Chapter 21: Q-21-5RQ (page 1166)
When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? Why?
Answer
Operating income under absorption costing is higher compared to variable costing because some fixed costs remain in ending inventory unexpended.
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Why is it appropriate to use variable costing when planning production in the short term?
Using variable costing, service company Henry’s Helpers provides locksmith services. One type of service call is to evaluate private residences for security concerns and make recommendations for a safety plan. Use the data below to determine the company’s total contribution margin, contribution margin per service call, and contribution margin ratio when 220 service calls are made in the month of June.
Service Revenue $ 170 per service call
Variable Costs 68 per service call
Fixed Costs 21,040 per month
Using variable costing, service company Sherman Company provides carpet cleaning services to commercial and residential customers. Using the data below, determine the contribution margin ratio for each business segment, rounded to two decimal places:
Pierce Company had the following costs:
Units produced
500 units Manufacturing costs:
Direct materials
$ 25 per unit Direct labor
45 per unit Variable manufacturing overhead
15 per unit Fixed manufacturing overhead
5,000 per year Selling and administrative costs:
Variable selling and administrative costs
30 per unit Fixed selling and administrative costs
3,200 per year
Calculate the unit product cost using absorption costing and variable costing
The Stark Company manufactures a product that is expected to incur \(20 per unit in variable production costs and sell for \)40 per unit. The sales commission is 10% of the sales price. Due to intense competition, Stark actually sold 200 units for \(38 per unit. The actual variable production costs incurred were \)23.75 per unit. Calculate the total contribution margin and contribution margin ratio at the expected price/costs and the actual price/costs. How might management use this information?
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