Chapter 19: Q2QS (page 867)
Refer to Vijay Company’s data in QS 19-1. Compute its product cost per unit under variable costing.
The variable cost per unit is$40.
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Refer to the information about Ramort Company in QS 19-5. Compute contribution margin under variable costing.
Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.
2016 | 2017 | |
Sales (\(46 per unit) | \)920,000 | \(1,840,000 |
Cost of goods sold (\)31 per unit) | 620,000 | 1,240,000 |
Gross margin | 300,000 | 600,000 |
Selling and administrative expenses | 290,000 | 340,000 |
Net income | \(10,000 | \)260,000 |
Additional Information
Sales and production data for these first two years follow.
2016 | 2017 | |
Units produced | 30,000 | 30,000 |
Units sold | 20,000 | 40,000 |
Variable cost per unit and total fixed costs are unchanged during 2016 and 2017. The company’s \(31 per unit product cost consists of the following.
Direct materials | \)5 |
Direct labor | 9 |
Variable overhead | 7 |
Fixed overhead (\(300,000/30,000 units) | 10 |
Total product cost per unit | \)31 |
Selling and administrative expenses consist of the following.
2016 | 2017 | |
Variable selling and administrative expenses (\(2.50 per unit) | \)50,000 | \(100,000 |
Fixed selling and administrative expenses | 240,000 | 240,000 |
Total selling and administrative expenses | \)290,000 | $340,000 |
Required
1. Prepare income statements for the company for each of its first two years under variable costing.
2. Explain any difference between the absorption costing income and the variable costing income for these two years.
What conditions must exist to achieve accurate short-run pricing decisions using variable costing?
Question: Kenzi Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,050 kayaks and sold 800 at a price of \(1,050 each. At this first year-end, the company reported the following income statement information using absorption costing.
Sales (800 × \)1,050) | \(840,000 |
Cost of goods sold (800 × \)500) | 400,000 |
Gross margin | 440,000 |
Selling and administrative expenses | 230,000 |
Net income | 210,000 |
Additional Information
a. Product cost per kayak totals \(500, which consists of \)400 in variable production cost and \(100 in fixed production cost—the latter amount is based on \)105,000 of fixed production costs allocated to the 1,050 kayaks produced.
b. The \(230,000 in selling and administrative expense consists of \)75,000 that is variable and $155,000 that is fixed.
1. Prepare an income statement for the current year under variable costing.
2. Explain the difference in income between the variable costing and absorption costing income statement.
Assume that Samsung (Samsung.com) is considering offering a service similar to Apple’s iTunes music download store. However, instead of developing the division internally, Samsung is considering buying a company that already offers such services.
Required
Would absorption or variable costing be most useful to Samsung in evaluating whether to acquire an existing business that provides services similar to iTunes? Explain.
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