1. Sierra Company incurs the following costs to produce and sell a single product.
Variable costs per unit:
Direct materials $9
Direct labor $10
Variable manufacturing overhead $5
Variable selling and administrative expenses $3
Fixed costs per year:
Fixed manufacturing overhead $150,000
Fixed selling and administrative expenses $400,000
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During the last year, 25,000 units were produced and 22,000 units were sold. The Finished Goods inventory account at the end of the year shows a balance of $72,000 for the 3,000 unsold units.
Compute the total cost of finished goods inventory using variable costing?
Compute the total cost of finished goods inventory using absorption costing?
At what dollar amount should the 3,000 units be carried in the inventory for external reporting purposes?
2. Whitman Company has just completed its first year of operations. The company’s absorption costing income statement for the year appears below:
Whitman Company
Income Statement
Sales (35,000 units Af— $25 per unit) $875,000
Cost of goods sold (35,000 units Af— $16 per unit) 560,000
Gross margin 315,000
Selling and administrative expenses 280,000
Net operating income $35,000
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The company’s selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 per unit product cost given above is computed as follows:
Direct materials $5
Direct labor 6
Variable manufacturing overhead 1
Fixed manufacturing overhead ($160,000 Af· 40,000 units) 4
Absorption costing unit product cost $16
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Redo the company’s income statement in the contribution format using variable costing.
Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above.
3. During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows:
Year 1 Year 2
Sales ($25 per unit) $1,000,000 $1,250,000
Cost of goods sold ($18 per unit) 720,000 900,000
Gross margin 280,000 350,000
Selling and administrative expenses* 210,000 230,000
Net operating income $70,000 $120,000
*$2 per unit variable; $130,000 fixed each year.
The company’s $18 unit product cost is computed as follows:
Direct materials $4
Direct labor 7
Variable manufacturing overhead 1
Fixed manufacturing overhead ($270,000 Af· 45,000 units) 6
Absorption costing unit product cost $18
Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.
Production and cost data for the two years are:
Year 1 Year 2
Units produced 45,000 45,000
Units sold 40,000 50,000
Prepare a variable costing contribution format income statement for each year.
Determine the absorption costing and variable costing net operating income figures for each year.
Year 1 Year 2
Variable costing net operating income for each year.
Add/(deduct): Fixed manufacturing overhead deferred in inventory under absorption costing
Absorption costing net operating income.
4. Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler’s personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.
Tami’s Creations, Inc.
Income Statement
For the Quarter Ended March 31
Sales (28,000 units) $1,120,000
Variable expenses:
Variable cost of goods sold $462,000
Variable selling and administrative 168,000 630,000
Contribution margin 490,000
Fixed expenses:
Fixed manufacturing overhead 300,000
Fixed selling and administrative 200,000 500,000
Net operating loss $(10,000)
Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company would probably have reported a profit for the quarter.
At this point, Ms. Tyler is manufacturing only one product, a swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:
Units produced 30,000
Units sold 28,000
Variable costs per unit:
Direct materials $3.50
Direct labor $12.00
Variable manufacturing overhead $1.00
Variable selling and administrative $6.00
Requirement 1:
Complete the following:
(a) Compute the unit product cost under absorption costing.
Unit product cost $
(b) Redo the company’s income statement for the quarter using absorption costing.
(c) Reconcile the variable and absorption costing net operating income (loss) figures.
: Fixed manufacturing overhead cost deferred in inventory under absorption costing
Requirement 3:
During the second quarter of operations, the company again produced 30,000 units but sold 32,000 units. (Assume no change in total fixed costs.)
(a) Prepare a contribution format income statement for the quarter using variable costing.
Sales $
Variable expenses:
Variable cost of goods sold $
Variable selling and administrative expenses
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative expense
(b) Prepare an income statement for the quarter using absorption costing.
(c) Reconcile the variable costing and absorption costing net operating incomes.
: Fixed manufacturing overh
