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Chapter 21: Q1CA (page 1182)

Question: Communication Activity 21-1

In 100 words or fewer, explain the main differences and similarities between variable costing and absorption costing.

Short Answer

Expert verified

Answer

The main dissimilarity between variable and absorption costing is that one method considers the fixed manufacturing overhead, and the other is not.

Step by step solution

01

Meaning of Variable Costing 

Variable costing is a cost accounting technique that only considers the variable manufacturing overheads while calculating the cost of a product.

02

Main differences between variable costing and absorption costing

In absorption costing,all the manufacturing costs are charged to the cost of the product. While in variable costing, onlydirect costs incurred being the part of the cost of the product.

Absorption costing focuses on giving resultsof gross profit. Variable costingcalculatesthe contribution margin.

03

Similarities between variable costing and absorption costing

Variable and absorption costing techniques both help in calculating operating income. Both methods include material and labor costs as a direct cost.

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Most popular questions from this chapter

When should a company use absorption costing when setting sales prices? When should it use variable costing?

Why is it appropriate to use variable costing when planning production in the short term?

When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? Why?

Computing absorption costing gross profit

Refer to your answers to Short Exercise S21-6. Product X sells for \(175 per unit. Assume no beginning inventories. Calculate the gross profit using absorption costing when Adamson:

  1. Produces and sells 2,000 units.
  2. Produces 2,500 units and sells 2,000 units.
  3. Produces 5,000 units and sells 2,000 units.

S21-6 Direct materials \) 41 per unit Direct labor 57 per unit Variable manufacturing overhead 7 per unit Fixed manufacturing overhead 20,000 per ye

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:

  1. Calculate the fixed cost per unit produced for each year.
  2. Prepare income statements for the three years using absorption costing.
  3. Calculate Hopper’s bonus based on the current plan.
  4. Prepare income statements for the three years using variable costing.
  5. Calculate Hopper’s bonus based on the proposed plan.
  6. Give possible reasons why Hopper is opposed to the proposed bonus plan. Do you think Hopper’s actions have been ethical the past three years? Why or why not?
See all solutions

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