Chapter 21: Q-21-2RQ (page 1167)
What is variable costing?
Answer
Variable costing is the modern method of calculating product cost per unit.
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Question: Chaney Company provides lawn care services. Following are data for a recent week:
Service Revenue \(1,300
Variable Costs \)780
Contribution Margin $520 Chaney provided service to 25 customers during the week. Determine the average amount the company charged each customer, the variable cost per customer, and the contribution margin ratio.
When units produced are less than units sold, how does operating income differ between variable costing and absorption costing? Why
: Before you begin this assignment, review the Tying It All Together feature in the chapter. CF Industries Holdings, Inc. is one of the largest manufacturers and distributors of nitrogen fertilizer and other nitrogen products in the world. The corporation often produces and stores large amounts of inventory during periods of low demand to ensure that there is enough product to meet the demand of peak seasons. Assume that one line of fertilizer (with no beginning Finished Goods Inventory) had the following data during a time period of low demand:
Sales price $ 20.00 per case Variable manufacturing costs 4.00 per case Fixed manufacturing costs 100,000 per quarter Variable selling and administrative costs 2.00 per case Fixed selling and administrative costs 45,000 per quarter Given that the time period has low demand, assume the company produced 1,000,000 cases but only sold 250,000 cases.
Requirement
1. Prepare the income statement for the quarter using variable costing.
2. Prepare the income statement for the quarter using absorption costing.
3. Why, if at all, is there a difference between operating income under the two methods?
Question: Preparing variable and absorption costing income statements
Game Store manufactures video games that it sells for \(38 each. The company uses a fixed manufacturing overhead allocation rate of \)3 per game. Assume all costs and production levels are exactly as planned. The following data are from Game Store’s first two months in business during 2018:
October November
Sales 1,500 units 2,900 units
Production 2,800 units 2,800 units
Variable manufacturing cost per game \( 16 \) 16
Sales commission cost per game 8 8
Total fixed manufacturing overhead 8,400 8,400
Total fixed selling and administrative costs 8,000 8,000 Requirements
1. Compute the product cost per game produced under absorption costing and under variable costing.
2. Prepare monthly income statements for October and November, including columns for each month and a total column, using these costing methods:
a. absorption costing.
b. variable costing.
3. Is operating income higher under absorption costing or variable costing in October? In November? Explain the pattern of differences in operating income based on absorption costing versus variable costing.
4. Determine the balance in Finished Goods Inventory on October 31 and November 30 under absorption costing and variable costing. Compare the differences in inventory balances and the differences in operating income. Explain the differences in inventory balances based on absorption costing versus variable costing.
Computing variable costing contribution margin
Refer to your answers to Short Exercise S21-6. Product X sells for \(175 per unit. Assume no beginning inventories. Calculate the contribution margin using variable costing when Adamson:
S21-6 Direct materials \) 41 per unit Direct labor 57 per unit Variable manufacturing overhead 7 per unit Fixed manufacturing overhead 20,000 per year
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