Chapter 19: Q5DQ (page 867)
How can absorption costing lead to incorrect short-runpricing decisions?
Absorption costing leads to incorrect short-run pricing decisions because it skews the picture of an organization’s profitability. It does not improve the business operation of the company.
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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?
Refer to the information in QS 19-16. The company sells its product for \(50 per unit. Due to new regulations, the company must now incur \)2 per unit of hazardous waste disposal costs and $8,500 per year of fixed hazardous waste disposal costs. Compute the contribution margin per unit, including hazardous waste disposal costs.
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.
Aces Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. Each racket was sold at a price of \(90. Fixed overhead costs are \)78,000, and fixed selling and administrative costs are \(65,200. The company also reports the following per unit variable costs for the year. Prepare an income statement under variable costing.
Variable product costs \)25.00
Variable selling and administrative expenses 2.00
Azule Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.
2016 | 2017 | |
Sales (\(35 per unit) | \)1,925,000 | \(2,275,000 |
Cost of goods sold (\)26 per unit) | 1,430,000 | 1,690,000 |
Gross margin | 495,000 | 585,000 |
Selling and administrative expenses | 465,000 | 495,000 |
Net income | \(30,000 | \)90,000 |
Additional information
2016 | 2017 | |
Units produced | 60,000 | 60,000 |
Units sold | 55,000 | 65,000 |
Direct materials | \)4 |
Direct labor | 6 |
Variable overhead | 8 |
Fixed overhead (\(480,000/60,000 units) | 8 |
Total product cost per unit | \)26 |
2016 | 2017 | |
Variable selling and administrative expenses (\(3 per unit) | \)165,000 | \(195,000 |
Fixed selling and administrative expenses | 300,000 | 300,000 |
Total selling and administrative expenses | \)465,000 | $495,000 |
Required
1. Prepare this company’s income statements under variable costing for each of its first two years.
2. Explain any difference between the absorption costing income and the variable costing income for these two years.
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