Chapter 05

CH APTE R 5 Marginal or Variable Costing TRUE-FALSE 1.

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

2.

The cost of goods sold is always higher using varible costing than full costing.

3.

Sales is higher using full costing than using variable costing if inventory levels are increasing.

4.

The units sold are higher using variable costing than using full costing.

5.

If a company has no fixed costs, then variable costing income will equal full costing income.

6.

Variable costing income is more useful for decision making.

7.

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

8.

Full costing defers fixed costs of production into ending inventory.

9.

The total selling and administrative expense is the same using variable and full costing.

10.

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

11.

Income statements of manufacturing firms prepared for external purposes use variable costing.

12.

Full costing ending inventory includes fixed and variable production costs.

13.

Variable costing ending inventory includes variable production costs and variable selling and administrative costs.

14.

Contribution margin is reported on a variable costing income statement.

15.

If sales equals production, then contribution margin will equal gross profit (margin).

16.

Full costing income can be increased by increasing production without increasing sales.

17.

When the number of units produced exceeds the number of units sold, variable costing yields a higher income than full costing.

18.

Variable costing income can be increased by increasing production without increasing sales.

5-2

Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

19.

The inventory cost per unit under variable costing will be reduced if the number of units produced increases.

20.

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

21.

Full costing can give higher income than variable costing as long as inventory levels continue to increase.

22.

There are no cash flow consequences associated with increasing full costing income through increasing production.

23.

Just-in-time (JIT) inventory management systems cause a much larger difference between variable costing income and full costing income.

24.

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

25.

Variable costing facilitates C-V-P analysis.

Answers 1 2 3 4 5

T F F F T

6 7 8 9 10

T F T T T

11 12 13 14 15

F T F T F

16 17 18 19 20

T F F F T

21 22 23 24 25

T F F F T

Chapter 5 Variable Costing

MULTIPLE CHOICE 26.

Full costing A. is the same as absorption costing. B. considers fixed manufacturing overhead as part of the cost of inventory. C. often does not provide the information needed for C-V-P analysis. D. All of the above choices are correct.

27.

Which of the following is treated differently in full costing than in variable costing? A. Direct materials B. Fixed manufacturing overhead C. Direct labor D. Variable manufacturing overhead

28.

Which of the following is treated as a product cost in variable costing? A. Sales commissions B. Administrative salaries C. Fixed manufacturing overhead D. Direct labor

29.

Which of the following is treated as a product cost in full costing? A. Sales commissions B. Administrative salaries C. Security at the factory D. Security at corporate headquarters

30.

Full costing is A. more useful for decision making. B. required for financial reporting under generally accepted accounting principles. C. better because income cannot be affected by increasing production. D. All of the above.

31.

In variable costing, when does fixed manufacturing overhead become an expense? A. Never. B. In the period when the product is sold. C. In the period when the expense is incurred. D. In the period when other expenses are at the lowest level.

32.

In full costing, when does fixed manufacturing overhead become an expense? A. In the period when other fixed costs are at the highest level. B. In the period when the product is sold. C. In the period when the expense is incurred. D. When the controller decides that the expense should be recognized.

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Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

33.

In variable costing, which of the following would be included in inventory? A. Fixed production cost B. Variable selling cost C. Fixed selling costs D. none of the above items would be in inventory in variable costing

34.

In full costing, which of the following would be included in inventory? A. Fixed production cost B. Variable selling cost C. Fixed selling costs D. None of the above items would be in inventory in full costing

35.

Noth Company’s manufacturing costs for 2010 are as follows: Direct materials Direct labor Depreciation of factory equipment Other fixed manufacturing overhead

$86,000 $102,000 $41,000 $72,000

What amount should be considered product costs for external reporting purposes? A. $260,000 B. $188,000 C. $229,000 D. $301,000 36.

Train Company’s fixed manufacturing overhead costs totaled $220,000 and variable selling costs totaled $190,000. Under full costing, how should these costs be classified?

A. B. C. D. 37.

Period Costs $190,000 $410,000 $0 $220,000

Product Costs $220,000 $0 $410,000 $190,000

West Company’s manufacturing costs for 2010 are as follows: Direct materials Direct labor Depreciation of factory equipment Other fixed manufacturing overhead

$100,000 $250,000 $30,000 $50,000

What amount should be considered product costs for external reporting purposes? A. $430,000 B. $380,000 C. $350,000 D. $400,000

Chapter 5 Variable Costing

38.

Wilson Company’s fixed manufacturing overhead costs totaled $400,000 and variable selling costs totaled $250,000. Under full costing, how should these costs be classified?

A. B. C. D. 39.

5-5

Period Costs $400,000 $0 $650,000 $250,000

Product Costs $250,000 $650,000 $0 $400,000

Peak Manufacturing produces snow blowers. The selling price per snow blower is $100. Costs involved in production are: Direct Material per unit Direct Labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year

$20 12 10 $148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Peak produces 45,000 snow blowers and sells 30,000 snow blowers. Ignoring taxes, how much will full costing profit differ from variable costing profit? A. $148,500 B. $49,500 C. $94,500 D. $74,250 40.

Which of the following items appears on a variable costing income statement but not on a full costing income statement? A. Sales B. Gross margin C. Net income D. Contribution margin

41.

Variable costing income is a function of: A. units sold only B. units produced only C. both units sold and units produced D. neither units sold nor units produced

42.

Which of the following items on a variable costing income statement will change in direct proportion to a change in sales? A. Sales, contribution margin, income. B. Sales, variable costs, contribution margin. C. Sales, variable costs, contribution margin, fixed costs and income. D. Sales, variable costs, and fixed costs.

5-6

Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

43.

If income is positive and fixed costs exist, which will increase or decrease at a greater rate than sales changes on a variable costing income statement? A. Variable costs B. Fixed costs C. Contribution margin D. Income

44.

Nilsan Company experienced the following costs in 2010: Direct materials Direct labor Variable manufacturing overhead Variable selling Fixed manufacturing overhead Fixed selling Fixed administrative

$2.25 / unit $4.10 / unit $0.75 / unit $3.00 / unit $60,000 $35,000 $20,000

During 2010 the company manufactured 120,000 units and sold 145,000 units. Assume the same unit costs in all years. Total variable costs on the company’s 2010 contribution income statement will be: A. $1,464,500 B. $1,029,500 C. $1,102,000 D. $1,537,000 45.

Washington Supply Company experienced the following costs in 2010: Direct materials Direct labor Manufacturing Overhead Costs Variable Fixed Selling & Administrative Costs Variable selling Fixed selling Fixed administrative

$3.50 / unit $2.55 / unit $1.50 / unit $20,000 $2.15 / unit $8,000 $7,000

During the year the company manufactured 95,000 units and sold 80,000 units. If the average selling price per unit was $20, how much was the company’s contribution margin? A. $996,000 B. $776,000 C. $824,000 D. $1,116,000

Chapter 5 Variable Costing

46.

5-7

Spacet Excavating Company experienced the following costs in 2010: Direct materials Direct labor Variable manufacturing overhead Variable selling Fixed manufacturing overhead Fixed selling Fixed administrative

$1.75 / unit $2.00 / unit $2.50 / unit $.75 / unit $50,000 $15,000 $5,000

During the year the company manufactured 100,000 units and sold 80,000 units. If the average selling price per unit was $22.65 what is the company’s contribution margin per unit? A. $16.40 B. $15.65 C. $18.90 D. $13.65 47.

Data from Madison Company for 2010 is as follows: Sales Variable cost of goods sold Fixed manufacturing overhead Variable selling & administrative Fixed selling & administrative

$20 / unit ?? $85,000 ?? $150,000

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

5-8

Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

48.

During the past year, Cutt Company manufactured 25,000 units and sold 20,000 units. Production costs during the year were as follows: Fixed manufacturing overhead Variable manufacturing overhead Direct labor Direct materials

$550,000 $380,000 $278,000 $214,000

Sales totaled $1,270,000, variable selling and administrative costs totaled $110,000, and fixed selling and administrative costs totaled $170,000. There were no units in beginning inventory. How much is the contribution margin per unit? A. $6.62 B. $23.12 C. $28.62 D. $24.22 49.

Peak Manufacturing produces snow blowers. The selling price per snow blower is $100. Costs involved in production are: Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year

$20 12 10 $148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Peak produces 45,000 snow blowers and sells 30,000 snow blowers. What is variable cost of goods sold? A. $1,408,500 B. $1,260,000 C. $1,359,900 D. $2,038,500 50.

Peak Manufacturing produces snow blowers. The selling price per snow blower is $100. Costs involved in production are: Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year

$20 12 10 $148,500

Chapter 5 Variable Costing

5-9

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Peak produces 45,000 snow blowers and sells 30,000 snow blowers. How much is net income using variable costing? A. $1,440,000 B. $1,740,000 C. $1,491,000 D. $1,441,500 51.

The following information relates to Carmin Industries for fiscal 2011, the company’s first year of operations: Units produced Units sold Units in ending inventory Fixed manufacturing overhead

100,000 80,000 20,000 $650,000

How much fixed manufacturing overhead would be expensed in 2011 using variable costing? A. $520,000 B. $130,000 C. $650,000 D. $0 52.

Lenat’s contribution income statement utilizing variable costing appears below: Lenat Company Income Statement For the Year ended December 31, 2010 Sales ($28 / unit) $1,120,000 Less variable costs: Cost of goods sold 560,000 Selling & administrative costs 96,000 656,000 Contribution margin 464,000 Less fixed costs: Manufacturing overhead 80,000 Selling & administrative costs 90,000 170,000 Profit $294,000 Lenat Company produced 50,000 units during the year. Variable costs per unit and fixed production costs have remained constant the entire year. There were no beginning inventories. How much is the dollar value of the ending inventory using full costing? A. $140,000 B. $160,000 C. $156,000 D. $128,000

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Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

Multiple Choice Answers 26 D 41 C 27 B 42 B 28 D 43 D 29 C 44 A 30 B 45 C 31 C 46 B 32 B 47 B 33 D 48 B 34 A 49 B 35 D 50 D 36 A 51 C 37 A 52 C 38 D 39 B 40 D

Chapter 5 Variable Costing

5-11

EXERCISES 110.

Bud Cooling Company is a small manufacturer of window air conditioners. The units sell for $150 each. In 2011, the company produced 1,000 units and sold 800 units. Below are variable and full costing income statements for 2011. Bud Cooling Company Variable Costing Income Statement For the Year Ending December 31, 2011 Sales Less variable costs: Variable cost of goods sold Variable selling expense Contribution margin Less fixed costs: Fixed manufacturing expense Fixed selling expense Fixed administrative expense Net income

$120,000 $15,000 5,000

20,000 100,000

25,000 10,000 15,000

50,000 $50,000

Bud Cooling Company Full Costing Income Statement For the Year Ending December 31, 2011 Sales Less cost of goods sold Gross margin Less selling and administrative expenses: Selling expense Administrative expense Net income

$120,000 35,000 85,000 $15,000 15,000

Reconcile the difference in profit between the two income statements. Answer Fixed manufacturing overhead Divided by units produced Fixed manufacturing overhead per unit

$25,000 1,000 $ 25.00

Amount of fixed manufacturing overhead in ending inventory: $25 × 200 units = $5,000

30,000 $55,000

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Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

111.

The following information is available for Captain Spa, a manufacturer of above-ground spa kits: 2011 2012 Total Units produced 20,000 16,000 36,000 Units sold 18,000 18,000 36,000 Selling price per unit Direct material per unit Direct labor per unit

$8,000 $1,600 $3,000

$8,000 $1,600 $3,000

Variable manufacturing overhead per unit $600 $600 Fixed manufacturing overhead per year $4,800,000 $4,800,000 Fixed selling and administrative expense per year$3,000,000 $3,000,000 In its first year of operations, the company produced 20,000 units, but was only able to sell 18,000 units. In its second year, the company needed to get rid of excess inventory (the extra 2,000 units produced but not sold in 2011) so it cut back production to 16,000 units. a. b.

Calculate profit for both years using variable costing. Does variable costing profit present a more realistic view of firm performance in the two years? Explain.

Answer a. Variable manufacturing costs per unit Sales ($8,000 × 18,000 units) Less cost of goods sold: ($5,200 × 18,000 units) Contribution margin Less fixed costs: Manufacturing Selling and administrative Net income Ending inventory ($5,200 × 2,000) b.

2011 $5,200

2012 $5,200

Total

$144,000,000 $144,000,000 93,600,000 50,400,000

93,600,000 50,400,000

4,800,000 3,000,000 $42,600,000

4,800,000 3,000,000 $42,600,000

$10,400,000

$0

$85,200,000

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

Chapter 5 Variable Costing

112.

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Raeon, Inc. produces car radios. The selling price per radio is $1,000. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$100 100 50 $250,000

In addition, the company has fixed selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year

$175,000 $75,000

During the year, Raeon produces 1,000 car radios and sells 800 radios. What is the value of ending inventory using variable costing? Answer Ending inventory under variable costing: $250 × 200 = $50,000 113.

Raeon, Inc. produces car radios. The selling price per radio is $1,000. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$100 100 50 $250,000

In addition, the company has fixed selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year

$175,000 $75,000

During the year, Raeon produces 1,000 car radios and sells 800 radios. How much is profit using variable costing? Answer Sales ($1,000 × 800) Less variable cost of goods sold ($250 × 800) Contribution margin Less Fixed manufacturing overhead Selling expense Administrative expense Profit

$ 800,000 200,000 600,000 $250,000 175,000 75,000

500,000 $100,000

5-14

Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

114.

Raeon, Inc. produces car radios. The selling price per radio is $1,000. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$100 100 50 $250,000

In addition, the company has fixed selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year

$175,000 $75,000

During the year, Raeon produces 1,000 car radios and sells 800 radios. a. How much is profit using full costing? b. How much fixed manufacturing overhead is in ending inventory under full costing? Answer a.

VC: $1,000 - $250 =

$750

$750 × 800 = $600,000 Less FC = $175,000 + $75,000 = 250,000 Profit = $ 350,000 b.

$250 × 200 = $50,000

Chapter 5 Variable Costing

115.

5-15

Below is a variable costing income statement for Wilner Glass Company, a maker of bottles for the beverage industry. For the coming year, the company is considering hiring two additional sales representatives at $80,000 each for base salary plus 5 percent of their sales for commissions. The company anticipates that each sales representative will generate $900,000 of incremental sales. The budget for 2011 follows: Wilner Glass Company Budgeted Variable Costing Income Statement For the Year Ending December 31, 2011 Sales Less variable costs: Cost of goods sold Selling expense Contribution margin Less fixed costs: Manufacturing expense Selling expense Administrative expense Net income

$15,000,000 $5,000,000 4,000,000

2,300,000 1,200,000 2,000,000

9,000,000 6,000,000

5,500,000 $ 500,000

Calculate the impact on profit of the proposed hiring decision. Should the company hire the two additional sales representatives? Answer Contribution margin ÷ sales = contribution margin ratio $6,000,000 ÷ $15,000,000 = 0.40 (Incremental sales × CMR) – incremental salaries = incremental profit ($1,800,000 × .40) - $160,000 – ($1,800,000 × .05) = $470,000 profit increase Since profit increases, Wilner Glass Company should hire the two additional sales representatives.

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Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

116.

Superior Electronics produces a wireless home security device that allows consumers to arm/disarm their security system from their cars. Information on the first three years of business is as follows:

Units sold Units produced Fixed production costs Variable production costs per unit Selling price per unit Fixed selling and administrative expense a. b.

2012 20,000 25,000 $500,000 `$100 $200

$150,000

$150,000

2013 20,000 15,000 $500,000 $100 $200

Total 60,000 60,000

$150,000

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

Answer a. Units sold Selling price per unit Sales Less variable cost of goods sold: ($100 × 20,000) Contribution margin Less fixed costs: Production Selling and administrative Profit Ending inventory ($100 × 5,000) c.

2011 20,000 20,000 $500,000 $100 $200

2011 20,000 $ 200 $4,000,000

2012 20,000 $ 200 $4,000,000

2013 20,000 $ 200 $4,000,000

2,000,000 2,000,000

2,000,000 2,000,000

2,000,000 2,000,000

500,000 150,000 $1,350,000

500,000 150,000 $1,350,000

500,000 150,000 $1,350,000

$0

$500,000

$0

Profit does not fluctuate each period. Fixed manufacturing overhead is treated as a period cost and expensed each year even if units produced differ from the units sold.

Chapter 5 Variable Costing

5-17

117. The following information is available for Captain Spa, a manufacturer of above-ground spa kits: 2011 2012 Total Units produced 20,000 16,000 36,000 Units sold 18,000 18,000 36,000 Selling price per unit $8,000 $8,000 Direct material per unit $1,600 $1,600 Direct labor per unit $3,000 $3,000 Variable manufacturing overhead per unit $600 Fixed manufacturing overhead per year $4,800,000 Fixed selling and administrative expenseper year $3,000,000

$600 $4,800,000 $3,000,000

In its first year of operation, the company produced 20,000 units, but was only able to sell 18,000 units. In its second year, the company needed to get rid of excess inventory (the extra 2,000 units produced but not sold in 2011) so it cut back production to 16,000 units. Calculate profit for both years using full costing. Answer Fixed manufacturing overhead Divided by units produced Fixed manufacturing overhead per unit Variable manufacturing costs per unit Full cost per unit Sales ($8,000 × 18,000 units) Less cost of goods sold: ($5,440 × 18,000) ($5,440 × 2,000 + $5,500 × 16,000) Gross margin Less selling and administrative expense Net income

2011 $4,800,000 20,000 240 5,200 $ 5,440 $144,000,000

2012 $4,800,000 16,000 300 5,200 $ 5,500 $144,000,000

97,920,000 46,080,000 3,000,000 $43,080,000

98,880,000 45,120,000 3,000,000 $42,120,000

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Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

118.

The following information relates to Ixim Production for fiscal year 2011, the company’s first year of operations: Units produced 20,000 Units sold 17,000 Selling price per unit $30 Direct material per unit $5 Direct labor per unit $5 Variable manufacturing overhead per unit $2 Variable selling cost per unit $3 Annual fixed manufacturing overhead $160,000 Annual fixed selling and administrative expense $80,000 a. b.

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

Answer a. Ixim Production Full Costing Income Statement For the Year Ending December 31, 2011 Sales ($30 × 17,000) Less cost of goods sold ($20 × 17,000)* Gross margin Less selling and administrative expenses: Fixed selling and administrative expense Variable selling expenses ($3 × 17,000) Profit

$510,000 340,000 170,000 $80,000 51,000

131,000 $39,000

* Product cost per unit: $5 + $5 + $2 + $8 = $20 b. Ixim Production Variable Income Statement For the Year Ending December 31, 2011 Sales ($30 × 17,000) Less variable expenses Production costs ($12 × 17,000) Selling costs ($3 × 17,000) Contribution margin Less fixed expenses Manufacturing overhead Selling and administrative Profit

$510,000 204,000 51,000

160,000 80,000

255,000 255,000

240,000 $15,000

Chapter 5 Variable Costing

119.

A company has a variable manufacturing cost of $3.00 per unit, a variable selling cost of $1.00 per unit; a fixed manufacturing cost of $100,000 per year; and a fixed selling and administrative cost of $60,000 per year. The selling price is $9.00 per unit. During the year, 50,000 units are produced and 42,000 units are sold. a. What is the cost per unit of inventory using variable costing? b. What is the cost per unit of inventory using full costing? c. Prepare an income statement without report titles using variable costing. d. Prepare an income statement without report titles using full costing.

Answer: a.

$3.00

b.

$3.00 + (100,000 / 50,000) = $5.00

c.

Sales (42,000 × $9) Variable Mfg Cost (42,000 × $3) $126,000 Variable Selling Cost (42000 × $1) 42,000 Contribution Margin Fixed Production Costs 100,000 Fixed Selling & Admin Costs 60,000 Net Income

$378,000

Sales (42,000 × $9) Cost of Goods Sold (42,000 × $5) Gross Profit Selling & Admin [$60,000 + ($1 × 42,000)] Net Income

$378,000 210,000 $168,000 102,000 $ 66,000

d.

120.

5-19

168,000 $210,000 $160,000 $ 50,000

Raeon, Inc. produces car radios. The selling price per radio is $1,000. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$100 100 50 $250,000

In addition, the company has fixed selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year

$175,000 $75,000

During the year, Raeon produces 1,000 car radios and sells 800 radios. What is the value of ending inventory using full costing?

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Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

Answer Variable cost per unit Fixed manufacturing overhead per unit ($250,000 ÷ 1,000 units) Full cost per unit

$250 250 $500

Ending inventory under full costing: $500 × 200 units = $100,000 121.

Raeon, Inc. produces car radios. The selling price per radio is $1,000. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$100 100 50 250,000

In addition, the company has fixed selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year

$175,000 75,000

During the year, Raeon produces 1,000 car radios and sells 800 radios. How much is profit using full costing? Answer Sales ($1,000 × 800 pairs) Less: Cost of goods sold ($500 × 800 pairs) Gross margin Less: Selling expenses 175,000 Administrative expense 75,000 Profit 122.

$800,000 400,000 400,000 250,000 $150,000

Superior Electronics produces a wireless home security device that allows consumers to arm/disarm their security system from their cars. Information on the first three years of business is as follows:

Units sold Units produced Fixed production costs Variable production costs per unit Selling price per unit Fixed selling and administrative expense

2011 20,000 20,000 $500,000 $100 $200

2012 20,000 25,000 $500,000 $100 $200

2013 20,000 15,000 $500,000 $100 $200

$150,000

$150,000

$150,000

Total 60,000 60,000

Chapter 5 Variable Costing

a. b.

5-21

Calculate profit and the value of ending inventory for each year using full costing. Explain why profit fluctuates from year to year even though the number of units sold, the selling price, and the cost structure remain constant.

Answer 2011 Fixed production overhead $500,000 Divided by units produced 20,000 Fixed production overhead per unit $25.00 Variable production costs per unit 100.00 Full cost per unit $125.00

2012 $500,000 25,000 $20.00 100.00 $120.00

2013 $500,000 15,000 $33.33 100.00 $133.33

Sales ($200 × 20,000 units) $4,000,000 Less cost of goods sold: ($125 × 20,000) 2,500,000 ($120 × 20,000) ($120 × 5,000) + ($133.33 × 15,000)

$4,000,000

$4,000,000

Gross margin Less selling and admin expense Net income

1,500,000 150,000 $1,350,000

1,600,000 150,000 $1,450,000

1,400,050 150,000 $1,250,050

Ending inventory($120 × 5,000)

$0

$600,000

$0

2,400,000 2,599,950

b.

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

123.

Last month, RainRunner produced 90,000 buckets and sold 85,000 of them at a price of $30 per bucket. Manufacturing costs consisted of direct materials of $200,000, direct labor of $320,000, variable manufacturing overhead of $155,000 and fixed manufacturing overhead of $396,000. General and administrative fixed costs totaled $60,000. a. b.

Calculate RainRunner’s net income using full costing. Calculate RainRunner’s net income using variable costing.

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Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

Answer a.

Revenue = 85,000 × $30 = $2,550,000 Cost of goods sold = ($7.5 × 85,000) + ($4.4 × 85,000) = $1,011,500 Net income = $2,550,000 – $1,011,500 – $60,000 = $1,478,500

b.

Revenue = 85,000 × $30 = $2,550,000 Cost of goods sold = ($7.50 × 85,000) = $637,500 Net income = $2,550,000 – $637,500 – $396,000 – $60,000 = $1,456,500

124.

A company has $8.00 per unit in variable production costs and $3.00 per unit in variable selling and administrative costs. The annual fixed production cost is $180,000. The annual fixed selling and administrative cost is $20,000. a.

Complete the table below for the number of units and dollar value of ending inventory for each year. Assume a FIFO flow.

Units Produced Units Sold Units in ending inventory Ending inventory using variable costing Ending inventory using full costing b.

2010 60,000 55,000

2011 70,000 72,000

2012 80,000 82,000

2013 90,000 91,000

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

Chapter 5 Variable Costing

5-23

Answer a. 2010 Units Produced 60,000 Units Sold 55,000 Units in ending inventory 5,000 Ending inventory using variable costing $3 × 5,000 = $15,000 $3 × 3000 = $3 × 1,000 = Ending inventory using full costing $6 × 5,000 = $30,000 $5.57 × 3,000 = ($5.25 × 1,000) - $5,250 b.

2011 70,000 72,000 3,000

2012 80,000 82,000 1,000

2013 90,000 91,000 0

$3,000

$0

$9,000

$16,710 $0

Since sales equals production for the 4 year period, income would be the same.

SHORT-ANSWER ESSAYS 125.

Explain the significant difference between variable costing and full costing.

Answer The significant difference between variable costing and full costing is the treatment of fixed manufacturing overhead. In variable costing, fixed manufacturing overhead is treated as a period cost and expensed as it is incurred. In full costing, fixed manufacturing overhead is considered a cost that becomes part of inventory and is not expensed until the goods are sold. 126.

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

Answer The format separates fixed and variable costs facilitating cost-volume-profit analysis. Also, it discourages over-production since managers cannot increase income by increasing production. 127.

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

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

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Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition

128.

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

Answer It is possible that a growing company can do this. The only way to do this is to produce more than is sold in each year. This will result in a continuous buildup of inventory. For most companies, that would not be a good strategy as it would lead to expensive cash outflow for buildups of inventories along with all the associated carrying costs. 129.

What is the implication of a company being JIT on the full costing versus variable costing discussion?

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