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Chapter 21: Q-21-11RQ (page 1167)
Why is it appropriate to use variable costing when planning production in the short term?
Answer
Because fixed cost is irrelevant in short run.
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How are absorption costing and variable costing the same? How are they different?
Question: Preparing absorption costing income statements, production less than sales
Refer to Exercise E21-19.
Requirements
Analyzing profitability
Camden Company has divided its business into segments based on sales territories: East Coast, Midland, and West Coast. Following are financial data for 2018:
East Coast | Midland | West Coast | |
Units sold | 71 | 69 | 53 |
Sales price per unit | \(10,300 | \)13,600 | \(12,000 |
Variable cost per unit | 6,283 | 7,072 | 7,080 |
Prepare an income statement for Camden Company for 2018 using the contribution margin format assuming total fixed costs for the company were \)435,000. Include columns for each business segment and a column for the total company.
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
Preparing variable and absorption costing income statements
Claudia’s Foods produces frozen meals that it sells for \(11 each. The company computes a new monthly fixed manufacturing overhead allocation rate based on the planned number of meals to be produced that month. Assume all costs and production levels are exactly as planned. The following data are from Linda’s Foods’s first month in business:
January 2018 Units produced and sold: Sales 850 meals Production 1,050 meals Variable manufacturing cost per meal \) 5Sales commission cost per meal 1 Total fixed manufacturing overhead 315Total fixed selling and administrative costs 450 Requirements
1. Compute the product cost per meal produced under absorption costing and under variable costing.
2. Prepare income statements for January 2018 using: a. absorption costing. b. variable costing.
3. Is operating income higher under absorption costing or variable costing in January?
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