Chapter 19: Q10DQ (page 867)
Google uses variable costing for several business decisions. How can variable costing income statements be converted to absorption costing?
Variable costing income can be adjusted to absorption income by adding fixed costs allocated and deducting the previously allocated fixed cost.
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E-Com had net income of \(130,000 under variable costing. Beginning and ending inventories were 1,200 units and 4,900 units, respectively. Fixed overhead cost was \)2.50 per unit for both the beginning and ending inventory. What is net income under absorption costing?
When units produced exceed units sold for a reporting period, would income under variable costing be greater than, equal to, or less than income under absorption costing? Explain.
Empire Plaza Hotel is a luxury hotel with 400 rooms. Its regular room rate is \(300 per night per room. The hotel’s cost is \)165 per night per room and consists of the following.
Variable direct labor and material cost | \(40 |
Fixed cost | 125 |
Total cost per night per room | \)165 |
The hotel manager received an offer to hold the Junior States of America (JSA) convention at the hotel in February, which is the hotel’s low season with an occupancy rate of under 45%. JSA would reserve 100 rooms for four nights if the hotel could offer a 50% discount, or a rate of \(150 per night. The hotel manager is inclined to reject the offer because the cost per room per night is \)165. Prepare an analysis of this offer for the hotel manager. Explain (with supporting computations) whether the offer from JSA should be accepted or rejected.
Santana Rey expects sales of Business Solutions’ line of computer workstation furniture to equal 300 workstations (at a sales price of \(3,000 each) for 2018. The workstations’ manufacturing costs include the following.
Direct materials | \)800 per unit |
Direct labor | \(400 per unit |
Variable overhead | \)100 per unit |
Fixed overhead | \(24,000 per year |
The selling expenses related to these workstations follow.
Variable selling expenses | \)50 per unit |
Fixed selling expenses | $4,000 per year |
Santana is considering how many workstations to produce in 2018. She is confident that she will be able to sell any workstations in her 2018 ending inventory during 2019. However, Santana does not want to overproduce as she does not have sufficient storage space for many more workstations.
Required
1. Compute Business Solutions’s absorption costing income assuming
a. 300 workstations are produced.
b. 320 workstations are produced.
2. Compute Business Solutions’s variable costing income assuming
a. 300 workstations are produced.
b. 320 workstations are produced.
3. Explain to Santana any differences in the income figures determined in parts 1 and 2. How should Santana use the information from parts 1 and 2 to make production decisions?
Diaz Company reports the following variable costing income statement for its single product. This company’s sales totaled 50,000 units, but its production was 80,000 units. It had no beginning finished goods inventory for the current period.
DIAZ COMPANY
Income Statement (Variable Costing)
Sales (50,000 units × \(60 per unit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \)3,000,000 Variable expenses
Variable manufacturing expense (50,000 units × \(28 per unit) . . . . . . . . . . . . . . . . . . 1,400,000 Variable selling and admin.expense (50,000 units × \)5 per unit) . . . . . . . . . . . . . . . . 250,000
Total variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,650,000 Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350,000 Fixed expenses
Fixed overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,000
Fixed selling and administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000
Total fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 870,000
1. Convert this company’s variable costing income statement to an absorption costing income statement.
2. Explain the difference in income between the variable costing and absorption costing income statement.
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