Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city's crowded

streets that it sells for 500 rupees. (Indian currency is denominated in rupees, denoted by R.) Selected data for
the company's operations last year follow:

Units in beginning inventory

Units produced
Units sold
Units in ending inventory
Requirement 2:
Variable costs per unit:
Assume that the company uses variable costing. Compute the unit product cost for one bicycle. (Omit the
"R" sign in your response.)
Unit product cost

R ____________

Fixed costs:

Requirement 1:
Assume that the company uses absorption costing. Compute the unit product cost for one bicycle.
"R" sign in your response.)
Unit product cost

Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city's crowded
streets that it sells for 500 rupees. (Indian currency is denominated in rupees, denoted by R.) Selected data
for the company's operations last year follow:

Units in beginning inventory

Units produced

10,000

Units sold

8,000

Units in ending inventory

2,000

Variable costs per unit:

Direct materials

120

Direct labor

140

Variable manufacturing overhead

50

Variable selling and administrative

20

Fixed costs:
Fixed manufacturing overhead

R 600,000

Fixed selling and administrative

R 400,000

An absorption costing income statement prepared by the company's accountant appears below:

Sales (8,000 units R500 per unit)

4,000,00
0

Cost of goods sold:

Beginning inventory

Add cost of goods manufactured

(10,000 units R ? per unit)

3,700,00
0

Goods available for sale

3,700,00
0

Less ending inventory

(2,000 units R ?

per unit)

2,960,00
0

740,000

1,040,00
0

Gross margin
Selling and administrative expenses:
Variable selling and administrative

160,000

Fixed selling and administrative

400,000

Net operating income

560,000
R

480,000

Requirement 1:
Determine how much of the ending inventory of R740,000 above consists of fixed manufacturing overhead

cost deferred in inventory to the next period. (Omit the "R" sign in your response.)
Fixed manufacturing overhead

R ____________

Requirement 2:
Prepare an income statement for the year using the variable costing method. (Leave no cells blank - be
certain to enter "0" wherever required. Omit the "R" sign in your response.)

__________

R ____________

Variable expenses:
Variable cost of goods sold:
Beginning inventory

R ____________

__________: __________

____________

__________

____________

__________: __________

____________

__________

____________

__________

____________

Contribution margin

____________
____________

Fixed expenses:
__________

____________

__________

____________

__________

____________
R ____________

High Tension Transformers, Inc., manufactures heavy-duty transformers for electrical switching stations. The company
uses variable costing for internal management reports and absorption costing for external reports to shareholders,
creditors, and the government. The company has provided the following data:

Year 1

Year 2

Year 3

Inventories:
Beginning (units)

180

150

160

Ending (units)

150

160

200

Variable costing net operating income

292,400 $

269,200 $

251,800

The company's fixed manufacturing overhead per unit was constant at $450 for all three years.

Requirement 1:
Determine each year's absorption costing net operating income. (Omit the "$" sign in your response.)
Year 1
Absorption costing net operating income

Year 2

Year 3

$ ____________ $ ____________ $ ____________

Requirement 2:
In Year 4, the company's variable costing net operating income was $240,200 and its absorption costing net
operating income was $267,200.
(a) Did inventories increase or decrease during Year 4?
(a) Decrease
(b) Increase
(b) How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4? (Omit
the "$" sign in your response.)
__________ fixed manufacturing overhead cost

$ ____________

The questions below pertain to two different scenarios involving a manufacturing company. In each scenario, the
cost structure of the company is constant from year to year. Selling prices, unit variable costs, and total fixed
costs are the same in every year. However, unit sales and/or unit production levels may vary from year to year.
Requirement 1:
Consider the following data for scenario A and for each year, indicate whether inventories grew or shrank.
Year 1

Year 2

Year 3

Variable costing net operating income

16,847 $

16,847 $

16,847

Absorption costing net operating income

16,847 $

29,378 $

6,018

Year1

__________

Year2

__________

Year3

__________

Requirement 3:
Given the patterns of net operating income in scenarios A and B above, which costing method, variable costing
or absorption costing, do you believe provides a better reflection of economic reality?

(a) variable costing

(b) absorption costing

Maxwell Company manufactures and sells a single product. The following costs were incurred during the
company's first year of operations:

Variable costs per unit:

Manufacturing:
Direct materials

18

Direct labor

Variable manufacturing overhead

Variable selling and administrative

Fixed costs per year:

Fixed manufacturing overhead

$ 160,000

Fixed selling and administrative expenses

$ 110,000

During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company's
product is $50 per unit.
Rquirement 1:
Assume that the company uses absorption costing:
(a) Compute the unit product cost. (Omit the "$" sign in your response.)
Unit product cost

$ ____________

(b) Prepare an income statement for the year. (Omit the "$" sign in your response.)

__________

$ ____________

Less variable expenses:

Variable cost of goods sold:
__________
__________:__________

$ ____________
____________

__________

____________

__________:__________

____________

Variable cost of goods sold

____________

__________

____________

__________

____________
____________

Less fixed expenses:

__________

____________

__________

____________

__________

____________
$ ____________

Amcor, Inc., incurs the following costs to produce and sell a single product.

Variable costs per unit:

Direct materials

10

Direct labor

Variable manufacturing overhead

Variable selling and administrative expenses

Fixed manufacturing overhead

90,000

Fixed selling and administrative expenses

300,000

Fixed costs per year:

During the last year, 30,000 units were produced and 25,000 units were sold. The Finished Goods inventory
account at the end of the year shows a balance of $85,000 for the 5,000 unsold units.
Requirement 1:
(a) Is the company using absorption costing or variable costing to cost units in the Finished Goods inventory
account?

(a) Variable costing

(b) Absorption costing
(b) Compute the total cost of finished goods inventory using variable costing and absorption costing. (Omit the
"$" sign in your response.)
Variable
Costing
Total cost

Absorption Costing
$ ____________

$ ____________

Requirement 2:
Assume that the company wishes to prepare financial statements for the year to issue to its stock-holders.
(a) Is the $85,000 figure for Finished Goods inventory the correct amount to use on these statements for
external reporting purposes?
(a) Yes
(b) No

b) At what dollar amount should the 5,000 units be carried in inventory for external reporting purposes? (Omit
the "$" sign in your response.)
Finished goods inventory

$ ____________

Morey Company has just completed its first year of operations. The company's absorption costing income
statement for the year appears below:
Morey Company
Income Statement
Sales (40,000 units at $33.75 per unit)

1,350,000

Cost of goods sold:

Beginning inventory

Add cost of goods manufactured

(50,000 units at $21 per unit)

1,050,000

Goods available for sale

1,050,000

Less ending inventory (10,000 units at $21 per unit)

210,000

840,000

Gross margin

510,000

Selling and administrative expenses

420,000

Net operating income

90,000

The company's selling and administrative expenses consist of $300,000 per year in fixed expenses and $3 per unit
sold in variable expenses. The company's $21 per unit product cost given above is computed as follows:
Direct materials

$ 10

Direct labor

Variable manufacturing overhead

Fixed manufacturing overhead ($250,000 50,000 units)

Unit product cost

$ 21

Requirement 1:
Redo the company's income statement in the contribution format using variable costing. (Omit the "$" sign in
your response.)

__________

$ ____________

Variable expenses:
__________

$ ____________

__________

____________

Contribution margin

____________
____________

Fixed expenses:
__________

____________

__________

____________

__________

____________
$ ____________

Requirement 2:
Reconcile any difference between the net operating income on your variable costing income statement and the
net operating income on the absorption costing income statement above. (Omit the "$" sign in your
response.)

Variable costing net operating income (loss)

__________: Fixed manufacturing overhead cost deferred
Absorption costing net operating income (loss)

$ ____________
____________
$ ____________