Problems for Absorption and

Variable Costing
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Unit/Module Absorption and Variable Costing

Week

 Shu Corporation manufactures and sells a hand held calculator. The following
information relates to Shun's operation 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?
Solution:

Unit product cost under VC $5.20

FMOH cost/unit $260,000/400,000 0.65
Unit produced cost under AC $5.85

 A manufacturing company that produces a single product has provided the

following data concerning its most recent month of operations:

Problems for Absorption and Variable Costing 1

 What is the total period cost for the month under the variable costing
approach?
Solution:
Variable selling & administrative 8 x 6,300 50,400
Fixed selling & administrative 88,200
FMOH 46,200
Period cost under VC $184,800

 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 cost per unit:

Problems for Absorption and Variable Costing 2

 Direct materials $33
Direct labor $53

Variable manufacturing overhead $1

Variable selling & administrative $7

Fixed costs:

Fixed manufacturing overhead $170,400

Fixed selling & administrative $7,000

What is the unit product cost for the month under variable costing?

Solution:
Direct materials $33

Direct labor $53

Variable manufacturing overhead $1

Product cost $87

 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:

Problems for Absorption and Variable Costing 3

 Direct materials $32
Direct labor $25

Variable manufacturing overhead $2

Variable selling & administrative $9

Fixed costs:
Fixed manufacturing overhead $8,800

Fixed selling & administrative $37,800

What is the total period cost for the month under the absorption costing
approach?

Solution:

Fixed selling & administrative $37,800

Variable selling & administrative $9 x 2,100 18,900

Period cost under AC $56,700

 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

Variable costs per unit:

Direct materials $1.50

Problems for Absorption and Variable Costing 4

 Direct labor $2.50

Variable manufacturing overhead $1

Variable selling & administrative $2

7
Fixed costs per year:

Fixed manufacturing overhead $200,000

Fixed selling & administrative $50,000

What was the absorption costing net operating income last year?

Solution:

Sales 98,000 x $10 $980,000

COGS
Beg. inventory 0

COGM 100,000 x 7 700,000

TGAS 700,000

End. Inventory 2,000 x 7 14,000 686,000

Gross margin $294,000

Selling & Administrative expense

Variable selling & admin. expense

$2 x 98,000 196,000

Fixed selling & admin. expense 50,000 246,000

Operating income under AC $48,000

 A manufacturing company that produces a single product has provided the

following data concerning its most recent month of operations:

Selling price $135

Problems for Absorption and Variable Costing 5

 Units in beg. inventory 0

Units produced 6,400

Units sold 6,200

Units in ending inventory 200

Variable cost per unit:

Direct materials $49

Direct labor $38

Variable manufacturing overhead $6 $93

Variable selling & administrative $11

Fixed costs:

Fixed manufacturing overhead $108,800

Fixed selling & administrative $74,400

The total contribution margin for the month under the variable costing
approach is:

Solution:

Sales $135 x 6,200 $837,000

Variable Cost of Sales:

Beg. inventory 0

COGM 6,400 x $93 $595,200

TGAS 595,200
End. inventory 200 x $93 18,600
VCOGS 576,600

Variable S & E expense 11 x 6,200 68,200 644,800

Problems for Absorption and Variable Costing 6

 Contribution margin $192,200

 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?
Solution:

VC/unit $9

VSE 1
Product cost FMOH 8

Product cost per unit 11

FMOH per unit $3

Difference in NOI 3,600

Divide: FMOH 3

Units difference 1,200 unit

Units sold 10,000

Unit difference 1,200

Units produced 8,800 units

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

Year 1
Year 2
Units (spice racks) produced 40,000
40,000

Problems for Absorption and Variable Costing 7

 Units (spice racks) sold 37,000
41,000
Absorption costing net operating income $44,000
$52,000

Variable costing net operating income $38,000

???

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?
Solution:

Unit FMOH Cost: 44,000 - 38,000 = 6,000 = $2 per unit

40,000 - 37,000 3,000

NOI under AC $52,000

Add: FMOH cost released

from inventory under AC 1,000 x $2 2,000

NOI under VC $54,000

 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?

Solution:
NOI under VC $90,900

Deduct: FMOH cost 21,900

NOI under AC $69,000

Problems for Absorption and Variable Costing 8

  Phearsum Corporation manufactures a parachute. Shown below is Phearsum's
cost structure:
Variable cost per parachute Total
fixed cost for the year
Manufacturing cost $160
$342,000

Selling and administrative $10

$171,000

In its first year of operation, Phearsum produced and sold 4,000 parachutes.
The parachutes sold for $310 each.
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?
Solution:

Units in ending inventory 200

Variable Manufacturing cost $160
FGI under VC $32,000

 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?
Solution:

NOI under VS $40,000

Add: FMOH cost deferral in inventory under AC
27,000 - 22,000 x 3 15,000

NOI under AC $55,000

Problems for Absorption and Variable Costing 9

Problems for Absorption and Variable Costing 10