managerial accounting

Variable and Absorption Costing Unit Product Costs

difficulty: medium

Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city?s
crowded streets that it sells for 500 rupees. (Indian currency is denominated in rupees, denoted by R.)
Selected data for the company?s operations last year follow:
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labor
Fixed costs:

0
10,000
8,000
2,000
R
R
R
R

120
140
50
20

R600,000
R400,000

Required:
1. Assume that the company uses absorption costing. Compute the unit product cost for one bicycle.
Unit product cost

R

2. Assume that the company uses variable costing. Compute the unit product cost for one bicycle.
Unit product cost

R

Hints
Hint #1
References
Worksheet

Difficulty: Medium

Exercise 6-1
Variable and
Absorption
Costing Unit
Product Costs
[LO1]

Learning Objective:
06-01 Explain how
variable costing
differs from
absorption costing
and compute unit
product costs under
each method.

Amcor, Inc., incurs the following costs to produce and sell a single product.
Variable costs per unit:
Direct materials
Direct labor
Fixed costs per year:

\$
\$
\$
\$

10
5
2
4

\$ 90,000
\$ 300,000

During the last year, 30,000 units were produced and 25,000 units were sold. The Finished Goods
inventory account at the end of the year shows a balance of \$85,000 for the 5,000 unsold units.
Required:
1. Determine whether the company is using absorption costing or variable costing to cost units in the
Finished Goods inventory account.
a. Calculate the ending balance in the Finished Goods inventory account under variable costing and
absorption costing.
Ending balance in Finished Good inventory account under variable costing
Ending balance in Finished Goods inventory account under absorption costing

\$
\$

b. Which costing method is the company using to cost units in the Finished Goods inventory account?
Absorption costing
Variable costing
2. Assume that the company wishes to prepare financial statements for the year to issue to its
stockholders.
a. Is the \$85,000 figure for Finished Goods inventory the correct amount to use on these statements for
external reporting purposes?
Yes, because variable costing is generally accepted for external reporting.
No, because variable costing is not generally accepted for external reporting.
Yes, because absorption costing is generally accepted for external reporting.
No, because absorption costing is not generally accepted for external reporting.
b.

At what dollar amount should the 5,000 units be carried in inventory for external reporting purposes?
Finished Goods inventory balance for external reporting purposes

Hints
Hint #1

\$

References
Worksheet

Difficulty: Medium

Exercise 6-6
Inferring
Costing
Method; Unit
Product Cost
[LO1]

Learning Objective:
06-01 Explain how
variable costing
differs from
absorption costing
and compute unit
product costs under
each method.

CompuDesk, Inc., makes an oak desk specially designed for personal computers. The desk sells for \$200.
Data for last year?s operations follow:
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labor

0
10,000
9,000
1,000
\$

60
30
10
20

Total variable cost per unit

\$

120

Fixed costs:

\$ 300,000
450,000

Total fixed costs

\$ 750,000

Required:
1. Assume that the company uses variable costing. Compute the unit product cost for one computer desk.
Unit product cost

\$

2. Assume that the company uses variable costing. Prepare a contribution format income statement for the
year. (Input all amounts as positive values except losses which should be indicated by a minus
sign.)

(Click to select)
Variable expenses:
(Click to select)
(Click to select)

Variable Costing Income Statement

\$

\$

(Click to select)
Fixed expenses:
(Click to select)
(Click to select)

(Click to select)

\$

3. What is the company?s break-even point in terms of units sold?
Break-even point

units

References
Worksheet

Difficulty: Medium

Exercise 6-9
Variable
Costing Unit
Product Cost
and Income
Statement;
Break-Even
[LO1, LO2]

Learning Objective:
06-01 Explain how
variable costing
differs from
absorption costing
and compute unit
product costs under
each method.

Learning Objective: 06-02 Prepare income
statements using both variable and
absorption costing.

Required:
1. By how much would the company?s net operating income increase if Dallas increased its sales by
\$75,000 per year? Assume no change in cost behavior patterns.
Increase in Net operating income

rev: 03_13_2013_QC_27117

\$

References
Worksheet

Difficulty: Medium

Exercise 6-14
Part 1

Learning Objective:
06-04 Prepare a
segmented income
statement that
differentiates
traceable fixed costs
from common fixed
costs and use it to
make decisions.