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Chapter 21: Q-21-9-RQ (page 1169)
When should a company use absorption costing when setting sales prices? When should it use variable costing?
Answer
Absorption costing should be used for long-term planning while variable costing is used for short-term planning.
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Classifying costs Classify each cost by placing an X in the appropriate columns. The first cost is completed as an example.
Absorption Costing Variable Costing Product Cost Period Cost Product Cost Period cost
Question: Using variable costing, service company
Divine Pool Cleaning Service provides pool cleaning services to residential customers. The company has three employees, each assigned to specific customers. The company considers each employee’s territory as a business segment. The company incurs variable costs that include the employees’ wages, pool chemicals, and gas for the service vans. Fixed costs include depreciation on the service vans. Following is the income statement for the month of August:
Requirements
1. Calculate the contribution margin ratio for each business segment.
2. The business segments had the following number of customers: Byson, 80; Moore, 50; and Freeman, 110. Compute the service revenue per customer, variable cost per customer, and contribution margin per customer for each business segment.
3. Which business segment was most profitable? List some possible reasons why this segment was most profitable. How might the various reasons affect the company in the long term?
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
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
Question: Chaney Company provides lawn care services. Following are data for a recent week:
Service Revenue \(1,300
Variable Costs \)780
Contribution Margin $520 Chaney provided service to 25 customers during the week. Determine the average amount the company charged each customer, the variable cost per customer, and the contribution margin ratio.
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