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Chapter 21: Q-21-10RQ (page 1167)
In the long run, all costs are controllable. Is this statement true? Why or why not?
Answer
True, all costs are controllable in the long run.
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Preparing variable and absorption costing income statements
This problem continues the Piedmont Computer Problem situation from Chapter 20. Piedmont Computer Company manufactures personal computers and tablets. Based on the latest information from the cost accountant, using the current sales mix, the weighted-average sales price per unit is \(750 and the weighed-average variable cost per unit is \)450. The company does not expect the sales mix to vary for the next year. Assume the beginning balance in Finished Goods Inventory is \(0. Additional data for the first month of 2020:
January 2020
Unitsproduced and sold: Sales 945 units Production 1,000 units Variable manufacturing cost per unit \) 450 Sales commission cost per unit 25 Total fixed manufacturing overhead 93,600 Total fixed selling and administrative costs 62,400
Requirements
1. Compute the product cost per unit produced under absorption costing and under variable costing.
2. Prepare income statements for January 2020 using: a. absorption costing. b. variable costing.
3. Is operating income higher under absorption costing or variable costing in January? What causes the difference?
Computing absorption cost per unit and variable cost per unit
Adamson, Inc. has the following cost data for Product X:
Direct materials $ 41 per unit Direct labor 57 per unit Variable manufacturing overhead 7 per unit Fixed manufacturing overhead 20,000 per year
Calculate the unit product cost using absorption costing and variable costing when production is 2,000 units, 2,500 units, and 5,000 units.
Question: Communication Activity 21-1
In 100 words or fewer, explain the main differences and similarities between variable costing and absorption costing.
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.
Using variable and absorption costing, making decisions The 2018 data that follow pertain to Eli’s Electric Eyewear, a manufacturer of swimming goggles. (Eli’s Electric Eyewear had no beginning Finished Goods Inventory in January 2018.)
Number of goggles produced 245,000 Number of goggles sold 215,000 Sales price per unit \( 22Variable manufacturing cost per unit 8Sales commission cost per unit 5Fixed manufacturing overhead 1,470,000 Fixed selling and administrative costs 250,000 Requirements
1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Eli’s Electric Eyewear for the year ended December 31, 2018.
2. Which statement shows the higher operating income? Why?
3. Eli’s ElectricEyewear’s marketing vice president believes a new sales promotion that costs \)60,000 would increase sales to 220,000 goggles. Should the company go ahead with the promotion? Give your reasoning.
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