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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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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
: Before you begin this assignment, review the Tying It All Together feature in the chapter. CF Industries Holdings, Inc. is one of the largest manufacturers and distributors of nitrogen fertilizer and other nitrogen products in the world. The corporation often produces and stores large amounts of inventory during periods of low demand to ensure that there is enough product to meet the demand of peak seasons. Assume that one line of fertilizer (with no beginning Finished Goods Inventory) had the following data during a time period of low demand:
Sales price $ 20.00 per case Variable manufacturing costs 4.00 per case Fixed manufacturing costs 100,000 per quarter Variable selling and administrative costs 2.00 per case Fixed selling and administrative costs 45,000 per quarter Given that the time period has low demand, assume the company produced 1,000,000 cases but only sold 250,000 cases.
Requirement
1. Prepare the income statement for the quarter using variable costing.
2. Prepare the income statement for the quarter using absorption costing.
3. Why, if at all, is there a difference between operating income under the two methods?
Computing unit product cost, absorption costing Calculate the unit product cost using absorption costing. Round your answer to the nearest cent.
Use the following information for Short Exercises S21-2 and S21-3.
Martin Company had the following costs:
Units produced 320 units Direct materials $ 71 per unit Direct labor 40 per unit Variable manufacturing overhead 13 per unit Fixed manufacturing overhead 7,360 per year Variable selling and administrative costs 22 per unit
Fixed selling and administrative costs 1,920 per year
Using variable costing, service company Refer to Exercise E21-25. The commercial business segment provided services to 200 customers. The residential business segment provided services to 400 customers. Determine the average amount Sherman Company charged each type of customer for services, the average variable cost per customer, and the average contribution margin per customer, rounded to two decimal places. What caused the difference in contribution margin in the two segments?
Sampson Company operates a manufacturing facility where several products are made. Each product is considered a business segment, and the product managers have the opportunity to receive a bonus based on the profit of the segment. Franco Hopper is the manager for the scissors product line. Production and sales data for the scissors product line for the past three years are shown below:
Year 1 Year 2 Year 3 Units produced 100,000 units 125,000 units 160,000 units Units sold 100,000 units 100,000 units 100,000 units Sales price per unit \( 12.00 per unit \) 12.00 per unit $ 12.00 per unit Variable manufacturing cost per unit 5.00 per unit 5.00 per unit 5.00 per unit Total fixed manufacturing costs 200,000 per year 200,000 per year 200,000 per year
Hopper’s bonus is 0.5% of the gross profit of the scissors product line, based on absorption costing. Upper management is discussing changing the bonus system so that bonuses are based on operating income using variable costing. Hopper is opposed to this change and has been trying to convince the other product managers to join him in voicing their opposition. There are no beginning inventories in Year 1.
Requirements:
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