Chapter 19: Q1DQ (page 867)
What costs are normally included in product costs under variable costing?
Under variable costing, the following costs are included in the product cost:
Direct materials, direct labor, and variable overhead.
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Under absorption costing a company had the following per unit costs when 10,000 units were produced.
Direct labor | \(2 |
Direct material | 3 |
Variable overhead | 4 |
Total variable cost | 9 |
Fixed overhead (\)50,000/10,000 units) | 5 |
Total product cost per unit | $14 |
1. Compute the company’s total product cost per unit if 12,500 units had been produced.
2. Why might a manager of a company using absorption costing produce more units than can currently be sold?
Samsung’s managers rely on reports of variable costs. How can variable costing reports prepared using the contribution margin format help managers in computing break-even volume in units?
Describe how use of absorption costing in determining income can lead to overproduction and a buildup of inventory. Explain how variable costing can avoid this same problem.
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?
Grand Garden is a luxury hotel with 150 suites. Its regular suite rate is \(250 per night per suite. The hotel’s cost per night is \)140 per suite and consists of the following.
Variable direct labor and material cost | \(30 |
Fixed cost | 110 |
Total cost per night per suite | \)140 |
The hotel manager received an offer to hold the local Bikers’ Club annual meeting at the hotel in March, which is the hotel’s low season with an occupancy rate of under 50%. The Bikers’ Club would reserve 50 suites for three nights if the hotel could offer a 50% discount, or a rate of \(125 per night. The hotel manager is inclined to reject the offer because the cost per suite per night is \)140. Prepare an analysis of this offer for the hotel manager. Explain (with supporting computations) whether the offer from the Bikers’ Club should be accepted or rejected.
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