Chapter 7 Variable Costing: A Tool for Management

True/False Questions

1. Under variable costing, only variable production costs are treated as product costs.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

2. Under variable costing, variable selling and administrative costs are included in
product costs.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

3. Absorption costing treats all manufacturing costs as product costs.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

4. In the preparation of financial statements using variable costing, fixed manufacturing

overhead is treated as a period cost.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

5. Absorption costing treats fixed manufacturing overhead as a period cost.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

6. When the number of units in work in process and finished goods inventories increase,
absorption costing net operating income will typically be greater than variable costing
net operating income.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2,3 Level: Easy

7. Net operating income computed using absorption costing will always be greater than
net operating income computed using variable costing.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-5

Chapter 7 Variable Costing: A Tool for Management

8. When reconciling variable costing and absorption costing net operating income, fixed
manufacturing overhead costs released from inventory under absorption costing
should be added to variable costing net operating income to arrive at the absorption
costing net operating income.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

9. When production exceeds sales for the period, absorption costing net operating
income will exceed variable costing net operating income.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

10. Under variable costing it may be possible to report a profit even if the company sells
less than the break-even volume of sales.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 4 Level: Medium

11. Absorption costing net operating income is closer to the net cash flow of a period than
is variable costing net operating income.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 4 Level: Medium

12. Variable costing is not permitted for income tax purposes, but it is widely accepted for
external financial reports.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 4 Level: Medium

13. A basic concept of the contribution approach and variable costing is that fixed costs
are not important in an organization.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 4 Level: Medium

14. Variable costing is better suited to cost-volume-profit calculations than absorption

costing.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 4 Level: Easy

7-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

15. When lean production is introduced, the difference in net operating income computed
under the absorption and variable costing methods is reduced.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 5 Level: Easy

Multiple Choice Questions

16. How would the following costs be classified (product or period) under variable costing
at a retail clothing store?

Cost of purchasing clothing Sales commissions

A) Product Product
B) Product Period
C) Period Product
D) Period Period

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

17. The principal difference between variable costing and absorption costing centers on:
A) whether variable manufacturing costs should be included as product costs.
B) whether fixed manufacturing costs should be included as product costs.
C) whether fixed manufacturing costs and fixed selling and administrative costs
should be included as product costs.
D) none of these.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

18. Which of the following costs at a manufacturing company would be treated as a

product cost under the variable costing method?
A) direct material cost
B) property taxes on the factory building
C) sales manager's salary
D) all of the above

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-7

Chapter 7 Variable Costing: A Tool for Management

19. Assuming that direct labor is a variable cost, the primary difference between the
absorption and variable costing is that:
A) variable costing treats only direct materials and direct labor as product cost
while absorption costing treats direct materials, direct labor, and the variable
portion of manufacturing overhead as product costs.
B) variable costing treats direct materials, direct labor, the variable portion of
manufacturing overhead, and an allocated portion of fixed manufacturing
overhead as product costs while absorption costing treats only direct materials,
direct labor, and the variable portion of manufacturing overhead as product
costs.
C) variable costing treats only direct materials, direct labor, the variable portion of
manufacturing overhead, and the variable portion of selling and administrative
expenses as product cost while absorption costing treats direct materials, direct
labor, the variable portion of manufacturing overhead, and an allocated portion
of fixed manufacturing overhead as product costs.
D) variable costing treats only direct materials, direct labor, and the variable portion
of manufacturing overhead as product costs while absorption costing treats
direct materials, direct labor, the variable portion of manufacturing overhead,
and an allocated portion of fixed manufacturing overhead as product costs.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

20. The costing method that treats all fixed costs as period costs is:
A) absorption costing.
B) job-order costing.
C) variable costing.
D) process costing.

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

7-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

21. In its first year of operations, Bronfren Corporation produced 800,000 sets and sold
780,000 sets of artificial tan lines. What would have happened to net operating income
in this first year under the following costing methods if Bronfren had produced 20,000
fewer sets? (Assume that Bronfren has both variable and fixed production costs.)

Variable costing Absorption costing

A) Increase Increase
B) Decrease Increase
C) Decrease Decrease
D) No effect Decrease

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

22. When sales are constant, but the production level fluctuates, net operating income
determined by the variable costing method will:
A) fluctuate in direct proportion to changes in production.
B) remain constant.
C) fluctuate inversely with changes in production.
D) be greater than net operating income under absorption costing.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

23. Under the variable costing method, which of the following is always expensed in its
entirety in the period in which it is incurred?
A) fixed manufacturing overhead cost
B) fixed selling and administrative expense
C) variable selling and administrative expense
D) all of the above

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-9

Chapter 7 Variable Costing: A Tool for Management

24. Which of the following will usually be found on an income statement prepared using
the absorption costing method?

Contribution Margin Gross Margin

A) Yes Yes
B) Yes No
C) No Yes
D) No No

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy

25. Net operating income under variable and absorption costing will generally:
A) always be equal.
B) never be equal.
C) be equal only when production and sales are equal.
D) be equal only when production exceeds sales.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

26. When production exceeds sales, net operating income reported under variable costing
generally will be:
A) greater than net operating income reported under absorption costing.
B) less than net operating income reported under absorption costing
C) equal to net operating income reported under absorption costing.
D) higher or lower because no generalization can be made.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

7-10 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

27. Net operating income under absorption costing may differ from net operating income
determined under variable costing. How is this difference calculated?
A) change in the quantity of units in inventory times the fixed manufacturing
overhead rate per unit.
B) number of units produced during the period times the fixed manufacturing
overhead rate per unit.
C) change in the quantity of units in inventory times the variable manufacturing
cost per unit.
D) number of units produced during the period times the variable manufacturing
cost per unit.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Hard Source: CMA, adapted

28. When sales are constant, but the production level fluctuates, net operating income
determined by the absorption costing method will:
A) tend to fluctuate in the same direction as fluctuations in the level of production.
B) tend to remain constant.
C) tend to fluctuate inversely with fluctuations in the level of production.
D) none of these

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 4 Level: Medium

29. A reason why absorption costing income statements are sometimes difficult for the
manager to interpret is that:
A) they omit variable expenses entirely in computing net operating income.
B) they shift portions of fixed manufacturing overhead from period to period
according to changing levels of inventories.
C) they include all fixed manufacturing overhead on the income statement each
year as a period cost.
D) they ignore inventory levels in computing income charges.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 4 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-11

Chapter 7 Variable Costing: A Tool for Management

30. Under the theory of constraints (TOC), which of the following is treated as a period
cost?

Direct labor Direct material

A) Yes Yes
B) Yes No
C) No Yes
D) No No

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 5 Level: Medium

31. Fleet Corporation produces a single product. The company manufactured 700 units
last year. The ending inventory consisted of 100 units. There was no beginning
inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing
costs were $2.00 per unit. What would be the change in the dollar amount of ending
inventory if variable costing was used instead of absorption costing?
A) $800 decrease
B) $200 decrease
C) $0
D) $200 increase

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted
Solution:
Change in inventory × Fixed manufacturing costs per unit
= 100 × $2 = $200 decrease

7-12 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

32. Shun Corporation manufactures and sells a hand held calculator. The following
information relates to Shun's operations for last year:

Unit product cost under variable costing......................... $5.20 per unit

Fixed manufacturing overhead cost for the year............. $260,000
Fixed selling and administrative cost for the year........... $180,000
Units (calculators) produced and sold............................. 400,000

What is Shun's unit product cost under absorption costing for last year?
A) $4.10
B) $4.55
C) $5.85
D) $6.30

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = Fixed manufacturing overhead ÷ Units produced

= $260,000 ÷ 400,000 units = $0.65 per unit
Unit product cost = $5.20 + $0.65 = $5.85

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-13

Chapter 7 Variable Costing: A Tool for Management

33. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:

Units in beginning inventory..................... 0

Units produced........................................... 7,100
Units sold................................................... 7,000
Units in ending inventory.......................... 100

Variable costs per unit:

Direct materials...................................... $33
Direct labor............................................. $53
Variable manufacturing overhead.......... $1
Variable selling and administrative........ $7

Fixed costs:
$170,40
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $7,000

What is the unit product cost for the month under variable costing?
A) $118
B) $94
C) $111
D) $87

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $33 + $53 + $1 = $87

7-14 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

34. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:

Units in beginning inventory..................... 0

Units produced........................................... 1,900
Units sold................................................... 1,700
Units in ending inventory.......................... 200

Variable costs per unit:

Direct materials...................................... $33
Direct labor............................................. $32
Variable manufacturing overhead.......... $2
Variable selling and administrative........ $6

Fixed costs:
$72,20
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $6,800

What is the unit product cost for the month under absorption costing?
A) $67
B) $105
C) $111
D) $73

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $72,200 ÷ 1,900 = $38

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
cost + Fixed manufacturing overhead cost
= $33 + $32 + $2 + $38 = $105

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-15

Chapter 7 Variable Costing: A Tool for Management

35. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:

Selling price............................................... $79

Units in beginning inventory..................... 0

Units produced........................................... 6,600
Units sold................................................... 6,300
Units in ending inventory.......................... 300

Variable costs per unit:

Direct materials...................................... $14
Direct labor............................................. $30
Variable manufacturing overhead.......... $4
Variable selling and administrative........ $8

Fixed costs:
$46,20
Fixed manufacturing overhead............... 0
$88,20
Fixed selling and administrative............. 0

What is the total period cost for the month under the variable costing approach?
A) $138,600
B) $134,400
C) $46,200
D) $184,800

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Total variable selling and administrative cost = $8 × 6,300 = $50,400

Period cost = Total variable selling and administrative cost + Fixed manufacturing
overhead + Fixed selling and administrative cost
= $50,400 + $46,200 + $88,200 = $184,800

7-16 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

36. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:

Selling price............................................... $97

Units in beginning inventory..................... 0

Units produced........................................... 2,200
Units sold................................................... 2,100
Units in ending inventory.......................... 100

Variable costs per unit:

Direct materials...................................... $32
Direct labor............................................. $25
Variable manufacturing overhead.......... $2
Variable selling and administrative........ $9

Fixed costs:
Fixed manufacturing overhead............... $8,800
$37,80
Fixed selling and administrative............. 0

What is the total period cost for the month under the absorption costing approach?
A) $56,700
B) $65,500
C) $8,800
D) $37,800

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Total variable selling and administrative cost = $9 × 2,100 = $18,900

Period cost = Variable selling and administrative cost + Fixed selling and
administrative cost = $18,900 + $37,800 = $56,700

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-17

Chapter 7 Variable Costing: A Tool for Management

37. Mullee Corporation produces a single product and has the following cost structure:

Number of units produced each year..................... 7,000

Variable costs per unit:
Direct materials.................................................. $51
Direct labor......................................................... $12
Variable manufacturing overhead...................... $2
Variable selling and administrative expense...... $5
Fixed costs per year:
$441,00
Fixed manufacturing overhead........................... 0
$112,00
Fixed selling and administrative expense........... 0

The unit product cost under absorption costing is:

A) $149
B) $65
C) $63
D) $128

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $441,000 ÷ 7,000 = $63

Unit product cost = $63 + $51 + $12 + $2 = $128

7-18 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

38. Stoneberger Corporation produces a single product and has the following cost
structure:

Number of units produced each year..................... 4,000

Variable costs per unit:
Direct materials.................................................. $50
Direct labor......................................................... $72
Variable manufacturing overhead...................... $6
Variable selling and administrative expense...... $3
Fixed costs per year:
$296,00
Fixed manufacturing overhead........................... 0
Fixed selling and administrative expense........... $76,000

The unit product cost under variable costing is:

A) $128
B) $125
C) $202
D) $131

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = $50 + $72 + $6 = $128

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-19

Chapter 7 Variable Costing: A Tool for Management

39. Beamish Inc., which produces a single product, has provided the following data for its
most recent month of operations:

Number of units produced..................................... 8,000

Variable costs per unit:
Direct materials................................................... $37
Direct labor......................................................... $56
Variable manufacturing overhead....................... $4
Variable selling and administrative expense...... $2
Fixed costs:
$312,00
Fixed manufacturing overhead........................... 0
$448,00
Fixed selling and administrative expense........... 0

There were no beginning or ending inventories. The unit product cost under absorption
costing was:
A) $93
B) $97
C) $136
D) $194

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $312,000 ÷ 8,000 = $39

Unit product cost = $37 + $56 + $4 + $39 = $136

7-20 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

40. Kray Inc., which produces a single product, has provided the following data for its
most recent month of operations:

Number of units produced............................................... 3,000

Variable costs per unit:
Direct materials............................................................ $91
Direct labor................................................................... $13
Variable manufacturing overhead................................ $7
Variable selling and administrative expense................ $6
Fixed costs:
$237,00
Fixed manufacturing overhead..................................... 0
$165,00
Fixed selling and administrative expense..................... 0

There were no beginning or ending inventories. The unit product cost under variable
costing was:
A) $111
B) $190
C) $117
D) $110

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $91 + $13 + $7 = $111

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-21

Chapter 7 Variable Costing: A Tool for Management

41. The following data pertain to last year's operations at Clarkson, Incorporated, a
company that produces a single product:

Units in beginning inventory..................... 0

Units produced........................................... 100,000
Units sold................................................... 98,000

Selling price per unit.................................. $10.00

Variable costs per unit:

Direct materials...................................... $1.50
Direct labor............................................. $2.50
Variable manufacturing overhead.......... $1.00
Variable selling and administrative........ $2.00

Fixed costs per year:

$200,00
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $50,000

What was the absorption costing net operating income last year?
A) $44,000
B) $48,000
C) $50,000
D) $49,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead = $200,000 ÷ 100,000 = $2

Unit product cost = $1.50 + $2.50 + $1 + $2 = $7
Absorption costing income statement
Sales ($10 × 98,000)............................................ $980,000
Cost of goods sold ($7 × 98,000)......................... 686,000
Gross margin........................................................ 294,000
Selling and administrative expenses expenses:
Variable selling and administrative................... $196,000
Fixed selling and administrative....................... 50,000 246,000
Net operating income........................................... $ 48,000

7-22 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

42. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:

Selling price............................................... $135

Units in beginning inventory..................... 0

Units produced........................................... 6,400
Units sold................................................... 6,200
Units in ending inventory.......................... 200

Variable costs per unit:

Direct materials.......................................... $49
Direct labor................................................ $38
Variable manufacturing overhead............. $6
Variable selling and administrative........... $11

Fixed costs:
$108,80
Fixed manufacturing overhead.................. 0
Fixed selling and administrative................ $74,400

The total contribution margin for the month under the variable costing approach is:
A) $155,000
B) $260,400
C) $192,200
D) $83,400

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Sales revenue ($135 × 6,200)................................ $837,000

Variable cost:.........................................................
Direct materials ($49 × 6,200)............................ $303,800
Direct labor ($38 × 6,200).................................. 235,000
Variable manufacturing overhead ($6 × 6,200). 37,200
Variable selling and administrative ($11 ×
6,200).............................................................. 68,200 644,800
Contribution margin.............................................. $192,200

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-23

Chapter 7 Variable Costing: A Tool for Management

43. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:

Selling price............................................... $123

Units in beginning inventory..................... 0

Units produced........................................... 1,000
Units sold................................................... 900
Units in ending inventory.......................... 100

Variable costs per unit:

Direct materials...................................... $41
Direct labor............................................. $26
Variable manufacturing overhead.......... $4
Variable selling and administrative........ $6

Fixed costs:
$17,00
Fixed manufacturing overhead............... 0
$11,70
Fixed selling and administrative............. 0

What is the net operating income for the month under variable costing?
A) $12,700
B) $5,600
C) $1,700
D) $14,400

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Sales ($123 × 900)................................................. $110,700

Variable cost of goods sold ($71 × 900)................ 63,900
Less variable selling and administrative ($6 × 900) 5,400
Contribution margin............................................... 41,400
Fixed cost:
Fixed manufacturing overhead........................... $17,000
Fixed selling and administrative......................... 11,700 28,700
Net operating income............................................. $ 12,700

7-24 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

44. Swifton Company produces a single product. Last year, the company had net
operating income of $40,000 using variable costing. Beginning and ending inventories
were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost
was $3.00 per unit, what was the income using absorption costing?
A) $15,000
B) $25,000
C) $40,000
D) $55,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Difference between absorption costing net income and variable costing net
income = Change in inventory in units × Unit fixed manufacturing overhead
= (27,000 − 22,000) × $3 = 5,000 × $3 = $15,000
Net income under absorption costing = $40,000 + $15,000 = $55,000

45. Blake Company produces a single product. Last year, Blake's net operating income
under absorption costing was $3,600 lower than under variable costing. The company
sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1
was variable selling expense. If production cost was $11 per unit under absorption
costing, then how many units did the company produce during the year?
A) 8,200 units
B) 8,800 units
C) 11,200 units
D) 11,800 units

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Hard

Solution:

Direct material + Direct labor + Variable manufacturing overhead

= Variable unit product cost = $9 – $1 = $8
Unit fixed manufacturing overhead = $11 – $8 = $3
Difference in net income between methods ÷ Unit fixed manufacturing overhead =
($3,600) ÷ $3 per unit = (1,200) units
Units produced = Units sold + Change in inventory = 10,000 + (1,200) = 8,800

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-25

Chapter 7 Variable Costing: A Tool for Management

46. Pungent Corporation manufactures and sells a spice rack. Shown below are the actual
operating results for the first two years of operations:

Year 1 Year 2
Units (spice racks) produced................................. 40,000 40,000
Units (spice racks) sold.......................................... 37,000 41,000
$44,00 $52,00
Absorption costing net operating income.............. 0 0
$38,00
Variable costing net operating income.................. 0 ???

Pungent's cost structure and selling price were the same for both years. What is
Pungent's variable costing net operating income for Year 2?
A) $48,000
B) $50,000
C) $54,000
D) $56,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Hard

Solution:

Unit fixed manufacturing overhead = Difference in net income ÷ Change in inventory

= ($44,000 – $38,000) ÷ (40,000 – 37,000) = $6,000 ÷ 3,000 = $2
Variable costing net operating income = Absorption costing net income − Difference
in net operating income
= $52,000 − [(40,000 − 41,000) × $2)]
= $52,000 − ($2,000) = $54,000

7-26 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

47. Sipho Corporation manufactures a variety of products. Last year, the company's
variable costing net operating income was $90,900. Fixed manufacturing overhead
costs released from inventory under absorption costing amounted to $21,900. What
was the absorption costing net operating income last year?
A) $69,000
B) $90,900
C) $21,900
D) $112,800

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Absorption costing net income = Variable costing net income – fixed manufacturing
overhead costs released from inventory
= $90,900 – $21,900 = $69,000

48. Last year, Kirsten Corporation's variable costing net operating income was $63,400.
Fixed manufacturing overhead costs released from inventory under absorption costing
amounted to $10,700. What was the absorption costing net operating income last year?
A) $10,700
B) $74,100
C) $63,400
D) $52,700

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Absorption costing net income = Variable costing net income – fixed manufacturing
overhead costs released from inventory
= $63,400 – $10,700 = $52,700

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-27

Chapter 7 Variable Costing: A Tool for Management

49. Bellue Inc. manufactures a variety of products. Variable costing net operating income
was $96,300 last year and ending inventory decreased by 2,600 units. Fixed
manufacturing overhead cost was $1 per unit. What was the absorption costing net
operating income last year?
A) $2,600
B) $93,700
C) $96,300
D) $98,900

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Absorption costing net income = Variable costing net income − fixed manufacturing
overhead costs released from inventory
= $96,300 − [2,600 × $1] = $96,300 − $2,600 = $93,700

50. Last year, Tinklenberg Corporation's variable costing net operating income was
$52,400 and its ending inventory decreased by 1,400 units. Fixed manufacturing
overhead cost was $8 per unit. What was the absorption costing net operating income
last year?
A) $41,200
B) $11,200
C) $63,600
D) $52,400

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Absorption costing net income = Variable costing net income − fixed manufacturing
overhead costs released from inventory
= $52,400 − [1,400 × $8] = $52,400 − $11,200 = $41,200

7-28 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 51-53:

Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000 units and
sold 12,000 units. Production costs for the year were as follows:

$150,00
Direct materials...................................................... 0
$180,00
Direct labor............................................................ 0
$135,00
Variable manufacturing overhead......................... 0
$210,00
Fixed manufacturing overhead.............................. 0

Sales totaled $840,000 for the year, variable selling expenses totaled $60,000, and fixed
selling and administrative expenses totaled $180,000. There were no units in the beginning
inventory. Assume that direct labor is a variable cost.

51. The contribution margin per unit would be:

A) $25
B) $39
C) $34
D) $35

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Unit selling price ($840,000 ÷ 12,000).................. $70

Less direct materials ($150,000 ÷ 15,000)............ $10
Less direct labor ($180,000 ÷ 15,000)................... 12
Less variable manufacturing overhead ($135,000
÷ 15,000)............................................................ 9
Less variable selling and administrative ($60,000
÷ 12,000)............................................................ 5 36
Contribution margin.............................................. $34

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-29

Chapter 7 Variable Costing: A Tool for Management

52. Under absorption costing, the carrying value on the balance sheet of the ending
inventory for the year would be:
A) $135,000
B) $93,000
C) $105,000
D) $0

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

Solution:

Unit fixed manufacturing overhead = $210,000 ÷ 15,000 = $14

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead
= $10 + $12 + $9 + $14 = $45
Carrying value = Unit product cost × Ending inventory in units
= $45 × (15,000 − 12,000) = $45 × 3,000 = $135,000

53. Under variable costing, the company's net operating income for the year would be:
A) $42,000 higher than under absorption costing
B) $30,000 higher than under absorption costing
C) $30,000 lower than under absorption costing
D) $42,000 lower than under absorption costing

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead × Change in inventory in units

= $14 × (15,000 − 12,000) = $14 × 3,000 = $42,000
Since the units produced are greater than the units sold (inventory increased), net
income under absorption costing will be higher than net income under variable
costing.

7-30 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 54-61:

Abdi Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price............................................... $81

Units in beginning inventory..................... 0

Units produced........................................... 7,300
Units sold................................................... 7,000
Units in ending inventory.......................... 300

Variable costs per unit:

Direct materials...................................... $20
Direct labor............................................. $30
Variable manufacturing overhead.......... $7
Variable selling and administrative........ $11

Fixed costs:
$65,70
Fixed manufacturing overhead............... 0
$21,00
Fixed selling and administrative............. 0

54. What is the unit product cost for the month under variable costing?
A) $77
B) $66
C) $68
D) $57

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Direct materials + Direct labor + Variable manufacturing overhead

= $20 + $30 + $7 = $57

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-31

Chapter 7 Variable Costing: A Tool for Management

55. What is the unit product cost for the month under absorption costing?
A) $66
B) $77
C) $57
D) $68

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $65,700 ÷ 7,300 = $9

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $20 + $30 + $7 + $9 = $66

56. The total contribution margin for the month under the variable costing approach is:
A) $91,000
B) $168,000
C) $105,000
D) $25,300

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit selling price................................................... $81

Less unit variable costs:
Direct materials.................................................. $20
Direct labor......................................................... 30
Variable manufacturing overhead...................... 7
Variable selling and administrative.................... 11 68
Contribution margin.............................................. $13
Total contribution margin = $13 × 7,000 = $91,000

7-32 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

57. The total gross margin for the month under the absorption costing approach is:
A) $105,000
B) $124,800
C) $7,000
D) $91,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead = $9

Unit product cost under absorption costing = $20 + $30 + $7 + $9 = $66
$567,00
Sales revenue ($81 × 7,000).................................. 0
462,00
Cost of goods sold ($66 × 7,000).......................... 0
$105,00
Gross margin.......................................................... 0

58. What is the total period cost for the month under the variable costing approach?
A) $65,700
B) $163,700
C) $98,000
D) $86,700

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Variable selling and administrative cost + Fixed costs

= ($11 × 7,000) + ($65,700 + $21,000)
= $77,000 + $86,700 = $163,700

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-33

Chapter 7 Variable Costing: A Tool for Management

59. What is the total period cost for the month under the absorption costing approach?
A) $98,000
B) $65,700
C) $21,000
D) $163,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Variable selling and administrative cost + Fixed selling and administrative cost
= $11 × 7,000 + $21,000
= $77,000 + $21,000 = $98,000

60. What is the net operating income for the month under variable costing?
A) $2,700
B) $4,300
C) $7,000
D) $(12,800)

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$567,00
Sales revenue ($81 × 7,000).................................. 0
Variable costs:
$399,00
Product cost ($57 × 7,000)................................. 0
Variable selling and administrative ($11 ×
7,000).............................................................. 77,000 476,000
Contribution margin.............................................. 91,000
Fixed costs:
Fixed manufacturing overhead........................... $ 65,700
Fixed selling and administrative......................... 21,000 86,700
Contribution margin.............................................. $ 4,300

7-34 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

61. What is the net operating income for the month under absorption costing?
A) $7,000
B) $4,300
C) $(12,800)
D) $2,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$567,00
Sales revenue ($81 × 7,000).................................. 0
Cost of goods sold ($66 × 7,000).......................... 462,000
Gross margin.......................................................... 105,000
Selling and administrative expenses:
Variable selling and administrative ($11 ×
7,000).............................................................. $77,000
Fixed selling and administrative......................... 21,000 98,000
Net operating income............................................. $ 7,000

Use the following to answer questions 62-65:

Hopkins Company manufactures a single product. The following data pertain to the
company's operations last year:

Selling price per unit.................................. $24

Variable costs per unit:
Production............................................... $8
Selling and administration...................... $2
Fixed costs in total:
$48,00
Production............................................... 0
$36,00
Selling and administration...................... 0

At the beginning of the year there were no units in inventory. A total of 12,000 units were
produced during the year, and 10,000 units were sold.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-35

Chapter 7 Variable Costing: A Tool for Management

62. Under variable costing, the unit product cost is:

A) $8.00
B) $10.00
C) $12.00
D) $14.00

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Production cost = $8

63. Under absorption costing, the unit product cost is:

A) $8.00
B) $10.00
C) $12.00
D) $15.00

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $48,000 ÷ 12,000 = $4

Unit product cost = $8 + $4 = $12

7-36 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

64. The net operating income under variable costing would be:
A) $64,000
B) $60,000
C) $56,000
D) $52,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$240,00
Sales revenue ($24 × 10,000)................................ 0
Variable costs:
Variable cost of goods sold ($8 × 10,000)......... $80,000
Variable selling and administrative ($2 ×
10,000)............................................................ 20,000 100,000
Contribution margin.............................................. 140,000
Fixed costs:
Fixed manufacturing overhead........................... $48,000
Fixed selling and administrative......................... 36,000 84,000
Net operating income............................................. $ 56,000

65. The net operating income under absorption costing would be:
A) the same as the income under variable costing.
B) $8,000 greater than the income under variable costing.
C) $12,000 greater than the income under variable costing.
D) $8,000 less than the income under variable costing.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead × Change in number of units in ending inventory =

$4 × (12,000 − 10,000) = $4 × 2,000
= $8,000 greater than the income under variable costing since inventory increased

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-37

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 66-68:

Phearsum Corporation manufactures a parachute. Shown below is Phearsum's cost structure:

Variable cost per Total fixed cost

parachute for the year
Manufacturing cost.................. $160 $342,000
Selling and administrative....... $10 $171,000

In its first year of operations, Phearsum produced and sold 4,000 parachutes. The parachutes
sold for $310 each.

66. If Phearsum would have sold only 3,800 parachutes in its first year, what total amount
of cost would have been assigned to the 200 parachutes in finished goods inventory
under the variable costing method?
A) $28,000
B) $32,000
C) $34,000
D) $49,100

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = $160

Total cost of ending finished goods inventory = $160 × 200 = $32,000

7-38 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

67. Refer back to the original data. How would Phearsum's absorption costing net
operating income been affected in its first year if only 3,800 parachutes were sold
instead of 4,000?
A) net operating income would have been $2,350 lower
B) net operating income would have been $10,900 lower
C) net operating income would have been $12,900 lower
D) net operating income would have been $28,000 lower

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1,2 Level: Hard

Solution:

Unit fixed manufacturing overhead = $342,000 ÷ 4,000 = $85.50

Unit product cost under absorption costing = $160 + $85.50 = $245.50
Unit gross margin = $310 − $245.50 = $64.50
Cost savings ($10 × 200).................................... $ 2,000
Less: decrease in gross margin ($64.50 × 200)... 12,900
Net operating income increase (decrease).......... ($10,900)

68. Refer back to the original data. How would Phearsum's variable costing net operating
income been affected in its first year if 4,500 parachutes were produced instead of
4,000 and Phearsum still sold 4,000 parachutes?
A) net operating income would not have been affected
B) net operating income would have been $38,000 higher
C) net operating income would have been $57,000 higher
D) net operating income would have been $75,000 lower

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1,2 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-39

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 69-72:

Feery Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price............................................... $110

Units in beginning inventory..................... 0

Units produced........................................... 3,800
Units sold................................................... 3,700
Units in ending inventory.......................... 100

Variable costs per unit:

Direct materials...................................... $32
Direct labor............................................. $34
Variable manufacturing overhead.......... $6
Variable selling and administrative........ $11

Fixed costs:
$68,40
Fixed manufacturing overhead............... 0
$14,80
Fixed selling and administrative............. 0

69. What is the unit product cost for the month under variable costing?
A) $72
B) $90
C) $83
D) $101

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Direct materials + Direct labor + Variable manufacturing overhead

= $32 + $34 + $6 = $72

7-40 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

70. What is the unit product cost for the month under absorption costing?
A) $83
B) $90
C) $72
D) $101

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $68,400 ÷ 3,800 = $18

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $32 + $34 + $6 + $18 = $90

71. What is the net operating income for the month under variable costing?
A) $1,800
B) $16,700
C) $9,500
D) $18,500

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$407,00
Sales revenue ($110 × 3,700)................................ 0
Variable costs:
$266,40
Variable cost of goods sold ($72 × 3,700)......... 0
Variable selling and administrative ($11 ×
3,700).............................................................. 40,700 307,100
Contribution margin.............................................. 99,900
Fixed costs:
Fixed manufacturing overhead........................... $ 68,400
Fixed selling and administrative......................... 14,800 83,200
Net operating income............................................. $ 16,700

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-41

Chapter 7 Variable Costing: A Tool for Management

72. What is the net operating income for the month under absorption costing?
A) $18,500
B) $1,800
C) $9,500
D) $16,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$407,00
Sales revenue ($110 × 3,700)................................ 0
Cost of goods sold ($90 × 3,700).......................... 333,000
Gross margin.......................................................... 74,000
Selling and administrative expenses costs:
Variable selling and administrative ($11 ×
3,700).............................................................. $40,700
Fixed selling and administrative......................... 14,800 55,500
Net operating income............................................. $ 18,500

7-42 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 73-76:

Jarbo Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price............................................... $129

Units in beginning inventory..................... 500

Units produced........................................... 3,600
Units sold................................................... 3,800
Units in ending inventory.......................... 300

Variable costs per unit:

Direct materials...................................... $13
Direct labor............................................. $59
Variable manufacturing overhead.......... $4
Variable selling and administrative........ $8

Fixed costs:
$97,20
Fixed manufacturing overhead............... 0
$64,60
Fixed selling and administrative............. 0

The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.

73. What is the unit product cost for the month under variable costing?
A) $76
B) $103
C) $84
D) $111

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $13 + $59 + $4 = $76

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-43

Chapter 7 Variable Costing: A Tool for Management

74. What is the unit product cost for the month under absorption costing?
A) $84
B) $76
C) $103
D) $111

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

Solution:

Unit fixed manufacturing overhead = $97,200 ÷ 3,600 = $27

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $13 + $59 + $4 + $27 = $103

75. What is the net operating income for the month under variable costing?
A) $3,800
B) $24,400
C) $9,200
D) $8,100

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$490,20
Sales revenue ($129 × 3,800)................................ 0
Variable costs:
$288,80
Variable cost of goods sold ($76 × 3,800)......... 0
Variable selling and administrative ($8 ×
3,800).............................................................. 30,400 319,200
Contribution margin.............................................. 171,000
Fixed costs:
Fixed manufacturing overhead........................... $ 97,200
Fixed selling and administrative......................... 64,600 161,800
Net operating income............................................. $ 9,200

7-44 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

76. What is the net operating income for the month under absorption costing?
A) $8,100
B) $9,200
C) $3,800
D) $24,400

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$490,20
Sales revenue ($129 × 3,800)................................ 0
Cost of goods sold ($103 × 3,800)........................ 391,400
Gross margin.......................................................... 98,800
Selling and administrative expenses costs:
Variable selling and administrative ($8 ×
3,800).............................................................. $30,400
Fixed selling and administrative......................... 64,600 95,000
Net operating income............................................. $ 3,800

Use the following to answer questions 77-79:

Beach Corporation, which produces a single product, budgeted the following costs for its first
year of operations. These costs are based on a budgeted volume of 30,000 towels produced
and sold:

$96,00
Direct materials.......................................... 0
$48,00
Direct labor................................................ 0
$72,00
Variable manufacturing overhead............. 0
$60,00
Fixed manufacturing overhead.................. 0
$12,00
Variable selling and administrative........... 0
$36,00
Fixed selling and administrative................ 0

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-45

Chapter 7 Variable Costing: A Tool for Management

During the first year of operations, Beach Towel actually produced 30,000 towels but only
sold 24,000 towels. Actual costs did not fluctuate from the cost behavior patterns described
above. The 24,000 towels were sold for $16 per towel. Assume that direct labor is a variable
cost.

7-46 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

77. What is the total cost that would be assigned to Beach Towel's finished goods
inventory at the end of the first year of operations under the variable costing method?
A) $43,200
B) $45,600
C) $55,200
D) $64,800

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing

overhead) ÷ 30,000 units = ($96,000 + $48,000 + $72,000) ÷ 30,000 = $7.20
Total cost of ending finished goods inventory = Unit product cost × Ending inventory
= $7.20 × (30,000 − 24,000) = $7.20 × 6,000 = $43,200

78. Under the absorption costing method, what is Beach Towel's actual net operating
income for its first year?
A) $60,000
B) $115,200
C) $117,600
D) $124,800

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing

overhead + Fixed manufacturing overhead) ÷ 30,000 units
= ($96,000 + $48,000 + $72,000 + $60,000) ÷ 30,000 = $9.20
Unit variable selling and administrative cost = $12,000 ÷ 30,000 = $0.40
$384,00
Sales revenue ($16 × 24,000)................................ 0
Cost of goods sold ($9.20 × 24,000)..................... 220,800
Gross margin.......................................................... 163,200
Selling and administrative expenses:
Variable selling and administrative ($0.40 ×
24,000)............................................................ $ 9,600
Fixed selling and administrative......................... 36,000 45,600
$117,60
Net operating income............................................. 0

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-47

Chapter 7 Variable Costing: A Tool for Management

7-48 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

79. Assuming no change in cost structure, which of the following would have increased
Beach Towel's net operating income under the variable costing method in its first year
of operations?
A) an increase in sales volume with no increase in production volume
B) an increase in production volume with no increase in sales volume
C) both A and B above
D) none of the above

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Use the following to answer questions 80-83:

Blake Corporation, which produces a single product, has provided the following absorption
costing income statement for the month of June:

Blake Corporation
Income Statement
For the month ended June 30

$285,00
Sales (9,500 units).................................... 0
Cost of goods sold:
Beginning inventory.............................. $ 16,000
Add cost of goods manufactured.......... 160,000
Goods available for sale........................ 176,000
Less ending Inventory........................... 24,000
Cost of goods sold.................................... 152,000
Gross margin............................................ 133,000
Selling and administrative expenses:
Fixed..................................................... $ 75,000
Variable................................................. 19,000 94,000
Net operating income............................... $ 39,000

During June, the company's variable production costs were $10 per unit and its fixed
manufacturing overhead totaled $60,000. A total of 10,000 units were produced during June
and the company had 1,000 units in the beginning inventory. The company uses the LIFO
method to value inventories.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-49

Chapter 7 Variable Costing: A Tool for Management

80. The contribution margin per unit during June was:

A) $20
B) $18
C) $16
D) $14

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Selling price ($285,000 ÷ 9,500)........................... $30

Less variable product cost..................................... 10
Less unit variable selling and administrative
($19,000 ÷ 9,500)............................................... 2
Unit contribution margin $18

81. The carrying value on the balance sheet of the company's inventory on June 30 under
the variable costing method would be:
A) $10,000
B) $12,000
C) $15,000
D) $24,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

Solution:

Ending inventory = Beginning inventory + Units produced − Units sold

= 1,000 + 10,000 − 9,500 = 1,500
Carrying value = Ending inventory in units × Variable production cost
= 1,500 × $10 = $15,000

7-50 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

82. Net operating income under the variable costing method for June would be:
A) $36,000
B) $40,000
C) $53,000
D) $60,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$285,00
Sales revenue (9,500 units).................................... 0
Variable costs:
Variable cost of goods sold ($10 × 9,500)......... $95,000
Variable selling and administrative.................... 19,000 114,000
Contribution margin.............................................. 171,000
Fixed costs:
Fixed manufacturing overhead........................... $60,000
Fixed selling and administrative......................... 75,000 135,000
Net operating income............................................. $ 36,000

83. The break-even point in units for the month under variable costing would be:
A) 6,000 units
B) 6,750 units
C) 7,500 units
D) 9,000 units

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

Solution:

$285,00
Sales revenue (9,500 units).................................... 0
Variable costs:
Variable cost of goods sold ($10 × 9,500)......... $95,000
114,00
Variable selling and administrative.................... 19,000 0
$171,00
Contribution margin.............................................. 0

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-51

Chapter 7 Variable Costing: A Tool for Management

Fixed costs ÷ Unit contribution margin = (Fixed manufacturing overhead + Fixed

selling and administrative) ÷ Unit contribution margin = ($60,000 + $75,000) ÷
($171,000 ÷ 9,500) = $135,000 ÷ $18 per unit = 7,500 units

7-52 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 84-87:

Haaikon Company, which has only one product, has provided the following data concerning
its most recent month of operations:

Selling price............................................... $86

Units in beginning inventory..................... 0

Units produced........................................... 3,400
Units sold................................................... 3,300
Units in ending inventory.......................... 100

Variable costs per unit:

Direct materials...................................... $17
Direct labor............................................. $39
Variable manufacturing overhead.......... $1
Variable selling and administrative........ $8

Fixed costs:
$40,80
Fixed manufacturing overhead............... 0
$23,10
Fixed selling and administrative............. 0

84. What is the unit product cost for the month under variable costing?
A) $77
B) $57
C) $69
D) $65

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = Direct materials + Direct Labor + Variable manufacturing

overhead = $17 + $39 + $1 = $57

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-53

Chapter 7 Variable Costing: A Tool for Management

85. The total contribution margin for the month under the variable costing approach is:
A) $56,100
B) $28,500
C) $95,700
D) $69,300

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$283,80
Sales revenue ($86 × 3,300).................................. 0
Variable costs:
$188,10
Variable cost of goods sold ($57 × 3,300)......... 0

Variable selling and administrative ($8 × 26,40 214,50

3,300).............................................................. 0 0
$
Contribution margin.............................................. 69,300

86. What is the total period cost for the month under the variable costing approach?
A) $40,800
B) $90,300
C) $49,500
D) $63,900

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead
+ Fixed selling and administrative cost
= ($8 × 3,300) + $40,800 + $23,100
= $26,400 + $40,800 + $23,100 = $90,300

7-54 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

87. What is the net operating income for the month under variable costing?
A) $6,600
B) $(300)
C) $5,400
D) $1,200

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$283,80
Sales revenue ($86 × 3,300).................................. 0
Variable costs:
$188,10
Variable cost of goods sold ($57 × 3,300)......... 0
Variable selling and administrative ($8 ×
3,300).............................................................. 26,400 214,500
Contribution margin.............................................. 69,300
Fixed costs:
Fixed manufacturing overhead........................... $ 40,800
Fixed selling and administrative......................... 23,100 63,900
Net operating income............................................. $ 5,400

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-55

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 88-89:

Ibarra Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price............................................... $81

Units in beginning inventory..................... 0

Units produced........................................... 6,900
Units sold................................................... 6,600
Units in ending inventory.......................... 300

Variable costs per unit:

Direct materials...................................... $22
Direct labor............................................. $28
Variable manufacturing overhead.......... $6
Variable selling and administrative........ $5

Fixed costs:
$69,00
Fixed manufacturing overhead............... 0
$66,00
Fixed selling and administrative............. 0

88. What is the unit product cost for the month under variable costing?
A) $71
B) $66
C) $56
D) $61

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead

= $22 + $28 + $6 = $56

7-56 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

89. What is the net operating income for the month under variable costing?
A) $0
B) $(19,800)
C) $(3,000)
D) $3,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$534,60
Sales revenue ($81 × 6,600).................................. 0
Variable costs:
$369,60
Variable cost of goods sold ($56 × 6,600)......... 0
Variable selling and administrative ($5 ×
6,600).............................................................. 33,000 402,600
Contribution margin.............................................. 132,000
Fixed costs:
Fixed manufacturing overhead........................... $ 69,000
Fixed selling and administrative......................... 66,000 135,000
Net operating income............................................. $ (3,000)

Use the following to answer questions 90-92:

Yankee Company manufactures a single product. The company has the following cost
structure:

Variable costs per unit:

Production................................... $4
Selling and administrative.......... $1
Fixed costs in total:
$12,00
Production................................... 0
Selling and administrative.......... $8,000

Last year, 4,000 units were produced and 3,500 units were sold. There were no beginning
inventories.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-57

Chapter 7 Variable Costing: A Tool for Management

90. Under variable costing, the unit product cost would be:
A) $4
B) $5
C) $7
D) $8

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Production cost = $4

91. The carrying value on the balance sheet of the ending finished goods inventory under
variable costing would be:
A) the same as under absorption costing
B) $1,500 less than under absorption costing
C) $2,000 higher than under absorption costing
D) $2,000 less than under absorption costing

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3

Difference in carrying value of ending finished goods inventory = Unit fixed
manufacturing overhead × Change in inventory in units
= $3 × (4,000 − 3,500)
= $1,500 less than under absorption costing

7-58 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

92. Under absorption costing, the cost of goods sold for the year would be:
A) $28,000
B) $24,500
C) $17,500
D) $14,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3

Product cost = $4 + $3 = $7
Cost of goods sold = $7 × 3,500 = $24,500

Use the following to answer questions 93-94:

Peterson Company produces a single product. Data from the company's records for last year
follow:

Units in beginning inventory..................... 0

Units produced........................................... 70,000
Units sold................................................... 60,000

$1,400,00
Sales........................................................... 0
Manufacturing costs:
Variable.................................................. $630,000
Fixed....................................................... $315,000
Selling and administrative expenses:
Variable.................................................. $98,000
Fixed....................................................... $140,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-59

Chapter 7 Variable Costing: A Tool for Management

93. The carrying value on the balance sheet of the ending finished goods inventory under
variable costing would be:
A) $90,000
B) $104,000
C) $105,000
D) $135,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit variable product cost = $630,000 ÷ 70,000 = $9

Change in inventory in units = 70,000 − 60,000 = 10,000
Carrying value of ending inventory = $9 × 10,000 = $90,000

94. Under the absorption costing method, Peterson's net operating income would be:
A) $217,000
B) $307,000
C) $352,000
D) $374,500

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted

Solution:

Product cost = $9 + $4.50 = $13.50

Sales revenue...................................................... $1,400,000
Cost of goods sold ($13.50 × 60,000)................. 810,000
Gross margin....................................................... 590,000
Selling and administrative expenses:
Variable selling and administrative................. $ 98,000
Fixed selling and administrative...................... 140,000 238,000
Net operating income.......................................... $ 352,000

7-60 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 95-97:

McCoy Corporation manufactures a computer monitor. Shown below is McCoy's cost

structure:
Variable cost Total fixed cost
per monitor for the year
Manufacturing cost........................ $75.20 $912,000
Selling and administrative............. $14.60 $456,000

In its first year of operations, McCoy produced 100,000 monitors but only sold 95,000.
McCoy's gross margin in this first year was $2,629,600. McCoy's contribution margin in this
first year was $2,109,000.

95. Under the variable costing method, what is McCoy's net operating income for its first
year?
A) $266,000
B) $741,000
C) $1,261,600
D) $2,173,600

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Contribution margin.............................................. $2,109,000

Fixed costs:
$912,00
Fixed manufacturing overhead........................... 0
456,00 1,368,000
Fixed selling and administrative......................... 0
Net operating income............................................. $ 741,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-61

Chapter 7 Variable Costing: A Tool for Management

96. Under the absorption costing method, what is McCoy's net operating income for its
first year?
A) $266,000
B) $786,600
C) $1,261,600
D) $2,173,600

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Gross margin........................................................ $2,629,600

Selling and administrative expenses:
Variable selling and administrative ($14.60 ×
95,000)........................................................... $1,387,000
Fixed selling and administrative....................... 456,000 1,843,000
Net operating income........................................... $ 786,600

97. If McCoy produces 100,000 monitors and sells 100,000 monitors in the second year of
operations, which of the following statements will be true? (Assume no change in cost
structure or selling price.)
A) McCoy's variable costing net operating income in its second year will be greater
than its absorption costing net operating income
B) McCoy's absorption costing unit product cost will decrease in the second year
C) McCoy's gross margin will be equal to its contribution margin in its second year
D) Both A and B above
E) none of the above

Ans: E AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Hard

7-62 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 98-100:

Mediocre Manufacturing Company produces a single product. Management budgeted the

following costs for its first year of operations. These costs are based on a budgeted volume of
4,000 units produced and sold:

$28,00
Direct materials.............................. 0
$14,00
Direct labor.................................... 0
Manufacturing overhead:
$56,00
Variable...................................... 0
$63,00
Fixed........................................... 0
Selling and administrative:
Variable...................................... $7,000
$42,00
Fixed........................................... 0

During the first year of operations, Mediocre actually produced 4,000 units but only sold
3,500 units. Actual costs did not fluctuate from the cost behavior patterns described above.
The 3,500 units were sold for $72 per unit. Assume that direct labor is a variable cost.

98. What is the total cost that would be assigned to Mediocre's finished goods inventory at
the end of the first year of operations under the absorption costing method?
A) $12,250
B) $20,125
C) $23,000
D) $26,250

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead +

Fixed manufacturing overhead
= $28,000 + $14,000 + $56,000 + $63,000 = $161,000
Unit product cost = $161,000 ÷ 4,000 = $40.25
Total cost of ending finished goods inventory = Unit product cost × Ending inventory
in units = $40.25 × (4,000 − 3,500) = $20,125

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-63

Chapter 7 Variable Costing: A Tool for Management

99. Under the variable costing method, what is Mediocre's actual net operating income for
its first year?
A) $42,000
B) $54,250
C) $55,125
D) $63,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing

overhead) ÷ 4,000 units = ($28,000 + $14,000 + $56,000) ÷ 4,000 = $24.50

$252,00
Sales revenue ($72 × 3,500).................................. 0
Variable costs:
Variable cost of goods sold ($24.50 × 3,500).... $85,750

Variable selling and administrative ($1.75 × 91,87

3,500).............................................................. 6,125 5
Contribution margin.............................................. 160,125
Fixed costs:
Fixed manufacturing overhead........................... $63,000
105,00
Fixed selling and administrative......................... 42,000 0
$
Net operating income............................................. 55,125

100. Assuming no change in cost structure, which of the following would have increased
Mediocre's net operating income under the absorption costing method in its first year
of operations?
A) an increase in sales volume with no increase in production volume
B) an increase in production volume with no increase in sales volume
C) both A and B above
D) none of the above

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

7-64 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 101-102:

JV Company produces a single product that sells for $7.00 per unit. Last year, 100,000 units
were produced and 80,000 units were sold. There were no beginning inventories. The
company has the following cost structure:

Fixed Costs Variable Costs

Raw materials................................ -- $1.50 per unit produced
Direct labor.................................... -- $1.00 per unit produced
Factory overhead........................... $150,000 $0.50 per unit produced
Selling and administrative............. $80,000 $0.50 per unit sold

101. The unit product cost under absorption costing is:

A) $2.50
B) $3.00
C) $3.50
D) $4.50

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit fixed overhead = $150,000 ÷ 100,000 = $1.50

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead
= $1.50 + $1.00 + $0.50 + $1.50 = $4.50

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-65

Chapter 7 Variable Costing: A Tool for Management

102. The net operating income under variable costing is:

A) $50,000
B) $80,000
C) $90,000
D) $120,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted

Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead

= $1.50 + $1 + $0.50 = $3

$560,00
Sales revenue ($7 × 80,000).................................. 0
Variable costs:
$240,00
Variable cost of goods sold ($3 × 80,000)......... 0

Variable selling and administrative ($0.50 × 40,00 280,00

80,000)............................................................ 0 0
Contribution margin.............................................. 280,000
Fixed costs:
Fixed manufacturing overhead........................... 150,000
80,00 230,00
Fixed selling and administrative......................... 0 0
$
Net operating income............................................. 50,000

7-66 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 103-106:

Gadepelli Company, which has only one product, has provided the following data concerning
its most recent month of operations:

Selling price............................................... $106

Units in beginning inventory..................... 0

Units produced........................................... 1,600
Units sold................................................... 1,400
Units in ending inventory........................... 200

Variable costs per unit:

Direct materials....................................... $15
Direct labor............................................. $14
Variable manufacturing overhead........... $6
Variable selling and administrative........ $4

Fixed costs:
$51,20
Fixed manufacturing overhead............... 0
$23,80
Fixed selling and administrative............. 0

103. The total contribution margin for the month under the variable costing approach is:
A) $54,600
B) $99,400
C) $93,800
D) $42,600

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1,2 Level: Medium

Solution:

Unit product cost = $15 + $14 + $6 = $35

$148,40
Sales revenue ($106 × 1,400)................................ 0
Variable costs:
Variable cost of goods sold ($35 × 1,400)......... $49,000
Variable selling and administrative ($4 × 5,600
1,400).............................................................. 54,60

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-67

Chapter 7 Variable Costing: A Tool for Management

0
$
Contribution margin.............................................. 93,800

7-68 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

104. The total gross margin for the month under the absorption costing approach is:
A) $25,200
B) $54,600
C) $68,000
D) $93,800

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead = $51,200 ÷ 1,600 = $32

Unit product cost = $15 + $14 + $6 + $32 = $67

Sales revenue ($106 × 1,400)............................... $148,400

Cost of goods sold ($67 × 1,400)......................... 93,800
Gross margin........................................................ $ 54,600

105. What is the total period cost for the month under the variable costing approach?
A) $75,000
B) $80,600
C) $29,400
D) $51,200

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead
+ Fixed selling and administrative cost
= $4 × 1,400 + $51,200 + $23,800
= $5,600 + $51,200 + $23,800 = $80,600

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-69

Chapter 7 Variable Costing: A Tool for Management

106. What is the total period cost for the month under the absorption costing approach?
A) $29,400
B) $80,600
C) $23,800
D) $51,200

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Period cost = Variable selling and administrative cost + Fixed selling and
administrative cost = $4 × 1,400 + $23,800 = $29,400

Use the following to answer questions 107-109:

During its first year of operations, Carlos Manufacturing Company incurred the following
costs to produce 8,000 units of its product:

Direct materials.......................................... $7 per unit

Direct labor................................................ $3 per unit
Variable manufacturing overhead............. $18 per unit
Fixed manufacturing overhead.................. $450,000 in total

The company also incurred the following costs in the sale of 7,500 units of product during its
first year:

Variable selling and administrative........... $2 per unit

Fixed selling and administrative................ $60,000 in total

Assume that direct labor is a variable cost.

7-70 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

107. What is the total cost that would be assigned to Carlos' finished goods inventory at the
end of the first year of operations under the absorption costing method?
A) $15,000
B) $42,125
C) $44,000
D) $47,125

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $450,000 ÷ 8,000 = $56.25

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $7 + $3 + $18 + $56.25 = $84.25
Total cost of ending finished goods inventory = Unit product cost × Ending inventory
in units = $84.25 × (8,000 − 7,500) = $84.25 × 500 = $42,125

108. What is the total cost that would be assigned to Carlos' finished goods inventory at the
end of the first year of operations under the variable costing method?
A) $15,000
B) $42,125
C) $44,000
D) $14,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $7 + $3 + $18 = $28
Total cost of ending finished goods inventory = Unit product cost × Ending inventory
in units = $28 × (8,000 − 7,500) = $28 × 500 = $14,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-71

Chapter 7 Variable Costing: A Tool for Management

109. If Carlos' absorption costing net operating income for this first year is $118,125, what
would its variable costing net operating income be for this first year?
A) $86,000
B) $90,000
C) $104,125
D) $146,250

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Variable costing net income = Absorption costing net income – (Unit fixed
manufacturing overhead × Change in inventory in units)
= $118,125 − ($56.25 × 500) = $118,125 − $28,125 = $90,000

Use the following to answer questions 110-111:

Kern Company produces a single product. Selected information concerning the operations of
the company follow:

Units in beginning inventory................................. 0

Units produced....................................................... 10,000
Units sold............................................................... 9,000

$40,00
Direct materials...................................................... 0
$20,00
Direct labor 0
$12,00
Variable factory overhead..................................... 0
$25,00
Fixed factory overhead.......................................... 0
Variable selling and administrative expenses........ $4,500
$30,00
Fixed selling and administrative expenses............ 0

Assume that direct labor is a variable cost.

7-72 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

110. The carrying value on the balance sheet of the ending finished goods inventory under
variable costing would be:
A) $7,200
B) $7,650
C) $8,000
D) $9,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit product cost = ($40,000 + $20,000 + $12,000) ÷ 10,000

= $72,000 ÷ 10,000 = $7.20
Ending inventory = Units produced − Units sold = 10,000 − 9,000 = 1,000
Carrying value of ending finished goods inventory = Unit product cost × Units in
ending inventory = $7.20 × 1,000 = $7,200

111. Which costing method, absorption or variable costing, would show a higher operating
income for the year and by what amount?
A) Absorption costing net operating income would be higher than variable costing
net operating income by $2,500.
B) Variable costing net operating income would be higher than absorption costing
net operating income by $2,500.
C) Absorption costing net operating income would be higher than variable costing
net operating income by $5,500.
D) Variable costing net operating income would be higher than absorption costing
net operating income by $5,500.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted

Solution:

Unit fixed manufacturing overhead = $25,000 ÷ 10,000 = $2.50

Difference between absorption costing net income and variable costing net income =
Unit fixed manufacturing overhead × Change in ending inventory in units = $2.50 ×
(10,000 − 9,000) = $2,500
Since inventory has increased (production exceeds sales), absorption costing net
income would be higher than variable costing net income.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-73

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 112-113:

Lina Co. produced 100,000 units of its single product during the month of June. Costs
incurred during June were as follows:

$100,00
Direct materials...................................................... 0
Direct labor............................................................ $80,000
Variable manufacturing overhead......................... $40,000
Fixed manufacturing overhead.............................. $50,000
Variable selling and administrative expenses........ $12,000
Fixed selling and administrative expenses............ $45,000

Assume that direct labor is a variable cost.

112. The unit product cost under absorption costing would be:
A) $3.27
B) $2.70
C) $2.20
D) $1.80

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead
= ($100,000 + $80,000 + $40,000 + $50,000) ÷ 100,000
= $270,000 ÷ 100,000 = $2.70

7-74 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

113. The unit product cost under variable costing would be:
A) $2.82
B) $2.70
C) $2.32
D) $2.20

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted

Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing

overhead) ÷ 100,000 units = ($100,000 + $80,000 + $40,000) ÷ 100,000 = $220,000 ÷
100,000 = $2.20

Use the following to answer questions 114-115:

Bauxar Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price............................................... $98

Units in beginning inventory..................... 0

Units produced........................................... 2,200
Units sold................................................... 2,100
Units in ending inventory.......................... 100

Variable costs per unit:

Direct materials...................................... $29
Direct labor............................................. $17
Variable manufacturing overhead.......... $5
Variable selling and administrative........ $9

Fixed costs:
$33,00
Fixed manufacturing overhead............... 0
$29,40
Fixed selling and administrative............. 0

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-75

Chapter 7 Variable Costing: A Tool for Management

114. What is the unit product cost for the month under variable costing?
A) $75
B) $66
C) $51
D) $60

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Direct materials + Direct labor + Variable manufacturing overhead

= $29 + $17 + $5 = $51

115. What is the unit product cost for the month under absorption costing?
A) $66
B) $51
C) $60
D) $75

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $33,000 ÷ 2,200 = $15

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $29 + $17 + $5 + $15 = $66

7-76 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 116-118:

Crossbow Corp. produces a single product. Data concerning June's operations follow:

Units in beginning inventory......... 0

Units produced............................... 6,000
Units sold....................................... 5,000

Variable costs per unit:

Manufacturing............................ $7
Selling and administrative.......... $3

Fixed costs in total:

$12,00
Manufacturing............................ 0
Selling and administrative.......... $3,000

116. Under variable costing, ending inventory on the balance sheet would be valued at:
A) $10,000
B) $7,000
C) $9,000
D) $12,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = $7

Ending inventory = Beginning inventory + Units produced − Units sold
= 0 + 6,000 − 5,000 = 1,000
Value of ending inventory = Unit product cost × Units in ending inventory
= $7 × 1,000 = $7,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-77

Chapter 7 Variable Costing: A Tool for Management

117. Under absorption costing, ending inventory on the balance sheet would be valued at:
A) $10,000
B) $7,000
C) $9,000
D) $12,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 6,000 = $2

Unit product cost = $7 + $2 = $9
Value of ending inventory = Unit product cost × Units in ending inventory
= $9 × 1,000 = $9,000

118. For the year in question, net operating income under variable costing will be:
A) higher than net operating income under absorption costing.
B) lower than net operating income under absorption costing.
C) the same as net operating income under absorption costing.
D) none of these

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

7-78 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 119-120:

Dearne Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price............................................... $67

Units in beginning inventory..................... 0

Units produced........................................... 5,200
Units sold................................................... 4,900
Units in ending inventory.......................... 300

Variable costs per unit:

Direct materials...................................... $20
Direct labor............................................. $16
Variable manufacturing overhead.......... $3
Variable selling and administrative........ $4

Fixed costs:
$41,60
Fixed manufacturing overhead............... 0
$73,50
Fixed selling and administrative............. 0

119. What is the total period cost for the month under the variable costing approach?
A) $41,600
B) $93,100
C) $115,100
D) $134,700

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead
+ Fixed selling and administrative cost
= $4 × 4,900 + $41,600 + $73,500
= $19,600 + $41,600 + $73,500 = $134,700

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Chapter 7 Variable Costing: A Tool for Management

120. What is the total period cost for the month under the absorption costing approach?
A) $93,100
B) $73,500
C) $134,700
D) $41,600

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Period cost = Variable selling and administrative cost + Fixed selling and
administrative cost = $4 × 4,900 + $73,500 = $93,100

Use the following to answer questions 121-122:

Tat Corporation produces a single product and has the following cost structure:

Number of units produced each year..................... 7,000

Variable costs per unit:
Direct materials.................................................. $77
Direct labor......................................................... $89
Variable manufacturing overhead...................... $5
Variable selling and administrative expenses..... $3
Fixed costs per year:
$532,00
Fixed manufacturing overhead........................... 0
$574,00
Fixed selling and administrative expenses......... 0

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Chapter 7 Variable Costing: A Tool for Management

121. The unit product cost under absorption costing is:

A) $247
B) $166
C) $332
D) $171

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $532,000 ÷ 7,000 = $76

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $77 + $89 + $5 + $76 = $247

122. The unit product cost under variable costing is:

A) $169
B) $171
C) $247
D) $174

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $77 + $89 + $5 = $171

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Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 123-124:

Caruso Inc., which produces a single product, has provided the following data for its most
recent month of operations:

Number of units produced.................................... 4,000

Variable costs per unit:
Direct materials................................................. $39
Direct labor....................................................... $71
Variable manufacturing overhead..................... $5
Variable selling and administrative expense..... $8
Fixed costs:
$220,00
Fixed manufacturing overhead.......................... 0
$308,00
Fixed selling and administrative expense......... 0

There were no beginning or ending inventories.

123. The unit product cost under absorption costing was:

A) $170
B) $115
C) $255
D) $110

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $220,000 ÷ 4,000 = $55

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $39 + $71 + $5 + $55 = $170

7-82 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

124. The unit product cost under variable costing was:

A) $115
B) $123
C) $118
D) $170

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $39 + $71 + $5 = $115

Use the following to answer questions 125-126:

Cloer Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price............................................... $95

Units in beginning inventory..................... 0

Units produced........................................... 8,900
Units sold................................................... 8,500
Units in ending inventory.......................... 400

Variable costs per unit:

Direct materials...................................... $10
Direct labor............................................. $48
Variable manufacturing overhead.......... $5
Variable selling and administrative........ $11

Fixed costs:
$106,80
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $68,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-83

Chapter 7 Variable Costing: A Tool for Management

125. The total contribution margin for the month under the variable costing approach is:
A) $178,500
B) $71,700
C) $272,000
D) $170,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit product cost = $10 + $48 + $5 = $63

$807,50
Sales revenue ($95 × 8,500).................................. 0
Variable costs:
$535,50
Variable cost of goods sold ($63 × 8,500)......... 0

Variable selling and administrative ($11 × 93,50 629,00

8,500).............................................................. 0 0
$178,50
Contribution margin.............................................. 0

126. The total gross margin for the month under the absorption costing approach is:
A) $200,000
B) $170,000
C) $8,500
D) $178,500

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead = $106,800 ÷ 8,900 = $12

Unit product cost = $10 + $48 + $5 + $12 = $75

Sales revenue ($95 × 8,500)................................. $807,500

Cost of goods sold ($75 × 8,500)......................... 637,500
Gross margin........................................................ $ 170,000

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Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 127-128:

Hirsch Company produces a single product. Variable manufacturing costs are $6 per unit, and
fixed manufacturing costs are $2 per unit based on 50,000 units produced each year. In the
current year, 50,000 units were produced, and 40,000 units were sold.

127. Under absorption costing, the amount of manufacturing cost (variable and fixed)
deducted from revenue in the current year would be:
A) $320,000
B) $400,000
C) $240,000
D) $300,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Total manufacturing cost deducted from revenue = Total per unit product cost × Units
sold = ($6 + $2) × 40,000 = $320,000

128. Under variable costing, the amount of manufacturing cost (variable and fixed)
deducted from revenue in the current year would be:
A) $320,000
B) $240,000
C) $340,000
D) $400,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Total fixed cost = Per unit fixed cost × Units produced

Total fixed cost = $2 × 50,000 = $100,000
Total manufacturing cost deducted from revenue = (Variable per unit product cost ×
Units sold) + Total fixed cost
= ($6 × 40,000) + $100,000
= $240,000 + $100,000 = $340,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-85

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 129-130:

Osawa Inc. manufactured 200,000 units of its only product in its first year of operations.
Variable manufacturing costs were $30 per unit. Fixed manufacturing costs were $600,000
and selling and administrative costs totaled $400,000. Osawa sold 120,000 units at a selling
price of $40 per unit.

129. Osawa's net operating income using absorption costing would be:
A) $200,000
B) $440,000
C) $600,000
D) $840,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium Source: CMA, adapted

Solution:

Unit fixed manufacturing cost = $600,000 ÷ 200,000 = $3

Unit product cost = $30 + $3 = $33

Sales revenue ($40 × 120,000)............................. $4,800,000

Cost of goods sold ($33 × 120,000)..................... 3,960,000
Gross margin........................................................ 840,000
Selling and administrative expenses cost............. 400,000
Net operating income........................................... $ 440,000

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Chapter 7 Variable Costing: A Tool for Management

130. Osawa's net operating income using variable costing would be:
A) $200,000
B) $440,000
C) $800,000
D) $600,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium Source: CMA, adapted

Solution:

Sales revenue ($40 × 120,000).............................. $4,800,000

Variable cost of goods sold ($30 × 120,000)......... 3,600,000
Contribution margin.............................................. 1,200,000
Fixed costs:
Fixed manufacturing costs.................................. $600,000
Selling and administrative.................................. 400,000 1,000,000
Net operating income............................................. $ 200,000

Use the following to answer questions 131-132:

Eldrick Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price............................................... $85

Units in beginning inventory..................... 0

Units produced........................................... 4,500
Units sold................................................... 4,400
Units in ending inventory.......................... 100

Variable costs per unit:

Direct materials...................................... $29
Direct labor............................................. $13
Variable manufacturing overhead.......... $7
Variable selling and administrative........ $5

Fixed costs:
$117,00
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $4,400

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Chapter 7 Variable Costing: A Tool for Management

131. What is the net operating income for the month under variable costing?
A) $10,100
B) $2,600
C) $15,000
D) $17,600

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit product cost = $29 + $13 + $7 = $49

$374,00
Sales revenue ($85 × 4,400).................................. 0
Variable costs:
$215,60
Variable cost of goods sold ($49 × 4,400)......... 0

Variable selling and administrative ($5 × 22,00 237,60

4,400).............................................................. 0 0
Contribution margin.............................................. 136,400
Fixed costs:
$117,00
Fixed manufacturing overhead........................... 0
4,40 121,40
Fixed selling and administrative......................... 0 0
$
Net operating income............................................. 15,000

7-88 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

132. What is the net operating income for the month under absorption costing?
A) $17,600
B) $10,100
C) $15,000
D) $2,600

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead = $117,000 ÷ 4,500 = $26

Unit product cost = $29 + $13 + $7 + $26 = $75

Sales revenue ($85 ×4,400).................................. $374,000

Cost of goods sold ($75 × 4,400)......................... 330,000
Gross margin........................................................ 44,000
Selling and administrative expenses:
Variable selling and administrative ($5 ×
4,400)............................................................. $22,000
Fixed selling and administrative....................... 4,400 26,400
Net operating income........................................... $ 17,600

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Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 133-134:

Kiefer Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price............................................... $133

Units in beginning inventory..................... 600

Units produced........................................... 6,600
Units sold................................................... 6,800
Units in ending inventory.......................... 400

Variable costs per unit:

Direct materials...................................... $34
Direct labor............................................. $52
Variable manufacturing overhead.......... $2
Variable selling and administrative........ $11

Fixed costs:
$158,40
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $61,200

The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.

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Chapter 7 Variable Costing: A Tool for Management

133. What is the net operating income for the month under variable costing?
A) $6,800
B) $9,600
C) $29,200
D) $11,600

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

$904,40
Sales revenue ($133 × 6,800)................................ 0
Variable costs:
$598,40
Variable cost of goods sold ($88 × 6,800)......... 0

Variable selling and administrative ($11 × 74,80 673,20

6,800).............................................................. 0 0
Contribution margin.............................................. 231,200
Fixed costs:
$158,40
Fixed manufacturing overhead........................... 0
61,20 219,60
Fixed selling and administrative......................... 0 0
$
Net operating income............................................. 11,600

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-91

Chapter 7 Variable Costing: A Tool for Management

134. What is the net operating income for the month under absorption costing?
A) $11,600
B) $6,800
C) $29,200
D) $9,600

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead= $24

Unit product cost = $34 + $52 + $2 + $24 = $112

Sales revenue ($133 × 6,800)............................... $904,400

Cost of goods sold ($112 × 6,800)....................... 761,600
Gross margin........................................................ 142,800
Selling and administrative expenses:
Variable selling and administrative ($11 ×
6,800)............................................................. $74,800
Fixed selling and administrative....................... 61,200 136,000
Net operating income........................................... $ 6,800

Use the following to answer questions 135-136:

Danahy Corporation manufactures a variety of products. The following data pertain to the
company's operations over the last two years:

$52,00
Variable costing net operating income, last year............. 0
$68,00
Variable costing net operating income, this year............ 0
Fixed manufacturing overhead costs released from
inventory under absorption costing, last year.............. $4,000
Fixed manufacturing overhead costs deferred in
inventory under absorption costing, this year.............. $6,000

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Chapter 7 Variable Costing: A Tool for Management

135. What was the absorption costing net operating income last year?
A) $50,000
B) $48,000
C) $52,000
D) $56,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Absorption costing net income = Variable costing net operating income – Fixed
manufacturing overhead released = $52,000 – $4,000 = $48,000

136. What was the absorption costing net operating income this year?
A) $62,000
B) $74,000
C) $70,000
D) $66,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $68,000 + $6,000 = $74,000

Use the following to answer questions 137-138:

Helmers Corporation manufactures a variety of products. Variable costing net operating

income last year was $86,000 and this year was $103,000. Last year, $32,000 in fixed
manufacturing overhead costs were released from inventory under absorption costing. This
year, $12,000 in fixed manufacturing overhead costs were deferred in inventory under
absorption costing.

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Chapter 7 Variable Costing: A Tool for Management

137. What was the absorption costing net operating income last year?
A) $106,000
B) $86,000
C) $54,000
D) $118,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Absorption costing net income = Variable costing net operating income – Fixed
manufacturing overhead released = $86,000 – $32,000 = $54,000

138. What was the absorption costing net operating income this year?
A) $81,000
B) $83,000
C) $115,000
D) $123,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $103,000 + $12,000 = $115,000

Use the following to answer questions 139-140:

Norenberg Corporation manufactures a variety of products. The following data pertain to the
company's operations over the last two years:

Variable costing net operating income, last year............. $88,600

Variable costing net operating income, this year............ $96,100
Increase in ending inventory, last year............................ 600 units
Decrease in ending inventory, this year........................... 2,300 units
Fixed manufacturing overhead cost per unit................... $7

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Chapter 7 Variable Costing: A Tool for Management

139. What was the absorption costing net operating income last year?
A) $92,800
B) $88,600
C) $84,400
D) $76,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Fixed manufacturing overhead deferred = 600 × $7 = $4,200

Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $88,600 + $4,200 = $92,800

140. What was the absorption costing net operating income this year?
A) $80,000
B) $100,500
C) $108,000
D) $112,200

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Fixed manufacturing overhead released = 2,300 × $7 = $16,100

Absorption costing net income = Variable costing net operating income − Fixed
manufacturing overhead released = $96,100 − $16,100 = $80,000

Use the following to answer questions 141-142:

Rosal Corporation manufactures a variety of products. Variable costing net operating income
was $74,700 last year and was $82,300 this year. Last year, ending inventory increased by
2,600 units. This year, ending inventory decreased by 1,400 units. Fixed manufacturing
overhead cost is $5 per unit.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-95

Chapter 7 Variable Costing: A Tool for Management

141. What was the absorption costing net operating income last year?
A) $61,700
B) $74,700
C) $80,700
D) $87,700

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Fixed manufacturing overhead deferred = $5 × 2,600 = $13,000

Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $74,700 + $13,000 = $87,700

142. What was the absorption costing net operating income this year?
A) $75,300
B) $89,300
C) $76,300
D) $68,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Fixed manufacturing overhead released = $5 × 1,400 = $7,000

Absorption costing net income = Variable costing net operating income − Fixed
manufacturing overhead released = $82,300 − $7,000 = $75,300

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Chapter 7 Variable Costing: A Tool for Management

Essay Questions

143. Lehne Company, which has only one product, has provided the following data
concerning its most recent month of operations:

Selling price............................................... $112

Units in beginning inventory..................... 500

Units produced........................................... 2,600
Units sold................................................... 3,000
Units in ending inventory.......................... 100

Variable costs per unit:

Direct materials...................................... $13
Direct labor............................................. $49
Variable manufacturing overhead.......... $6
Variable selling and administrative........ $10

Fixed costs:
$80,60
Fixed manufacturing overhead............... 0
$15,00
Fixed selling and administrative............. 0

The company produces the same number of units every month, although the sales in
units vary from month to month. The company's variable costs per unit and total fixed
costs have been constant from month to month.

Required:

a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and the
variable costing method.
d. Prepare an income statement for the month using the absorption costing method.
e. Reconcile the variable costing and absorption costing net operating incomes for
the month.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-97

Chapter 7 Variable Costing: A Tool for Management

Ans:

a. & b. Unit product costs

Variable costing:
$1
Direct materials.......................................... 3
Direct labor................................................ 49
Variable manufacturing overhead............. 6
$6
Unit product cost....................................... 8

Absorption costing:
$1
Direct materials.......................................... 3
Direct labor................................................ 49
Variable manufacturing overhead............. 6
Fixed manufacturing overhead.................. 31
$9
Unit product cost....................................... 9

c. & d. Income statements

Variable costing income statement

Sales....................................................................... $336,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory........................................ $ 34,000
Add variable manufacturing costs................... 176,800
Goods available for sale.................................. 210,800
Less ending inventory..................................... 6,800
Variable cost of goods sold................................ 204,000
Variable selling and administrative.................... 30,000 234,000
Contribution margin.............................................. 102,000
Less fixed expenses:
Fixed manufacturing overhead........................... 80,600
Fixed selling and administrative......................... 15,000 95,600
Net operating income............................................. $ 6,400

Absorption costing income statement

Sales....................................................................... $336,000
Cost of goods sold:
Beginning inventory........................................... $ 49,500

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Chapter 7 Variable Costing: A Tool for Management

Add cost of goods manufactured........................ 257,400

Goods available for sale..................................... 306,900
Less ending inventory......................................... 9,900 297,000
Gross margin.......................................................... 39,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-99

Chapter 7 Variable Costing: A Tool for Management

Selling and administrative expenses expenses:

Variable selling and administrative.................... 30,000
Fixed selling and administrative......................... 15,000 45,000
Net operating income............................................. $( 6,000)

e. Reconciliation
Variable costing net operating income............................ $ 6,400
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing..................... (12,400)
Absorption costing net operating income........................ $(6,000)

AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Hard

144. Maffei Company, which has only one product, has provided the following data
concerning its most recent month of operations:

Selling price............................................... $138

Units in beginning inventory..................... 0

Units produced........................................... 7,200
Units sold................................................... 7,000
Units in ending inventory.......................... 200

Variable costs per unit:

Direct materials...................................... $42
Direct labor............................................. $32
Variable manufacturing overhead.......... $1
Variable selling and administrative........ $8

Fixed costs:
$280,80
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $98,000

Required:

a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and the
variable costing method.
d. Prepare an income statement for the month using the absorption costing method.

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Chapter 7 Variable Costing: A Tool for Management

e. Reconcile the variable costing and absorption costing net operating incomes for
the month.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-101

Chapter 7 Variable Costing: A Tool for Management

Ans:

a. & b. Unit product costs

Variable costing:
Direct materials.......................................... $42
Direct labor................................................ 32
Variable manufacturing overhead............. 1
Unit product cost....................................... $75

Absorption costing:
Direct materials.......................................... $ 42
Direct labor................................................ 32
Variable manufacturing overhead............. 1
Fixed manufacturing overhead.................. 39
$11
Unit product cost....................................... 4

c. & d. Income statements

Variable costing income statement

Sales....................................................................... $966,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory........................................ $ 0
Add variable manufacturing costs................... 540,000
Goods available for sale.................................. 540,000
Less ending inventory..................................... 15,000
Variable cost of goods sold................................ 525,000
Variable selling and administrative.................... 56,000 581,000
Contribution margin.............................................. 385,000
Less fixed expenses:
Fixed manufacturing overhead........................... 280,800
Fixed selling and administrative......................... 98,000 378,800
Net operating income............................................. $ 6,200

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Chapter 7 Variable Costing: A Tool for Management

Absorption costing income statement....................

Sales....................................................................... $966,000
Cost of goods sold:
Beginning inventory........................................... $ 0
Add cost of goods manufactured........................ 820,800
Goods available for sale..................................... 820,800
Less ending inventory......................................... 22,800 798,000
Gross margin.......................................................... 168,000
Selling and administrative expenses expenses:
Variable selling and administrative.................... 56,000
Fixed selling and administrative......................... 98,000 154,000
Net operating income............................................. $ 14,000

e. Reconciliation
Variable costing net operating income............................ $ 6,200
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing.............................. 7,800
$14,00
Absorption costing net operating income........................ 0

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Chapter 7 Variable Costing: A Tool for Management

145. The Dean Company produces and sells a single product. The following data refer to
the year just completed:

Beginning inventory........................................................ 0
Units produced................................................................. 20,000
Units sold......................................................................... 19,000

Selling price per unit........................................................ $350

Selling and administrative expenses:
Variable per unit........................................................... $10
$225,00
Fixed (total).................................................................. 0
Manufacturing costs:
Direct materials cost per unit........................................ $190
Direct labor cost per unit.............................................. $40
Variable manufacturing overhead cost per unit............ $25
$250,00
Fixed manufacturing overhead (total).......................... 0

Assume that direct labor is a variable cost.

Required:

a. Compute the cost of a single unit of product under both the absorption costing and
variable costing approaches.
b. Prepare an income statement for the year using absorption costing.
c. Prepare an income statement for the year using variable costing.
d. Reconcile the absorption costing and variable costing net operating income figures
in (b) and (c) above.

7-104 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Ans:

a. Cost per unit under absorption costing:

$190.0
Direct materials................................................... 0
Direct labor.......................................................... 40.00
Variable overhead............................................... 25.00
Fixed overhead ($250,000 / 20,000)................... 12.50
$267.5
Total cost per unit................................................ 0

Cost per unit under variable costing:

$190.0
Direct materials................................................... 0
Direct labor.......................................................... 40.00
Variable overhead............................................... 25.00
$255.0
Total cost per unit................................................ 0

b
. Absorption costing income statement:
$6,650,00
Sales................................................................................. 0
Cost of goods sold:
Beginning inventory..................................................... $ 0
Add cost of goods manufactured (20,000 @ $267.50). 5,350,000
Cost of goods available................................................ 5,350,000
Less ending inventory (1,000 @ $267.50)................... 267,500 5,082,500
Gross profit...................................................................... 1,567,500
Selling and administrative expenses expenses:
415,00
[($10 × 19,000) + $225,000]........................................ 0
$1,152,50
Net operating income....................................................... 0

c. Variable costing income statement:

$6,650,00
Sales................................................................................. 0
Cost of goods sold:
$
Beginning inventory..................................................... 0
Cost of goods manufactured (20,000 @ $255)............ 5,100,000
Cost of goods available................................................ 5,100,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-105

Chapter 7 Variable Costing: A Tool for Management

Less ending inventory (1,000 @ $255)........................ 255,000

Variable cost of goods sold............................................. 4,845,000
Variable selling and administrative expenses:
(19,000 @ $10)............................................................. 190,000 5,035,000
Contribution margin........................................................ 1,615,000
Less fixed expenses:
Manufacturing overhead............................................... 250,000
225,00 475,00
Selling and administrative............................................ 0 0
$1,140,00
Net operating income...................................................... 0

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Chapter 7 Variable Costing: A Tool for Management

d $1,140,00
. Net operating income under variable costing.................. 0
Add fixed manufacturing overhead costs deferred in 12,50
inventory under absorption costing (1,000 @ $12.50) 0
$1,152,50
Net operating income under absorption costing.............. 0

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146. Pacht Company, which has only one product, has provided the following data
concerning its most recent month of operations:

Selling price............................................... $121

Units in beginning inventory..................... 400

Units produced........................................... 6,800
Units sold................................................... 6,900
Units in ending inventory.......................... 300

Variable costs per unit:

Direct materials...................................... $35
Direct labor............................................. $36
Variable manufacturing overhead.......... $3
Variable selling and administrative........ $4

Fixed costs:
$197,20
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $96,600

The company produces the same number of units every month, although the sales in
units vary from month to month. The company's variable costs per unit and total fixed
costs have been constant from month to month.

Required:

a. What is the unit product cost for the month under variable costing?
b. Prepare an income statement for the month using the contribution format and the
variable costing method.
c. Without preparing an income statement, determine the absorption costing net
operating income for the month. (Hint: Use the reconciliation method.)

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-107

Chapter 7 Variable Costing: A Tool for Management

Ans:

a. Variable costing unit product cost

$3
Direct materials....................................... 5
Direct labor.............................................. 36

Variable manufacturing overhead........... 3

$7
Unit product cost..................................... 4

b
. Variable costing income statement
Sales........................................................ $834,900
Less variable expenses:
Variable cost of goods sold:
Beginning inventory......................... $ 29,600
Add variable manufacturing costs.... 503,200
Goods available for sale.................... 532,800
Less ending inventory....................... 22,200
Variable cost of goods sold.................. 510,600
Variable selling and administrative..... 27,600 538,200
Contribution margin................................ 296,700
Less fixed expenses:
Fixed manufacturing overhead............ 197,200
Fixed selling and administrative.......... 96,600 293,800
Net operating income.............................. $ 2,900

c. Computation of absorption costing net operating income

Fixed manufacturing overhead per unit................................ $29.00
Change in inventories (units)................................................ (100)

Variable costing net operating income.................................. $2,900

Deduct fixed manufacturing overhead costs released from
inventory under absorption costing................................... (2,900)
Absorption costing net operating income.............................. $ 0

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7-108 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

147. Qin Company, which has only one product, has provided the following data
concerning its most recent month of operations:

Selling price............................................... $77

Units in beginning inventory..................... 0

Units produced........................................... 6,700
Units sold................................................... 6,500
Units in ending inventory.......................... 200

Variable costs per unit:

Direct materials...................................... $27
Direct labor............................................. $13
Variable manufacturing overhead.......... $5
Variable selling and administrative........ $7

Fixed costs:
$100,50
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $58,500

Required:

a. What is the unit product cost for the month under variable costing?
b. Prepare an income statement for the month using the contribution format and the
variable costing method.
c. Without preparing an income statement, determine the absorption costing net
operating income for the month. (Hint: Use the reconciliation method.)

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-109

Chapter 7 Variable Costing: A Tool for Management

Ans:

a. Variable costing unit product cost

$2
Direct materials....................................... 7
Direct labor.............................................. 13
Variable manufacturing overhead........... 5
$4
Unit product cost..................................... 5

b
. Variable costing income statement
Sales........................................................ $500,500
Less variable expenses:
Variable cost of goods sold:
Beginning inventory......................... $ 0
Add variable manufacturing costs.... 301,500
Goods available for sale.................... 301,500
Less ending inventory....................... 9,000
Variable cost of goods sold.................. 292,500
Variable selling and administrative..... 45,500 338,000
Contribution margin................................ 162,500
Less fixed expenses:
Fixed manufacturing overhead............ 100,500
Fixed selling and administrative.......... 58,500 159,000
Net operating income.............................. $ 3,500

c. Computation of absorption costing net operating income

$15.0
Fixed manufacturing overhead per unit............................... 0
Change in inventories (units)............................................... 200

$3,50
Variable costing net operating income................................ 0
Add fixed manufacturing overhead costs deferred in 3,00
inventory under absorption costing.................................. 0
$6,50
Absorption costing net operating income............................ 0

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Chapter 7 Variable Costing: A Tool for Management

148. Olguin Corporation produces a single product and has the following cost structure:

Number of units produced each year..................... 4,000

Variable costs per unit:
Direct materials.................................................. $15
Direct labor......................................................... $13
Variable manufacturing overhead...................... $7
Variable selling and administrative expenses..... $5
Fixed costs per year:
$328,00
Fixed manufacturing overhead........................... 0
$324,00
Fixed selling and administrative expenses......... 0

Required:

a. Compute the unit product cost under absorption costing. Show your work!
b. Compute the unit product cost under variable costing. Show your work!

Ans:

a. Absorption Costing:
$ 1
Direct materials.................................................................................... 5
Direct labor.......................................................................................... 13
Variable manufacturing overhead........................................................ 7
Total variable production cost.............................................................. 35
Fixed manufacturing overhead ($328,000/4,000 units of product)..... 82
$11
Unit product cost.................................................................................. 7

b
. Variable Costing:
Direct materials.................................................................................... $15
Direct labor.......................................................................................... 13
Variable manufacturing overhead........................................................ 7
Unit product cost.................................................................................. $35

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-111

Chapter 7 Variable Costing: A Tool for Management

149. Quates Corporation produces a single product and has the following cost structure:

Number of units produced each year............................... 3,000

Variable costs per unit:
Direct materials............................................................ $27
Direct labor................................................................... $96
Variable manufacturing overhead................................ $1
Variable selling and administrative expenses............... $4
Fixed costs per year:
$219,00
Fixed manufacturing overhead..................................... 0
$153,00
Fixed selling and administrative expenses................... 0

Required:

Compute the unit product cost under absorption costing. Show your work!

Ans:

$ 2
Direct materials................................................................................. 7
Direct labor....................................................................................... 96

Variable manufacturing overhead.................................................... 1

Total variable production cost.......................................................... 124
7
Fixed manufacturing overhead ($219,000/3,000 units of product). . 3
$19
Unit product cost.............................................................................. 7

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7-112 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

150. Davitt Corporation produces a single product and has the following cost structure:

Number of units produced each year............................... 1,000

Variable costs per unit:
Direct materials............................................................ $57
Direct labor................................................................... $20
Variable manufacturing overhead................................ $2
Variable selling and administrative expenses............... $3
Fixed costs per year:
$88,00
Fixed manufacturing overhead..................................... 0
$24,00
Fixed selling and administrative expenses................... 0

Required:

Compute the unit product cost under variable costing. Show your work!

Ans:

$5
Direct materials................................................................ 7
Direct labor...................................................................... 20
Variable manufacturing overhead................................... 2
$7
Unit product cost............................................................. 9

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-113

Chapter 7 Variable Costing: A Tool for Management

151. Murphy Inc., which produces a single product, has provided the following data for its
most recent month of operation:

Number of units produced............................................... 7,000

Variable costs per unit:
Direct materials............................................................ $37
Direct labor................................................................... $43
Variable manufacturing overhead................................ $5
Variable selling and administrative expenses............... $1
Fixed costs:
Fixed manufacturing overhead..................................... $84,000
$119,00
Fixed selling and administrative expenses................... 0

The company had no beginning or ending inventories.

Required:

a. Compute the unit product cost under absorption costing. Show your work!
b. Compute the unit product cost under variable costing. Show your work!

Ans:

a. Absorption costing:
Direct materials.............................................................................. $37
Direct labor.................................................................................... 43
Variable manufacturing overhead.................................................. 5
Total variable production cost........................................................ 85
Fixed manufacturing overhead ($84,000/7,000 units of product). 12
Unit product cost............................................................................ $97

b
. Variable costing:
Direct materials.............................................................................. $37
Direct labor.................................................................................... 43
Variable manufacturing overhead.................................................. 5
Unit product cost............................................................................ $85

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7-114 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

152. Vancott Inc., which produces a single product, has provided the following data for its
most recent month of operation:

Number of units produced............................................... 6,000

Variable costs per unit:
Direct materials............................................................ $93
Direct labor................................................................... $58
Variable manufacturing overhead................................ $1
Variable selling and administrative expenses............... $1
Fixed costs:
$192,00
Fixed manufacturing overhead..................................... 0
$348,00
Fixed selling and administrative expenses................... 0

The company had no beginning or ending inventories.

Required:

Compute the unit product cost under absorption costing. Show your work!

Ans:

Direct materials.................................................................................. $ 93
Direct labor......................................................................................... 58
Variable manufacturing overhead...................................................... 1
Total variable production cost............................................................ 152
Fixed manufacturing overhead ($192,000/6,000 units of product).... 32
$18
Unit product cost................................................................................ 4

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-115

Chapter 7 Variable Costing: A Tool for Management

153. Schlenz Inc., which produces a single product, has provided the following data for its
most recent month of operation:

Number of units produced............................................... 6,000

Variable costs per unit:
Direct materials............................................................ $12
Direct labor................................................................... $34
Variable manufacturing overhead................................ $4
Variable selling and administrative expenses............... $2
Fixed costs:
$486,00
Fixed manufacturing overhead..................................... 0
$522,00
Fixed selling and administrative expenses................... 0

The company had no beginning or ending inventories.

Required:

Compute the unit product cost under variable costing. Show your work!

Ans:

$1
Direct materials.......................................... 2
Direct labor................................................ 34
Variable manufacturing overhead............. 4
$5
Unit product cost....................................... 0

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Chapter 7 Variable Costing: A Tool for Management

154. Miller Company produces a single product. The company had the following results for
its first two years of operation:

Year 1 Year 2
$1,200,00 $1,200,00
Sales........................................................... 0 0
Cost of goods sold..................................... 800,000 680,000
Gross margin.............................................. 400,000 520,000
Selling and administrative expenses.......... 300,000 300,000
Net operating income................................. $ 100,000 $ 220,000

In Year 1, the company produced and sold 40,000 units of its only product; in Year 2,
the company again sold 40,000 units, but increased production to 50,000 units. The
company's variable production cost is $5 per unit and its fixed manufacturing
overhead cost is $600,000 a year. Fixed manufacturing overhead costs are applied to
the product on the basis of each year's unit production (i.e., a new fixed overhead rate
is computed each year). Variable selling and administrative expenses are $2 per unit
sold.

Required:

a. Compute the unit product cost for each year under absorption costing and under
variable costing.
b. Prepare an income statement for each year, using the contribution approach with
variable costing.
c. Reconcile the variable costing and absorption costing income figures for each
year.
d. Explain why the net operating income for Year 2 under absorption costing was
higher than the net operating income for Year 1, although the same number of
units were sold in each year.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-117

Chapter 7 Variable Costing: A Tool for Management

Ans:
a. Cost per unit under absorption costing:
Year 1 Year 2
Variable production cost per unit........................ $5 $5
Fixed manufacturing overhead cost:
($600,000/40,000)............................................... 15
($600,000/50,000)............................................... 12
Unit product cost................................................. $20 $17

Cost per unit under variable costing:

Year 1 Year 2
Variable production cost per unit........................ $5 $5

b. Income statements for each year under variable costing:

Year 1 Year 2
$1,200,00 $1,200,00
Sales....................................................................... 0 0
Cost of goods sold ($5 × 40,000).......................... 200,000 200,000
Variable selling and administrative expense
($2 × 40,000)...................................................... 80,000 80,000
Contribution margin.............................................. 920,000 920,000
Fixed expenses:
Fixed manufacturing overhead........................... 600,000 600,000
Fixed selling and administrative expense........... 220,000 220,000
Net operating income............................................. $ 100,000 $ 100,000

c. Reconciliation of absorption costing and variable costing net operating incomes:

Year 1 Year 2
$100,00 $100,00
Net operating income under variable costing................... 0 0
Fixed manufacturing overhead deferred in (released 120,00
from) inventory: Year 2 (10,000 units × $12 per unit). 0
$100,00 $220,00
Net operating income under absorption costing............... 0 0

d. The increase in production in Year 2, in the face of level sales, caused a buildup of
inventory and a deferral of a portion of the overhead costs of Year 2 to the next
year. This deferral of cost relieved Year 2 of $120,000 of fixed manufacturing
overhead. Income for Year 2 was $120,000 higher than income of Year 1, even
though the same number of units was sold each year. By increasing production and
building up inventory, the company was able to increase profits without increasing
sales. This is major criticism of the absorption costing approach.

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Chapter 7 Variable Costing: A Tool for Management

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-119

Chapter 7 Variable Costing: A Tool for Management

155. Neukirchen Company, which has only one product, has provided the following data
concerning its most recent month of operations:

Selling price............................................... $140

Units in beginning inventory..................... 300

Units produced........................................... 4,300
Units sold................................................... 4,500
Units in ending inventory.......................... 100

Variable costs per unit:

Direct materials...................................... $25
Direct labor............................................. $51
Variable manufacturing overhead.......... $7
Variable selling and administrative........ $6

Fixed costs:
$150,50
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $72,000

The company produces the same number of units every month, although the sales in
units vary from month to month. The company's variable costs per unit and total fixed
costs have been constant from month to month.

Required:

a. Prepare an income statement for the month using the contribution format and the
variable costing method.
b. Prepare an income statement for the month using the absorption costing method.

7-120 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

Ans:

a. Variable costing income statement

$630,00
Sales........................................................... 0
Less variable expenses:
Variable cost of goods sold:
Beginning inventory............................ $ 24,900
Add variable manufacturing costs....... 356,900
Goods available for sale...................... 381,800
Less ending inventory......................... 8,300
Variable cost of goods sold................. 373,500
Variable selling and administrative........ 27,000 400,500
Contribution margin.................................. 229,500
Less fixed expenses:
Fixed manufacturing overhead............... 150,500
Fixed selling and administrative............. 72,000 222,500
Net operating income................................. $ 7,000

b. Absorption costing income statement

$630,00
Sales........................................................... 0
Cost of goods sold:
Beginning inventory............................... $ 35,400
Add cost of goods manufactured............ 507,400
Goods available for sale......................... 542,800
Less ending inventory............................. 11,800 531,000
Gross margin.............................................. 99,000
Selling and administrative expenses
expenses:
Variable selling and administrative........ 27,000
Fixed selling and administrative............. 72,000 99,000
Net operating income................................. $ 0

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-121

Chapter 7 Variable Costing: A Tool for Management

156. Oates Company, which has only one product, has provided the following data
concerning its most recent month of operations:

Selling price............................................... $120

Units in beginning inventory..................... 0

Units produced........................................... 7,600
Units sold................................................... 7,400
Units in ending inventory.......................... 200

Variable costs per unit:

Direct materials...................................... $15
Direct labor............................................. $48
Variable manufacturing overhead.......... $7
Variable selling and administrative........ $10

Fixed costs:
$228,00
Fixed manufacturing overhead............... 0
Fixed selling and administrative............. $66,600

Required:

a. Prepare an income statement for the month using the contribution format and the
variable costing method.
b. Prepare an income statement for the month using the absorption costing method.

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Chapter 7 Variable Costing: A Tool for Management

Ans:
a. Variable costing income statement
Sales........................................................... $888,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory............................ $ 0
Add variable manufacturing costs....... 532,000
Goods available for sale...................... 532,000
Less ending inventory......................... 14,000
Variable cost of goods sold.................... 518,000
Variable selling and administrative........ 74,000 592,000
Contribution margin.................................. 296,000
Less fixed expenses:
Fixed manufacturing overhead............... 228,000
Fixed selling and administrative............. 66,600 294,600
Net operating income................................. $ 1,400

b. Absorption costing income statement

$888,00
Sales....................................................................... 0
Cost of goods sold:
Beginning inventory........................................... $ 0
Add cost of goods manufactured........................ 760,000
Goods available for sale..................................... 760,000
Less ending inventory......................................... 20,000 740,000
Gross margin.......................................................... 148,000
Selling and administrative expenses expenses:
Variable selling and administrative.................... 74,000
Fixed selling and administrative......................... 66,600 140,600
Net operating income............................................. $ 7,400

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-123

Chapter 7 Variable Costing: A Tool for Management

157. Succulent Juice Company manufactures and sells premium tomato juice by the gallon.
Succulent just finished its first year of operations. The following data relates to this
first year:

Number of gallons produced........................................... 75,000

Number of gallons sold.................................................... 70,000
Sales price........................................................................ $3.00 per gallon
Unit product cost under variable costing......................... $1.45 per gallon
Total contribution margin................................................ $84,000
Total fixed manufacturing overhead cost........................ $63,000
Total fixed selling and administrative expense............... $10,500

Required:

Using the absorption costing method, prepare Succulent Juice Company's income
statement for the year.

Ans:

$210,00
Sales (70,000 × $3.00).................................................... 0
Cost of goods sold:
Beginning inventory.................................................... $ 0
Add cost of goods manufactured (75,000 × $2.29*).. . 171,750
Goods available for sale............................................... 171,750
Less ending inventory (5,000 × $2.29)........................ 11,450 160,300
Gross margin................................................................... 49,700
Selling and administrative expenses**........................... 35,000
Net operating income...................................................... $ 14,700

* $1.45 + ($63,000/75,000)
** Total variable cost = $210,000 - $84,000 = $126,000;
Variable selling and administrative = $126,000 - ($1.45 × 70,000) = $24,500
Total selling and administrative = $24,500 + $10,500

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Chapter 7 Variable Costing: A Tool for Management

158. Worrel Corporation manufactures a variety of products. The following data pertain to
the company's operations over the last two years:

$71,00
Variable costing net operating income, last year............. 0
$92,00
Variable costing net operating income, this year............ 0
Fixed manufacturing overhead costs deferred in
inventory under absorption costing, last year.............. $2,000
Fixed manufacturing overhead costs released from $11,00
inventory under absorption costing, this year.............. 0

Required:

a. Determine the absorption costing net operating income last year. Show your work!
b. Determine the absorption costing net operating income this year. Show your work!

Ans:

a. and b.
Last Year This Year
Variable costing net operating income..................... $71,000 $92,000
Add fixed manufacturing overhead costs deferred
in inventory under absorption costing................... 2,000 0
Deduct fixed manufacturing overhead costs
released from inventory under absorption costing 0 (11,000)
Absorption costing net operating income................. $73,000 $81,000

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Chapter 7 Variable Costing: A Tool for Management

159. Corbett Corporation manufactures a variety of products. Last year, variable costing net
operating income was $72,000. The fixed manufacturing overhead costs deferred in
inventory under absorption costing amounted to $29,000.
Required:

Determine the absorption costing net operating income last year. Show your work!

Ans:

Variable costing net operating income............................ $72,000

Add fixed manufacturing overhead costs deferred in
inventory under absorption costing.............................. 29,000
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing..................... 0
$101,00
Absorption costing net operating income........................ 0

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

LO: 3 Level: Easy

160. Last year, Rasband Corporation's variable costing net operating income was $57,000.
The fixed manufacturing overhead costs deferred in inventory under absorption
costing amounted to $30,000.

Required:

Determine the absorption costing net operating income last year. Show your work!
Ans:

$57,00
Variable costing net operating income............................ 0
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing.............................. 30,000
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing..................... 0
$87,00
Absorption costing net operating income........................ 0

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

LO: 3 Level: Easy

7-126 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 7 Variable Costing: A Tool for Management

161. Phinisee Corporation manufactures a variety of products. The following data pertain to
the company's operations over the last two years:

$82,70
Variable costing net operating income, last year............. 0
$87,80
Variable costing net operating income, this year............ 0
Increase in ending inventory, last year............................ 900
Decrease in ending inventory, this year........................... 3,100
Fixed manufacturing overhead cost per unit................... $2

Required:

a. Determine the absorption costing net operating income for last year. Show your
work!
b. Determine the absorption costing net operating income for this year. Show your
work!

Ans:
a. and b.
Last Year This Year
Change in units in ending inventory.......................... $900 ($3,100)
Fixed manufacturing overhead cost per unit.............. $2 $2
Change in fixed manufacturing overhead in ending
inventory................................................................. $1,800 ($6,200)

Variable costing net operating income....................... $82,700 $87,800

Add fixed manufacturing overhead costs deferred in
inventory under absorption costing........................ 1,800 0
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing............... 0 (6,200)
Absorption costing net operating income.................. $84,500 $81,600

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

LO: 3 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 7-127

Chapter 7 Variable Costing: A Tool for Management

162. Last year, Denogean Corporation's variable costing net operating income was $64,200
and ending inventory increased by 1,900 units. Fixed manufacturing overhead cost per
unit was $4.

Required:

Determine the absorption costing net operating income for last year. Show your work!

Ans:

Change in units in ending inventory..................................... $1,900

Fixed manufacturing overhead cost per unit........................ $4
Change in fixed manufacturing overhead in ending
inventory........................................................................... $7,600

Variable costing net operating income................................. $64,200

Add fixed manufacturing overhead costs deferred in
inventory under absorption costing................................... 7,600
Deduct fixed manufacturing overhead costs released from
inventory under absorption costing................................... 0
Absorption costing net operating income............................. $71,800

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

LO: 3 Level: Medium

7-128 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition