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Chapter 21: Q1SE (page 1167)

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

  1. Direct materials
  2. Direct labor
  3. Variable manufacturing overhead
  4. Fixed manufacturing overhead
  5. Variable selling and administrative costs
  6. Fixed selling and administrative cost

Short Answer

Expert verified

Answer

The classification of cost is given in the table below.

Step by step solution

01

Absorption costing Vs. Variable costing

Absorption costing absorbs all manufacturing costs including fixed manufacturing overheads. Variable costing only allocates variable costs to the product, fixed manufacturing overhead is classified as a period cost under variable costing.

02

Classification of cost

Absorption Costing

Variable Costing

Product Cost

Period Cost

Product Cost

Period Cost

a. Direct materials

X

X

b. Direct labor

X

X

c. Variable manufacturing overhead

X

X

d. Fixed manufacturing overhead

X

X

e. Variable selling and administrative costs

X

X

f. Fixed selling and administrative cost

X

X

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Most popular questions from this chapter

Explain why the fixed manufacturing overhead cost per unit changes when there is a change in the number of units produced.

Preparing variable and absorption costing income statements

Game Source manufactures video games that it sells for \(43 each. The company uses a fixed manufacturing overhead allocation rate of \)5 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 2,500 units 2,500 units Variable manufacturing cost per game \( 17 \) 17Sales commission cost per game 7 7Total fixed manufacturing overhead12,500 12,500

Total fixed selling and administrative costs 11,500 11,500 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.

: Analyzing profitability Refer to Exercise E21-22. Assume the sales mix shifted to 50% for each product. Calculate the total amount each product contributed to the coverage of fixed costs and the total contribution margin for the company.

Question: Analyzing profitability Sampler Company sells two products, Sigma and Zeta, with a sales mix of 70% and 30%, respectively. Sigma has a contribution margin per unit of \(26, and Zeta has a contribution margin per unit of \)21. The company sold 700 total units in September. Calculate the total amount each product contributed to the coverage of fixed costs and the total contribution margin for the company.

: 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?

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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