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Exam 19: Variable Costing and Performance Reporting

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Question 91

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On a contribution margin income statement,expenses are grouped according to _______________.

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Question 92

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Decko Industries reported the following monthly data: $\begin{array}{ll}\text { Units produced } & 52,000 \text { units } \\\text { Sales price } & \$ 33 \text { per unit } \\\text { Direct materials } & \$ 1.50 \text { per unit } \\\text { Direct labor } & \$ 2.50 \text { per unit } \\\text { Variable overhead } & \$ 3.50 \text { per unit } \\\text { Fixed overhead } & \$ 234.000 \text { in total }\end{array}$ What is the company's contribution margin for this month if 50,000 units were sold?

A) $1,326,000
B) $1,716,000
C) $1,275,000
D) $1,650,000
E) $1,450,000

F) A) and C)
G) A) and D)

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Question 93

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The data needed for cost-volume-profit analysis is readily available if the income statement is prepared using a contribution format.

Stonehenge Inc.,a manufacturer of landscaping blocks,began operations on April 1 of the current year.During this time,the company produced 750,000 units and sold 720,000 units at a sales price of $9 per unit.Cost information for this period is shown in the following table: $\begin{array}{ll}\text { Production costs }\\\text { Direct materials } & \$ 1.80 \text { per unit } \\\text { Direct labor } & \$ .30 \text { per unit } \\\text { Variable overhead } & \$ 495,000 \text { in tota } \\\text { Fixed overhead } & \$ 450,000 \text { in total }\\\text { Nonproduction costs }\\ \text {Variable selling and administrative } &\$18,000 \text { in total} \\ \text { Fixed selling and administrative } & \text { \$53,000 in total} \\\end{array}$ a.Prepare Stonehenge's December 31 income statement for the current year under absorption costing. b.Prepare Stonehenge's December 31 income statement for the current year under variable costing.

Digby Company manufactured and sold 37,000 units of its product at a price of $93 per unit.Total variable cost per unit is $60,consisting of $58 in variable production cost and $2 in variable selling and administrative cost.Fixed costs of manufacturing are $350,000. a.Compute the manufacturing margin for the company under variable costing. b.Compute the contribution margin based on this data. c.Compute the gross margin under absorption costing.

To convert variable costing income to absorption costing income,management will need to change the way fixed overhead costs are treated.

Match each of the following terms (a)through (j)with the appropriate definitions 1 through 10. (a) Absorption costing (b) Variable costing (c) Contribution margin (d) Contribution format (e) Manufacturing margin (f) Contribution margin ratio (g) Break-even point (h) Product costs (i) Period costs (j) Gross margin _____ (1) Sales less cost of goods sold. _____ (2) A specific number of units sold that produces total income equal to zero. _____ (3) Sales less variable production costs. _____ (4) A costing method that includes all manufacturing costs. _____ (5) Costs that are expensed in the period they are incurred. _____ (6) Sales less variable expenses. _____ (7) A costing method that includes only variable manufacturing costs. _____ (8) Direct labor,direct materials,and manufacturing overhead. _____ (9) An income statement format that focuses on cost behavior. _____(10)Contribution margin divided by sales.

It is not possible to convert reports prepared using variable costing to absorption costing reports.

A company reports the following information for its first year of operations: $\begin{array} { l l } \text { Units produced this year } & 43,000 \text { units } \\\text { Units sold this year } & 39,000 \text { units } \\\text { Direct materials } & \$ 0.57 \text { per unit } \\\text { Direct labor } & \$ 0.83 \text { per unit } \\\text { Variable overhead } & \$ 26,660 \text { in total } \\\text { Fixed overhead } & ? \text { in total }\end{array}$ If the company's cost per unit of finished goods using variable costing is $2.02,what is the amount of total fixed overhead?

________________________ is a costing method that includes all manufacturing costs in unit product costs.

A company normally sells a product for $25 per unit.Variable per unit costs for this product are: $3 direct materials,$5 direct labor,and $2 variable overhead.The company is currently operating at 100% of capacity producing 30,000 units per year.Total fixed costs are $75,000 per year.The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs.

A company reports the following information regarding its production cost: $\begin{array}{ll}\text { Units produced } & 14,000 \text { units } \\\text { Direct labor } & \$ 13 \text { per unit } \\\text { Direct materials } & \$ 3 \text { per unit } \\\text { Variable overhead } & ? \text { in total } \\\text { Fixed overhead } & \$ 56,000 \text { in tota }\end{array}$ Required: Perform the following independent calculations. a.Compute total variable overhead cost if the production cost per unit under variable costing is $73. b.Compute total variable overhead cost if the production cost per unit under absorption costing is $73.

Contribution margin is another way to refer to gross margin.

Magenta Inc.reports the following information for the current year which is its first year of operations: $\begin{array}{ll}\text { Units produced this year } & 750,000 \text { units } \\\text { Units sold this year } & 740,000 \text { units } \\\text { Direct materials } & \$ 18.30 \text { per unit } \\\text { Direct labor } & \$ 14.20 \text { per unit } \\\text { Variable overhead } & ? \text { in total } \\\text { Fixed overhead } & \$ 4,500,000 \text { in total }\end{array}$ If the company's cost per unit of finished goods using absorption costing is $39.75,what is total variable overhead?

When units produced exceed the units sold,income under absorption costing is higher than income under variable costing.

A variable costing income statement focuses attention on the relationship between costs and sales that is not evident from the absorption costing format.

Wrap-It Company,a manufacturer of wrapping paper,began operations on June 1 of the current year.During this time,the company produced 370,000 units and sold 310,000 units at a sales price of $50 per unit.Cost information for this period is shown in the following table: $\begin{array}{ll}\text {Production costs}\\\text { Direct materials } & \$ 2.00 \text { per unit } \\\text { Direct labor } & \$ .80 \text { per unit } \\\text { Variable overhead } & \$ 814,000 \text { in total } \\\text { Fixed overhead } & \$ 481,000 \text { in total }\\\text { Non-production costs}\\\text { Variable selling and administrative}& \$ 78,000\text { in total}\\\text { Fixed selling and administrative }&\$ 210,000\text { in total}\end{array}$ a.Prepare Wrap-It's December 31^t income statement for the current year under absorption costing. b.Prepare Wrap-It's December 31 income statement for the current year under variable costing.

Variable costing treats fixed overhead cost as a period cost.