000B. $1,590,000C. $1,441,500D. $1,491,000

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In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. Beginning inventory consists of no units. How much fixed manufacturing overhead is in ending inventory under full costing?A. $0B. $49,500C. $148,500D. $99,000

109. The following information relates to Winslee Widgets during the company’s first year of operations:

Units produced 11,000Units sold 10,000Units in ending inventory 1,000Fixed manufacturing overhead $220,000

How much fixed manufacturing overhead will be expensed during the year using full costing?A. $220,000B. $20,000C. $200,000D. $0

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Multiple Choice Answers

26 B 41 A 56 C 71 D 86 A 101 C27 B 42 B 57 D 72 B 87 B 102 C28 B 43 D 58 A 73 A 88 A 103 B29 C 44 A 59 B 74 B 89 B 104 A30 B 45 B 60 A 75 C 90 C 105 B31 C 46 B 61 C 76 B 91 C 106 A32 B 47 B 62 B 77 A 92 A 107 D33 D 48 C 63 C 78 B 93 A 108 B34 A 49 A 64 B 79 B 94 B 109 B35 C 50 C 65 A 80 A 95 B36 D 51 C 66 A 81 A 96 A37 D 52 A 67 A 82 A 97 C38 D 53 A 68 A 83 C 98 D39 B 54 B 69 A 84 D 99 A40 D 55 B 70 A 85 D 100 A

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EXERCISES

110. Arctic AC Company is a small manufacturer of window air conditioners. The units sell for $180 each. In 2014, the company produced 1,000 units and sold 940 units. Beginning inventory was zero. Below is the variable costing income statements for 2014:

Arctic AC CompanyVariable Costing Income Statement

For the Year Ending December 31, 2012Sales $169,200Less variable costs:

Variable cost of goods sold $26,320Variable selling expense 12,220 38,540


Fixed manufacturing expense 21,000Fixed selling expense 6,580Fixed administrative expense 4,700 32,280

Net income $98,380

a. How much net income will be reported under full costing?b. Reconcile the difference in profit between the two income amounts.

Answera. Fixed manufacturing overhead $21,000

Divided by units produced 1,000Fixed manufacturing overhead per unit $ 21.00

Sales $169,200Less cost of goods sold 46,060Gross margin $123,140Less selling and administrative expenseSelling expense 23,500

Net income $99,640

b. Variable costing net income $98,380 Add: Fixed costs deferred in inventory ($21 × 60) 1,260

Full costing net income $99,64

0

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111. The following information is available for Trailblazer, a manufacturer of four-wheel all-terrain vehicles:

2014 2015Vehicles produced 20,000 16,000Vehicles sold 18,000 18,000

Selling price per unit $8,000 $8,000Direct material per unit $1,600 $1,600Direct labor per unit $3,000 $3,000

Variable manufacturing overhead per unit $600 $600Fixed manufacturing overhead per year $4,800,000 $4,800,000Fixed selling and administrative expense per year $3,000,000 $3,000,000

In the company’s second year, the company needed to get rid of excess inventory (the extra units produced but not sold in 2014), so it cut back production to 16,000 units.

a. Calculate profit for both years using variable costing.b. How much is reported as ending inventory when using variable costing? c. Does variable costing profit present a more realistic view of performance during the two

years? Explain.

Answera. 2014 2015 Total

Variable manufacturing costs per unit $5,200 $5,200

Sales ($8,000 × 18,000 units) $144,000,000 $144,000,000Less cost of goods sold:

($5,200 × 18,000 units) 93,600,000 93,600,000Contribution margin 50,400,000 50,400,000Less fixed costs:

Manufacturing 4,800,000 4,800,000Selling and administrative 3,000,000 3,000,000

Net income $ 42,600,000 $ 42,600,000 $85,200,000

b. Ending inventory $10,400,000 $0($5,200 × 2,000 units) ($5,200 × 0 units)

c. Variable costing presents a more realistic view of firm performance in that income is the same in both years, which is consistent with the firm having the same cost structure and level of sales in both years.

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112. Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are:

Direct material $11 per unitDirect labor 15 per unitVariable manufacturing overhead 12 per unitFixed manufacturing overhead per year $448,000

In addition, the company has selling and administrative costs:

Fixed selling costs per year $175,000Fixed administrative costs per year 75,000Variable selling and administrative costs per year $6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years. What is the value of ending inventory using variable costing?

AnswerEnding inventory in units = 1,800 + 28,000 – 29,400 = 400 unitsEnding inventory under variable costing: ($11 + $15 + $12) × 400 = $15,200




Fixed selling costs per year $175,000Fixed administrative costs per year 75,000Variable selling and administrative costs per year $6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years. How much is net income using variable costing?

AnswerSales ($80 × 29,400) $2,352,000Less variable cost of goods sold ($38 × 29,400) 1,117,200Less variable selling and administrative costs ($6 × 29,400) 176,400Contribution margin 1,058,400Less Fixed manufacturing overhead $448,000

Selling expense 175,000Administrative expense 75,000 698,000

Net income $ 360,400

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Fixed selling costs per year $175,000Fixed administrative costs per year 75,000Variable selling and admin costs per year $6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years.

a. How much is net income using full costing?b. How much fixed manufacturing overhead is in ending inventory under full costing?

Answera. Sales ($80 × 29,400) $2,352,000

Less cost of goods sold ($54 × 29,400)* 1,587,600Gross margin 764,400Less selling and administrative expenses:

Fixed selling and administrative expense $250,000Variable selling and admin expenses ($6 × 29,400) 176,400 426,400


* Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 per unit Product cost per unit = $11 + $15 + $12 + $16 = $54

b. Units in ending inventory = 1,800 + 28,000 – 29,400 = 400Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 per unitCost of ending inventory = $16 × 400 = $6,400

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115. Below is a variable costing income statement for Hops Dollar Store. The budget for 2014 follows:

Hops Dollar StoreBudgeted Variable Costing Income Statement

For the Year Ending December 31, 2014Sales $15,000,000Less variable costs:

Cost of goods sold $5,000,000Selling expense 4,000,000 9,000,000

Contribution margin 6,000,000Less fixed costs:

Manufacturing expense 2,300,000Selling expense 1,200,000Administrative expense 2,000,000 5,500,000


For the coming year, the company is considering hiring two additional sales representatives at $80,000 each for base salary plus 5 percent of their sales for commissions. The company anticipates that each sales representative will generate $900,000 of incremental sales. Calculate the impact on profit of the proposed hiring decision. Should the company hire the two additional sales representatives?

AnswerContribution margin ÷ Sales = Contribution margin ratio

$6,000,000 ÷ $15,000,000 = 0.40 = 40.00%

(Incremental sales × CMR) − Salaries – Commission = Incremental profit($1,800,000 × .40) − $160,000 − ($1,800,000 × .05) = $470,000 profit increase

Since profit increases, Hops Dollar Store should hire the two additional sales representatives.

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116. Perfect Buy produces electronic garage door openers. Information on the first three years of business follows:

2014 2015 2016Units sold 20,000 20,000 20,000Units produced 20,000 25,000 15,000Fixed production costs $500,000 $500,000 $500,000Variable production costs per unit $100 $100 $100Selling price per unit $200 $200 $200Fixed selling and administrative

expense $150,000 $150,000 $150,000

a. Calculate net income and the value of ending inventory for each year using variable costing.b. Explain why, using variable costing, profit does not fluctuate from year to year.

Answera. 2014 2015 2016Units sold 20,000 20,000 20,000Selling price per unit $ 200 $ 200 $ 200Sales 4,000,000 4,000,000 4,000,000Less variable cost of goods sold:

($100 × 20,000) 2,000,000 2,000,000 2,000,000Contribution margin 2,000,000 2,000,000 2,000,000Less fixed costs:

Production 500,000 500,000 500,000Selling and administrative 150,000 150,000 150,000

Net income $1,350,000 $1,350,000 $1,350,000

Ending inventory ($100 × 5,000) $0 $500,000 $0

b. Under variable costing system, profit remains the same each period because fixed manufacturing overhead is treated as a period cost and expensed each year even if units produced differ from the units sold.

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117. The following information is available for Trailblazer, a manufacturer of four-wheel all-terrain vehicles for its first two years of operation:

2014 2015 Vehicles produced 1,000 1,400Vehicles sold 900 1,200

Selling price per unit $1,200 $1,200Direct material per unit $350 $350Direct labor per unit $220 $220

Variable manufacturing overhead per unit $40 $40Fixed manufacturing overhead per year $112,000 $112,000Variable selling and administrative expense per unit $20 $20Fixed selling and administrative expense per year $35,000 $35,000

Calculate net income for 2015 using full costing.

AnswerSales ($1,200 × 1,200) $1,440,000Less cost of goods sold ($690 × 1,200)* 828,000Gross margin 612,000Less selling and administrative expenses:

Fixed selling and administrative expense $35,000Variable selling and admin expenses ($20 × 1,200) 24,000 59,000


* Fixed manufacturing cost per unit = $112,000 ÷ 1,400 = $80 per unit Product cost per unit = $350 + $220 + $40 + $80 = $690

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118. The following information relates to Markley Mattresses for fiscal year 2014, the company’s first year of operations:

Units produced 20,000Units sold 17,000Selling price per unit $30Direct material per unit $5Direct labor per unit $5Variable manufacturing overhead per unit $2Variable selling cost per unit $3Annual fixed manufacturing overhead $160,000Annual fixed selling and administrative expense $80,000

a. Prepare an income statement using full costing.b. Prepare an income statement using variable costing.

Answera.

Markley MattressesFull Costing Income Statement

For the Year Ending December 31, 2014Sales ($30 × 17,000) $510,000Less cost of goods sold ($20 × 17,000)* 340,000Gross margin 170,000Less selling and administrative expenses

Fixed selling and administrative expense $80,000Variable selling expenses ($3 × 17,000) 51,000 131,000

Profit $ 39,000

* Product cost per unit: $5 + $5 + $2 + $8 ($160,000 ÷ 20,000) = $20

b.Markley Mattresses

Variable Income StatementFor the Year Ending December 31, 2014

Sales ($30 × 17,000) $510,000 Less variable expenses

Production costs ($12 × 17,000) $204,000Selling costs ($3 × 17,000) 51,000 255,000

Contribution margin 255,000Less fixed expenses

Manufacturing overhead 160,000Selling and administrative expense 80,000 240,000

Profit $ 15,000

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119. Adam Tools produces screwdrivers and had 1,700 in inventory at the beginning of the year. It has a variable manufacturing cost of $5.00 per unit, a variable selling cost of $0.75 per unit; a fixed manufacturing cost of $45,000 per year; and a fixed selling and administrative cost of $24,000 per year. The selling price is $14.00 per screwdriver. During the year, 18,000 screwdrivers were produced and 18,400 were sold. Assume the same unit costs in all years.

a. What is the product cost per screwdriver using variable costing?b. What is the product cost per screwdriver using full costing?c. Prepare an income statement using variable costing. Omit the statement heading. d. Prepare an income statement using full costing. Omit the statement heading.

Answer:a. $5.00

b. $5.00 + ($45,000 ÷ 18,000) = $7.50

c. Sales (18,400 × $14) $257,600Variable manufacturing cost (18,400 × $5) $92,000Variable selling cost (18,400 × $0.75) 13,800 105,800Contribution margin 151,800Fixed production costs 45,000Fixed selling & administrative costs 24,000 69,000Net income $ 82,800

d. Sales (18,400 × $14) $257,600Cost of goods sold (18,400 × $7.50) 138,000Gross margin 119,600Selling & administrative [$24,000 + ($0.75 × 18,400)] 37,800Net income $ 81,800





During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years. What is the value of ending inventory using full costing?

AnswerEnding inventory in units = 1,800 + 28,000 – 29,400 = 400 unitsFixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 per unitProduct cost per unit = $11 + $15 + $12 + $16 = $54Ending inventory under full costing: $54 × 400 units = $21,600

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During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years. How much is gross margin per unit and in total?

AnswerFixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16Gross margin per unit = $80.00 – $11.00 – $15.00 – $12.00 – $16.00 = $26.00Total gross margin = $26 × 29,400 = $764,400

122. Last month, Toro Tools produced 6,000 wheelbarrows and sold 6,200 at a price of $62 each. Toro had 900 wheelbarrows in beginning inventory. Manufacturing costs consisted of direct materials of $84,000, direct labor of $27,300, variable manufacturing overhead of $21,000, and fixed manufacturing overhead of $120,000. General and administrative fixed costs totaled $32,000. Variable selling costs were $1 per wheelbarrow. Assume the same unit costs in all years.

a. Calculate Toro Tools’ net income using full costing.b. Calculate Toro Tools’ net income using variable costing.

Answera. Net income using full costing approach:

Revenue = 6,200 × $62 = $384,400Variable manufacturing cost per unit = ($84,000 + $27,300 + $21,000) ÷ 6,000 = $22.05Fixed manufacturing cost per unit = $120,000 ÷ 6,000 = $20.00Cost of goods sold = ($42.05 × 6,200) = $260,710Variable selling costs = $1 × 6,200 = $6,200Net income = $384,400 – $260,710 – $32,000 – $6,200 = $85,490

b. Net income using variable costing approach:Revenue = 6,200 × $62 = $384,400Variable manufacturing cost per unit = ($84,000 + $27,300 + $21,000) ÷ 6,000 = $22.05Variable selling costs = $1 × 6,200 = $6,200Net income = $384,400 – ($22.05 × 6,200) – $120,000 – $32,000 – $6,200 = $89,490

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123. Assess Digital produces digital controls. Information on its first three years of business is as follows:

2014 2015 2016 TotalUnits sold 20,000 20,000 20,000 60,000Units produced 20,000 25,000 15,000 60,000Fixed production costs $500,000 $500,000 $500,000Variable production costs per unit $100 $100 $100Selling price per unit $200 $200 $200Fixed selling and administrative exp. $150,000 $150,000 $150,000

a. Calculate net income and the value of ending inventory for each year using full costing.b. Explain why profit fluctuates from year to year even though the number of units sold, the

selling price, and the cost structure remain constant.

Answer2014 2015 2016

Fixed production overhead $500,000 $500,000 $500,000Divided by units produced 20,000 25,000 15,000Fixed production overhead per unit $25.00 $20.00 $33.33Variable production costs per unit 100.00 100.00 100.00Full cost per unit $ 125.00 $ 120.00 $ 133.33

Sales ($200 × 20,000 units) $4,000,000 $4,000,000 $4,000,000Less cost of goods sold:

($125 × 20,000) 2,500,000($120 × 20,000) 2,400,000($120 × 5,000) + ($133.33 × 15,000) 2,599,950

Gross margin 1,500,000 1,600,000 1,400,050Less selling and admin expense 150,000 150,000 150,000Net income $1,350,000 $1,450,000 $1,250,050

Ending inventory ($120 × 5,000) $0 $600,000 $0

b. Even though sales revenue amounts are the same in each period, profit fluctuates. This results because different quantities are produced each period which affects the fixed manufacturing overhead included in cost of goods sold versus ending inventory.

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124. Wise Company began operations in 2014. A company has $8.00 per unit in variable production costs and $3.00 per unit in variable selling and administrative costs. The annual fixed production cost is $180,000. The annual fixed selling and administrative cost is $20,000.

a. Complete the table below for the number of units and dollar value of ending inventory under variable costing for each year.

2014 2015 2016 2017Units produced 60,000 70,000 80,000 90,000Units sold 55,000 72,000 82,000 91,000Units in ending inventory

Ending inventory using variable costing

b. Assume that the selling price and cost structure stayed the same over the 4-year period. How would the total net income compare for the entire period between variable and full costing?

Answera.

2014 2015 2016 2017Units produced 60,000 70,000 80,000 90,000Units sold 55,000 72,000 82,000 91,000Units in ending inventory 5,000 3,000 1,000 0Ending inventory using variable costing

$8 × 5,000 = $40,000$8 × 3000 = $24,000$8 × 1,000 = $8,000 $0

b. Since sales equals production for the 4-year period, net income will remain be the same.

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CHALLENGE EXERCISES

125. ABT makes a single product, bucket stoppers. During 2014, 155,000 units were sold and 150,000 units were produced. Information for 2014 appears below:

Beginning inventory in units 6,000Variable production cost per unit $1.20Variable operating costs per unit $0.80Fixed production cost per year $127,500Fixed selling and administrative cost per year $32,000Selling price per unit $6.00

a. How much is the contribution margin for 2014 under variable costing? b. How much is the gross margin for 2014 under full costing? c. Explain why variable and full costing produce different results.

Answera. Sales ($6 × 155,000) $930,000

Variable cost of production ($1.20 × 155,000) 186,000Variable operating costs ($0.80 × 155,000) 124,000Contribution margin $620,000

b. Fixed cost per unit = $127,500 ÷ 150,000 = $0.85Full cost per unit = $0.85 + $1.20 = $2.05

Sales ($6 × 155,000) $930,000 Cost of goods sold ($2.05 × 155,000) 317,750Gross margin $612,250

c. Under full costing, a proportional share of the fixed manufacturing overhead costs is attached to each unit produced. The fixed costs associated with the extra units are reported on the balance sheet as ending inventory, rather than on the income statement as an expense. The entire fixed manufacturing cost is expensed under variable costing, making income smaller than if only part of the fixed cost was expensed.

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126. Bucket Zone had 2,200 buckets in its beginning inventory. It manufactured 23,000 buckets and sold 23,400 buckets during the year. Costs involved in production are $3 for direct materials, $2 for direct labor, and $1.20 for variable overhead, each on a per unit basis. The company has annual fixed selling and administrative costs of $78,000 and fixed annual manufacturing overhead costs totaling $86,250. Operating income using variable costing is $33,000.

a. Determine the amount by which net income will differ under absorption costing compared to variable costing.

b. Determine operating income under absorption costing. c. How would the difference between variable and full costing be impacted if the company

switched to a JIT system? Explain.

Answera. Change in inventory level = 23,400 – 23,000 = 400 units decrease

Fixed manufacturing cost per unit = $86,250 ÷ 23,000 = $3.75 per unitDifference = $3.75 × 400 units = $1,500

b. Variable costing operating income $33,000 Less fixed costs difference (1,500) Absorption costing operating income $31,500

c.Companies that use JIT inventory systems have very low inventory levels since they don’t produce until they are ready to sell products. Units they produce are approximately equal to those they sell, so the change in the inventory level is very close to zero. Since the difference in variable and full costing income is due to the change in inventory units, the net income difference will be close to zero as well.

SHORT-ANSWER ESSAYS

127. Explain the significant difference between variable costing and full costing.

AnswerThe significant difference between variable costing and full costing is the treatment of fixed manufacturing overhead. In variable costing, fixed manufacturing overhead is treated as a period cost and expensed as it is incurred. In full costing, fixed manufacturing overhead is considered a cost that becomes part of inventory and is not expensed until the goods are sold.

128. Why is a variable costing income statement more useful for internal purposes?

AnswerThe format separates fixed and variable costs facilitating cost-volume-profit analysis. Also, it discourages over-production since managers cannot increase income by increasing production.

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129. Under full costing, how does increasing production increase income? Does this work under variable costing? Why or why not?

AnswerSince fixed production costs are included in the unit product cost using full costing, increasing production will reduce the fixed cost per unit. When these reduced costs are included in cost of goods sold, income will be higher. Variable costing treats fixed production costs as a period cost, and expenses the full amount regardless of production. Thus, income is unaffected by increasing production.

130. Can a company continue to increase income indefinitely by using full costing?

AnswerIt is possible that a growing company can do this. The only way to do this is to produce more than is sold in each year. This will result in a continuous buildup of inventory. For most companies, that would not be a good strategy as it would lead to expensive cash outflow for buildups of inventories along with all the associated carrying costs.

131. What is the implication of a company using JIT with full costing versus using JIT with variable costing?

AnswerJIT companies have very little inventory and so there is very little difference between full and variable costing income.

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