Variable Costing

Unit Cost Computations

Harvey Co. produces a single product with the following information available:

Unit Cost Computations

Unit product cost is determined as follows:

Selling and administrative expenses are always treated as period expenses and deducted from revenue.

Income Comparison of Absorption and Variable Costing

Harvey Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year.
Absorption Costing
Sales (20,000 $30) Less cost of goods sold: Beginning inventory $ Add COGM (25,000 $16) 400,000 Goods available for sale 400,000 Ending inventory (5,000 $16) 80,000 Gross margin Less selling & admin. exp. Variable (20,000 $3) $ 60,000 Fixed 100,000 Net operating income $ 600,000

320,000 280,000

160,000 $ 120,000

Income Comparison of Absorption and Variable Costing

Now lets look at variable costing by Harvey Co.
Sales (20,000 $30) Less variable expenses: Beginning inventory $ Add COGM (25,000 $10) 250,000 Goods available for sale 250,000 Less ending inventory (5,000 $10) 50,000 Variable cost of goods sold 200,000 Variable selling & administrative expenses (20,000 $3) 60,000 Contribution margin Less fixed expenses: Manufacturing overhead $ 150,000 Selling & administrative expenses 100,000 Net operating income

Variable costs only.

Variable Costing
$ 600,000

All fixed manufacturing overhead is expensed.

260,000 340,000

250,000 $ 90,000

Income Comparison of Absorption and Variable Costing

Lets compare the methods.

Reconciliation
We can reconcile the difference between absorption and variable income as follows:
Variable costing net operating income Add: Increase in fixed manufacturing costs in inventory (5,000 units $6 per unit) Absorption costing net opearting income $ 90,000

30,000 $ 120,000

Fixed mfg. overhead $150,000 = = $6.00 per unit Units produced 25,000 units

Extending the Example

Lets look at the second year of operations for Harvey Company.

Harvey Co. Year 2

In its second year of operations, Harvey Co. started with an inventory of 5,000 units, produced 25,000 units and sold 30,000 units.

Harvey Co. Year 2

Unit product cost is determined as follows:

No change in Harveys cost structure.

Harvey Co. Year 2

Absorption Costing
Sales (30,000 $30) Less cost of goods sold: Beg. inventory (5,000 $16) Add COGM (25,000 $16) Goods available for sale Less ending inventory Gross margin Less selling & admin. exp. Variable (30,000 $3) Fixed Net operating income $ 900,000 $ 80,000 400,000 480,000 -

480,000 420,000

$ 90,000 100,000

190,000 $ 230,000

These are the 25,000 units produced in the current period.

Next, well look at Harveys second years income statement assuming variable costing is used.

Variable Harvey Co. Year 2 costs only.

All fixed manufacturing overhead is expensed.

Reconciliation
We can reconcile the difference between absorption and variable income as follows:
Variable costing net operating income $ 260,000 Deduct: Fixed manufacturing overhead costs released from inventory (5,000 units $6 per unit) 30,000 Absorption costing net operating income $ 230,000

Fixed mfg. overhead $150,000 = = $6.00 per unit Units produced 25,000 units

Summary

Summary

*Note that this column implicitly assumes that inventory units and fixed costs change in the same direction.This relation may not hold when production varies over time and unit fixed costs change from period to period.

The capitalization of fixed costs in inventories under absorption costing allows managers to affect reported income. In this sense, earnings may be managed to achieve profit targets. For example, if the fixed manufacturing cost that is included in the inventories increases over a given period, then the amount of profit reported will be higher under absorption costing than under variable costing.

Projected operating results: Absorption Costing

Sales (20,000 $30) Less cost of goods sold: Beginning inventory $ Add COGM (25,000 $16) 400,000 Goods available for sale 400,000 Ending inventory (5,000 $16) 80,000 Gross margin Less selling & admin. exp. Variable (20,000 $3) $ 60,000 Fixed 100,000 Net operating income $ 600,000

320,000 280,000

160,000 $ 120,000

The ending inventory includes $30,000 of fixed overhead, and cost of sales includes $120,000 of fixed overhead. These are potential tools for earnings management. Assume a target of $20,000 additional income. Given that sales are expected to be 20,000 units, what level of production is needed to report income of $140,000?

Projected operating results: Absorption Costing

Sales (20,000 $30) Less cost of goods sold: Beginning inventory $ Add COGM (25,000 $16) 400,000 Goods available for sale 400,000 Ending inventory (5,000 $16) 80,000 Gross margin Less selling & admin. exp. Variable (20,000 $3) $ 60,000 Fixed 100,000 Net operating income $ 600,000

320,000 280,000

160,000 $ 120,000

In order to report income of $140,000 it is necessary to assign $50,000 of fixed cost to the ending inventory. One third of the periods production must be in the inventory. This implies that the 20,000 units sold comprise 2/3 of total production, so total production must be 30,000 units.

Projected operating results: Absorption Costing

Sales (20,000 $30) Less cost of goods sold: Beginning inventory $ Add COGM (30,000 $15) 450,000 Goods available for sale 450,000 Ending inventory (10,000 $15) 150,000 Gross margin Less selling & admin. exp. Variable (20,000 $3) $ 60,000 Fixed 100,000 Net operating income $ 600,000

300,000 300,000

160,000 $ 140,000

Note that the fixed cost per unit would be $5 ($150,000 / 30,000 units), and a total of $50,000 in fixed costs is included in the ending inventory. The absorption costing income exceeds the variable costing income by $50,000.

Advantages of the Contribution (variable costing) Approach

Classifies costs based On behavior

Advantages

Consistent with standard costs and flexible budgeting.

Profit is not affected by changes in inventories.

Handout 14 (a): Variable and absorption costing, differing cost structures

Handout 14(a): Variable and absorption costs; income statement analysis The Patti, Maxine and LaVerne Divisions of the Andrews Company have identical amounts of revenue and operating income, but differ in their cost structures. The Patti Division is highly mechanized, and all manufacturing costs are fixed. The Maxine Division has a mixture of fixed and variable manufacturing costs. The LaVerne Divisions manufacturing costs are all directly variable with production. Operating results for each of the three divisions during the past year are shown below. Assume that each of the divisions had no beginning or ending inventories.

Divisions
Revenues Variable costs Fixed costs Operating income Patti $6,000,000 None $4,800,000 $1,200,000 Maxine $6,000,000 $3,000,000 $1,800,000 $1,200,000 LaVerne $6,000,000 $4,800,000 None $1,200,000

Divisions
Revenues Variable costs Fixed costs Operating income Patti $6,000,000 None $4,800,000 $1,200,000 Maxine $6,000,000 $3,000,000 $1,800,000 $1,200,000 LaVerne $6,000,000 $4,800,000 None $1,200,000

(a) If each of the divisions has a ten percent increase in revenues in the coming year, what would be the resulting percentage increase in operating income?

Divisions
Revenues Variable costs Fixed costs Operating income Patti $6,000,000 None $4,800,000 $1,200,000 Maxine $6,000,000 $3,000,000 $1,800,000 $1,200,000 LaVerne $6,000,000 $4,800,000 None $1,200,000

(a) If each of the divisions has a ten percent increase in revenues in the coming year, what would be the resulting percentage increase in operating income? Patti: A ten percent increase in revenue provides an increase of $600,000, or 50%. in operating income. Operating leverage is 5.0. Maxine: A ten percent increase in revenue provides an increase of $300,000, or 25%. in operating income. Operating leverage is 2.5. Laverne: A ten percent increase in revenue provides an increase of $120,000, or 10%. in operating income. Operating leverage is 1.0.

Divisions
Revenues Variable costs Fixed costs Operating income Patti $6,000,000 None $4,800,000 $1,200,000 Maxine $6,000,000 $3,000,000 $1,800,000 $1,200,000 LaVerne $6,000,000 $4,800,000 None $1,200,000

(b)At what dollar amount of revenues would each of the divisions break even (i.e., report operating income of zero)? The divisions break even when the total contribution margin is equal to total fixed cost.

Divisions
Revenues Variable costs Fixed costs Operating income Patti $6,000,000 None $4,800,000 $1,200,000 Maxine $6,000,000 $3,000,000 $1,800,000 $1,200,000 LaVerne $6,000,000 $4,800,000 None $1,200,000

(b)At what dollar amount of revenues would each of the divisions break even (i.e., report operating income of zero)? The divisions break even when the total contribution margin is equal to total fixed cost. Patti: Break-even occurs when total revenues equal $4,800,000. $4,800,000 x 100% = total fixed cost of $4,800,000. Maxine: Break-even occurs when total revenues equal $3,600,000. $3,600,000 x 50% = total fixed cost of $1,800,000. Laverne: Break-even occurs when total revenues equal zero. Total fixed cost is zero.

Divisions
Revenues Variable costs Fixed costs Operating income Patti $6,000,000 None $4,800,000 $1,200,000 Maxine $6,000,000 $3,000,000 $1,800,000 $1,200,000 LaVerne $6,000,000 $4,800,000 None $1,200,000

Assume instead that the divisions will each continue to report revenues of Required: in the coming year, and will also have ending inventories equal to $6,000,000 25% of production (i.e., 75% of the items produced will be sold, and the remaining 25% will be carried in the ending inventories). (a) What would be the carrying value of the ending inventories for each division? Of this amount, how much represents variable costs? How much represents fixed costs? (b) What amount of operating income would be reported by each of the divisions in the coming year? Explain the reason why the operating incomes would differ among the three divisions. (Hint: Compare the differences in divisional operating incomes to the differences across divisions in the amounts of fixed costs assigned to the inventories)

Divisions
Revenues Variable costs Fixed costs Operating income Patti $6,000,000 None $4,800,000 $1,200,000 Maxine $6,000,000 $3,000,000 $1,800,000 $1,200,000 LaVerne $6,000,000 $4,800,000 None $1,200,000

Assume instead that the divisions will each continue to report revenues of $6,000,000 in the coming year, and will also have ending inventories equal to 25% of production (i.e., 75% of the items produced will be sold, and the remaining 25% will be carried in the ending inventories). Production must increase by one-third, because sales will be threequarters of production. Total fixed costs remain the same. One quarter of the total variable and fixed manufacturing costs will be carried in the ending inventory.

The operating incomes will increase by the amount of fixed costs added to the inventories over the period: Patti: Operating income = $1,200,000 + $1,200,000 = $2,400,000 Maxine: Operating income = $1,200,000 + $450,000 = $1,650,000. LaVerne: Operating income = $1,200,000 + 0 = $1,200,000.

Divisions
Revenues Variable costs Fixed costs Operating income Patti $6,000,000 None $4,800,000 $1,200,000 Maxine $6,000,000 $3,000,000 $1,800,000 $1,200,000 LaVerne $6,000,000 $4,800,000 None $1,200,000

The operating incomes will increase by the amount of fixed costs added to the inventories over the period: Patti: Operating income = $1,200,000 + $1,200,000 = $2,400,000. Maxine: Operating income = $1,200,000 + $450,000 = $1,650,000. LaVerne: Operating income = $1,200,000 + 0 = $1,200,000. Divisional Income Statements with of production in ending inventories Patti Maxine LaVerne Revenues $6,000,000 $6,000,000 $6,000,000 Cost of sales: Variable costs -0$4,000,000 $6,400,000 Fixed costs $4,800,000 $1,800,000 -0Ending inventories: Variable costs (-0-) ($1,000,000) ($1,600,000) Fixed costs ($1,200,000) ($450,000) -0Cost of sales $3,600,000 $4,350,000 $4,800,000 Operating income $2,400,000 $1,650,000 $1,200,000

Handout 14 (b): Variable and absorption costing, earnings management

Handout 14(b): Variable and absorption costing; earnings management Tentative Products Company has prepared the following preliminary budgeted income statement for the coming year: Tentative Products Co. Budgeted Income Statement Revenues (100,000 units @ $12.00) Cost of sales: Beginning inventory None Variable manufacturing costs (120,000 units @ $4.00) $480,000 Fixed manufacturing costs $600,000 Ending inventory: Variable cost (20,000 units @ $4.00) ($ 80,000) Fixed cost (20,000 units @ $5.00) ($100,000) Cost of sales Selling and administrative expenses (all fixed) Operating income

$1,200,000

($900,000) ($200,000) $100,000

Tentative Products Co. Budgeted Income Statement Revenues (100,000 units @ $12.00) Cost of sales: Beginning inventory None Variable manufacturing costs (120,000 units @ $4.00) $480,000 Fixed manufacturing costs $600,000 Ending inventory: Variable cost (20,000 units @ $4.00) ($ 80,000) Fixed cost (20,000 units @ $5.00) ($100,000) Cost of sales Selling and administrative expenses (all fixed) Operating income

$1,200,000

($900,000) ($200,000) $100,000

Required: (a) The budgeted income statement shown above assumes that one-sixth of the coming years production will be used to increase inventories. What would be the budgeted operating income if the firm used variable costing in order to value its inventories?

Tentative Products Co. Budgeted Income Statement Revenues (100,000 units @ $12.00) Cost of sales: Beginning inventory None Variable manufacturing costs (120,000 units @ $4.00) $480,000 Fixed manufacturing costs $600,000 Ending inventory: Variable cost (20,000 units @ $4.00) ($ 80,000) Fixed cost (20,000 units @ $5.00) ($100,000) Cost of sales Selling and administrative expenses (all fixed) Operating income

$1,200,000

($900,000) ($200,000) $100,000

Required: (a) The budgeted income statement shown above assumes that one-sixth of the coming years production will be used to increase inventories. What would be the budgeted operating income if the firm used variable costing in order to value its inventories? Using variable costing, the ending inventory would be valued at solely variable production costs, and the entire amount of fixed costs would be written off as a period expense. Consequently, the income would be lower by $100,000, and be equal to zero.

Tentative Products Co. Budgeted Income Statement Revenues (100,000 units @ $12.00) Cost of sales: Beginning inventory None Variable manufacturing costs (120,000 units @ $4.00) $480,000 Fixed manufacturing costs $600,000 Ending inventory: Variable cost (20,000 units @ $4.00) ($ 80,000) Fixed cost (20,000 units @ $5.00) ($100,000) Cost of sales Selling and administrative expenses (all fixed) Operating income

$1,200,000

($900,000) ($200,000) $100,000

(b) What would be the dollar amount of budgeted cost of goods sold if the firm used absorption costing and decided to maintain no ending inventory? What would be the budgeted operating income in that case? The budgeted cost of goods sold would be $1,000,000 ($400,000 variable and $600,000 fixed costs). If the firm maintains no inventories, then variable costing and absorption costing incomes are the same. In the above case, income would be zero.

(c) Assume that the management of Tentative Products wishes to report absorption cost based operating income of $120,000 in the coming year, but is unable to increase revenues or to change the firms cost structure. Consequently, management has decided to increase production and further increase its inventories in order to achieve the target amount of operating income. What level of production is necessary in order to achieve the income objective? At that level of production, what will be the amount of fixed manufacturing cost per unit produced? What total amount of fixed manufacturing cost will be included in the valuation of the ending inventory?

Tentative Products Co. Budgeted Income Statement Revenues (100,000 units @ $12.00) Cost of sales: Beginning inventory None Variable manufacturing costs (120,000 units @ $4.00) $480,000 Fixed manufacturing costs $600,000 Ending inventory: Variable cost (20,000 units @ $4.00) ($ 80,000) Fixed cost (20,000 units @ $5.00) ($100,000) Cost of sales Selling and administrative expenses (all fixed) Operating income

$1,200,000

($900,000) ($200,000) $100,000

Tentative Products Co. Budgeted Income Statement Revenues (100,000 units @ $12.00) Cost of sales: Beginning inventory None Variable manufacturing costs (125,000 units @ $4.00) $500,000 Fixed manufacturing costs $600,000 Ending inventory: Variable cost (25,000 units @ $4.00) ($100,000) Fixed cost (25,000 units @ $4.80) ($120,000) Cost of sales Selling and administrative expenses (all fixed) Operating income

$1,200,000

($880,000) ($200,000) $120,000

To achieve its profit target, management needs to capitalize $120,000 of fixed cost in the ending inventory. This represents 1/5 of total fixed cost ($120,000 / $600,000 = 1/5). The budgeted 100,000 units to be sold must be 4/5 of the total units produced, so total production must be 125,000 units (125,000 x 4/5 = 100,000). At a production level of 125,000 units, the fixed cost per unit is $4.80 ($600,000 / 125,000 units = $4.80). The ending inventory of 25,000 units will be assigned total fixed costs of $120,000 (25,000 x $4.80 = $120,000).

Handout 14 (c): Variable and absorption costing, varying production levels

Part A: Cyclical Company has budgeted the following levels of production and sale over the next fiscal year. The firm has no items in inventory at the start of the year. Total factory fixed costs are budgeted at $2,400,000 in each quarter. Total fixed Units Units in the Unit fixed cost, ending Quarter produced Units sold ending inventory cost inventory 1 120,000 100,000 ? ? ? 2 120,000 110,000 ? ? ? 3 120,000 120,000 ? ? ? 4 120,000 130,000 ? ? ? Required: (a) Fill in the missing information in the above table. (b) Determine the change in the total amount of fixed costs in the inventory over each of the four quarters. (c) Determine the difference between variable costing and absorption costing profits in each period.

(a) Fill in the missing information in the above table. (b) Determine the change in the total amount of fixed costs in the inventory over each of the four quarters. (c) Determine the difference between variable costing and absorption costing profits in each period.

Qt 1 2 3 4

Units produced 120,000 120,000 120,000 120,000

Units sold 100,000 110,000 120,000 130,000

Units in the ending inventory 20,000 30,000 30,000 20,000

Unit fixed cost $20 $20 $20 $20

Fixed cost, ending inventory $400,000 $600,000 $600,000 $400,000

Change in inventory fixed cost +$400,000 +$200,000 -0-$200,000

OI. VC vs ABS AC>VC AC>VC -0AC<VC

Part B: Units produced 120,000 150,000 100,000 120,000 Units in the Units sold ending inventory 100,000 ? 110,000 ? 120,000 ? 130,000 ? Unit fixed cost ? ? ? ? Total fixed cost, ending inventory ? ? ? ?

Quarter 1 2 3 4 Required: (1) Assume that the firm uses FIFO inventory costing, and complete the information in the table above. (Hint: under FIFO, the units in the ending inventory are assumed to be the units most recently produced.)

Part B: Units produced 120,000 150,000 100,000 120,000 Units in the Units sold ending inventory 100,000 ? 110,000 ? 120,000 ? 130,000 ? Unit fixed cost ? ? ? ? Total fixed cost, ending inventory ? ? ? ?

Quarter 1 2 3 4 Required: (1) Assume that the firm uses FIFO inventory costing, and complete the information in the table above. (Hint: under FIFO, the units in the ending inventory are assumed to be the units most recently produced.) FIFO Units fixed FIFO Qt produced Units Units in Unit cost, Change in OI, sold the ending fixed ending inventory VC vs inventory cost inventory fixed cost ABS 1 120,000 100,000 20,000 $20 $400,000 +$400,000 AC>VC 2 150,000 110,000 60,000 $16 $960,000 +$560,000 AC>VC 3 100,000 120,000 40,000 $24 $960,000 -0-04 120,000 130,000 30,000 $20 $600,000 -$360,000 AC<VC

(1) Assume instead that the firm uses LIFO costing, and complete the information in the table above. (Hint: under LIFO, the units in the ending inventory are the oldest layers of production available to the firm. For example, if the number of units increases during the period, the LIFO inventory consists of the units in the beginning inventory plus additional units produced in the current period.)

(1) Assume instead that the firm uses LIFO costing, and complete the information in the table above. (Hint: under LIFO, the units in the ending inventory are the oldest layers of production available to the firm. For example, if the number of units increases during the period, the LIFO inventory consists of the units in the beginning inventory plus additional units produced in the current period.)
Units produced 120,000 150,000 Units sold 100,000 110,000 Units in the ending inventory 20,000 60,000 Unit fixed cost $20 $20 $16 $20 $16 $20 $16 LIFO fixed cost, ending inventory $400,000 $20x20,000 + $16x40,000 = $1,040,000 +$640,000 $20x20,000 + $16x20,000 =$720,000 -$320,000 $20x20,000 +$16x10,000 =$560,000 -$160,000 LIFO Changein inventory fixed cost +$400,000 OI, VC vs ABS AC>VC

Qt 1 2

AC>VC

100,000

120,000

40,000

AC<VC

120,000

130,000

30,000

AC<VC

Handout 14 (d): Variable and absorption costing, comprehensive

Peak Recycles Co. provides the following information for the past two years: Year 1 Beginning inventory Ending inventory Production Sales Sales price Variable manufacturing cost Fixed manufacturing cost Zero units ? 120 units 90 units Year 2 ? ? 120 units 120 units $35 per unit $10 per unit $2,160 per year

Required: (a)Assume the firm uses variable costing, and determine the following amounts: Operating profit, Year 1 $_______________ Operating profit, Year 2 $_______________

r e c a p F I F O L I F O

Qt 1 2 3 4

Units produced 120,000 120,000 120,000 120,000

Units produced

Units sold 100,000 110,000 120,000 130,000

Units in the ending inventory 20,000 30,000 30,000 20,000

Unit fixed cost $20 $20 $20 $20

Fixed cost, ending inventory $400,000 $600,000 $600,000 $400,000

FIFO fixed cost, ending inventory $400,000 $960,000 $960,000 $600,000

Change in inventory fixed cost +$400,000 +$200,000 -0-$200,000

FIFO Change in inventory fixed cost +$400,000 +$560,000 -0-$360,000
LIFO Changein inventory fixed cost +$400,000

OI. VC vs ABS AC>VC AC>VC -0AC<VC

Qt

Units sold 100,000 110,000 120,000 130,000

Units sold 100,000 110,000

1 2 3 4

120,000 150,000 100,000 120,000

Units produced 120,000 150,000

Units in the ending inventory 20,000 60,000 40,000 30,000

Units in the ending inventory 20,000 60,000

Unit fixed cost $20 $16 $24 $20

Unit fixed cost $20 $20 $16 $20 $16 $20 $16

OI, VC vs ABS AC>VC AC>VC -0AC<VC

OI, VC vs ABS AC>VC

Qt 1 2

100,000

120,000

40,000

120,000

130,000

30,000

LIFO fixed cost, ending inventory $400,000 $20x20,000 + $16x40,000 = $1,040,000 +$640,000 $20x20,000 + $16x20,000 =$720,000 -$320,000 $20x20,000 +$16x10,000 =$560,000 -$160,000

AC>VC

AC<VC

AC<VC

Peak Recycles Co. provides the following information for the past two years: Year 1 Beginning inventory Ending inventory Production Sales Sales price Variable manufacturing cost Zero units 30 units 120 units 90 units Year 2 ? 30 units 120 units 120 units $35 per unit $10 per unit

Fixed manufacturing cost $2,160 per year Required: (a)Assume the firm uses variable costing, and determine the following amounts: Operating profit, Year 1 $_____$ 90_______ OI = ($35 10) x 90u - $2,160 = $90 Operating profit, Year 2 $_____$ 840_______ OI = ($35 10) x 120u - $2,160 = $840

(a)Assume the firm uses variable costing, and determine the following amounts: Operating profit, Year 1 $_______________ Operating profit, Year 2 $_______________

(b)Assume that the firm uses absorption costing, and determine the fixed manufacturing costs per unit in the first year: $____________per unit

(b)Assume that the firm uses absorption costing, and determine the total amount of fixed manufacturing costs assigned to the ending inventories: At the end of year 1: $_______________ At the end of year 2: $_______________

(c) Assume that the firm uses absorption costing, and determine the following
amounts:

Operating profit, Year 1 Operating profit, Year 2

$_______________ $_______________

Year 1 Beginning inventory Ending inventory Production Sales Sales price Variable manufacturing cost Fixed manufacturing cost Zero units 30 units 120 units 90 units

Year 2 ? 30 units 120 units 120 units $35 per unit $10 per unit $2,160 per year

(b)Assume that the firm uses absorption costing, and determine the fixed manufacturing costs per unit in the first year: $2,160 / 120u = $18 $____$ 18_____per unit (c) Assume that the firm uses absorption costing, and determine the total amount of fixed manufacturing costs assigned to the ending inventories: At the end of year 1: $____$ 540______ 30 x $18 = $540 At the end of year 2: $_____$ 540______ 30 x $18 = $540 (d) Assume that the firm uses absorption costing, and determine the following
amounts:

Absorption profit equals variable costing profit plus increase in inventory fixed costs. Operating profit, Year 1 $ 90 + $540 = $630 Operating profit, Year 2 $ 840 + 0 = $ 840 $____$ 630_______ $____$ 840_______

(d) Assume that the firm has reduced its production level in the second year to 100 units. Determine the total amount of fixed manufacturing costs assigned to the ending inventories in year two under each of the following inventory flow assumptions: First, determine the per unit fixed costs in each year: Year 1: UFC = $ 2160 / 120u = $ 18/u Year 2: UFC = $ 2160 / 100u = $ 21.60/u LIFO (last in, first out) $_____180______ Under LIFO the ten units in inventory are assumed to be from year 1 production; 10u x $ 18 = $ 180. FIFO (first in, first out): $_____216_______

Under FIFO the ten units in inventory are assumed to be from year 2 production; 10u x $ 21.60 = $ 216.

Handout 14(e): Variable costing; short-answer questions

1. Fleet Corporation produces a single product. The company manufactured 700 units last year. The ending inventory consisted of 100 units. There was no beginning inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing costs were $2.00 per unit. What would be the change in the dollar amount of ending inventory if variable costing was used instead of absorption costing? A. $800 decrease B. $200 decrease C. $0 D. $200 increase

1. Fleet Corporation produces a single product. The company manufactured 700 units last year. The ending inventory consisted of 100 units. There was no beginning inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing costs were $2.00 per unit. What would be the change in the dollar amount of ending inventory if variable costing was used instead of absorption costing? A. $800 decrease The 100 units would be valued at B. $200 decrease $600 variable cost instead of at C. $0 $800 absorption cost. D. $200 increase

2. Swifton Company produces a single product. Last year, the company had net operating income of $40,000 using variable costing. Beginning and ending inventories were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost was $3.00 per unit, what was the income using absorption costing? A. $15,000 B. $25,000 C. $40,000 D. $55,000

2. Swifton Company produces a single product. Last year, the company had net operating income of $40,000 using variable costing. Beginning and ending inventories were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost was $3.00 per unit, what was the income using absorption costing? A. $15,000 B. $25,000 The fixed costs in inventory increase by C. $40,000 $15,000 (5,000 units x $3), so the income D. $55,000
increases to $55,000 ($40,000 + 15,000).

3. Blake Company produces a single product. Last year, Blake's net operating income under absorption costing was $3,600 lower than under variable costing. The company sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1 was variable selling expense. If production cost was $11 per unit under absorption costing, then how many units did the company produce during the year? A. 8,200 units B. 8,800 units C. 11,200 units D. 11,800 units

3. Blake Company produces a single product. Last year, Blake's net operating income under absorption costing was $3,600 lower than under variable costing. The company sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1 was variable selling expense. If production cost was $11 per unit under absorption costing, then how many units did the company produce during the year? A. 8,200 units B. 8,800 units The fixed cost per unit is $3 ($11 - $8), so C. 11,200 units production is lower than sales by 1,200 units. D. 11,800 units Production is 8,800 units (10,000 1,200).

4. Bellue Inc. manufactures a variety of products. Variable costing net operating income was $96,300 last year and ending inventory decreased by 2,600 units. Fixed manufacturing overhead cost was $1 per unit. What was the absorption costing net operating income last year? A. $2,600 B. $93,700 C. $96,300 D. $98,900

4. Bellue Inc. manufactures a variety of products. Variable costing net operating income was $96,300 last year and ending inventory decreased by 2,600 units. Fixed manufacturing overhead cost was $1 per unit. What was the absorption costing net operating income last year? A. $2,600 Absorption costing income is lower than B. $93,700 variable costing income by the $2,600 decrease C. $96,300 in inventory fixed cost. D. $98,900
$96,300 - $2,600 = $93,700.