Chapter 7

Variable Costing: A Tool for Management

True/False
1.
T
Easy

Inthepreparationoffinancialstatementsusingvariablecosting,
fixedmanufacturingoverheadistreatedasaperiodcost.

2.
F
Hard

Directlaborisalwaysconsideredtobeaproductcostundervariable
costing.

3.
F
Medium

Undervariablecosting,theunitproductcostcontainssomefixed
manufacturingoverheadcost.

4.
F
Medium

Undervariablecostingitmaybepossibletoreportaprofitevenif
thecompanysellslessthanthebreakevenvolumeofsales.

5.
T
Easy

Undervariablecosting,theimpactoffixedcostisemphasizedbecause
thetotalamountofsuchcostfortheperiodappearsintheincome
statement.

6.
F
Easy

Absorptioncostingtreatsfixedmanufacturingoverheadasaperiod
cost,ratherthanasaproductcost.

7.
F
Medium

Theunitproductcostunderabsorptioncostingcontainsnoelementof
fixedmanufacturingoverheadcost.

8.
T
Easy

Absorptioncostingtreatsallmanufacturingcostsasproductcosts.

9.
T
Easy

Whenthenumberofunitsinworkinprocessandfinishedgoods
inventoriesincrease,absorptioncostingnetincomewilltypicallybe
greaterthanvariablecostingnetincome.

10.
F
Easy

Whensalesexceedsproductionforaperiod,absorptioncostingnet
incomewillgenerallybegreaterthanvariablecostingnetincome.

ManagerialAccounting,9/e

221

11.
F
Medium

Absorptioncostingnetincomeisclosertothenetcashflowofa
periodthanisvariablecostingnetincome.

12.
F
Medium

Variablecostingisnotpermittedforincometaxpurposes,butitis
widelyacceptedforexternalfinancialreports.

13.
F
Medium

Netincomeisnotaffectedbychangesinproductionwhenabsorption
costingisused.

14.
T
Easy

WhenJITmethodsareintroduced,thedifferenceinnetincomecomputed
undertheabsorptionandvariablecostingmethodsisreduced.

15.
T
Easy

Sincevariablecostingemphasizescostsbybehavior,itworkswell
withcostvolumeprofitanalysis.

Multiple Choice
16.
C
Easy

Acostthatwouldbeincludedinproductcostsunderbothabsorption
costingandvariablecostingwouldbe:
a.supervisorysalaries.
b.equipmentdepreciation.
c.variablemanufacturingcosts.
d.variablesellingexpenses.

17.
C
Easy
CPA
adapted

Anallocatedportionoffixedmanufacturingoverheadisincludedin
productcostsunder:

18.
B
Medium
CPA
adapted

Thevariablecostingmethodordinarilyincludesinproductcoststhe
following:
a.Directmaterialscost,directlaborcost,butno manufacturing
overheadcost.
b.Directmaterialscost,directlaborcost,andvariable
manufacturingoverheadcost.
c.Primecostbutnotconversioncost.
d.Primecostandallconversioncost.

AbsorptionVariable
costingcosting
a.NoNo
b.NoYes
c.YesNo
d.YesYes

222ManagerialAccounting,9/e

19.
D
Easy

CayCompany'sfixedmanufacturingoverheadcoststotaled$100,000,and
variablesellingcoststotaled$80,000.Undervariablecosting,how
shouldthesecostsbeclassified?
PeriodcostsProductcosts
a.$0$180,000
b.$80,000$100,000
c.$100,000$80,000
d.$180,000$0

20.
A
Easy

Whichofthefollowingareconsideredtobeproductcostsunder
variablecosting?
I.Variablemanufacturingoverhead.
II.Fixedmanufacturingoverhead.
III.Sellingandadministrativeexpenses.
a.I.
b.IandII.
c.IandIII.
d.I,II,andIII.

21.
B
Medium
CPA
adapted

Whatfactoristhecauseofthedifferencebetweennetincomeas
computedunderabsorptioncostingandnetincomeascomputedunder
variablecosting?
a.Absorptioncostingconsidersallmanufacturingcostsinthe
determinationofnetincome,whereasvariablecosting
considers
onlyprimecosts.
b.Absorptioncostingallocatesfixedmanufacturingcosts between
costofgoodssoldandinventories,andvariable
costingconsiders
allfixedmanufacturingcostsasperiod
costs.
c.Absorptioncostingincludesallvariablemanufacturingcosts
in
productcosts,butvariablecostingconsidersvariable
manufacturingcoststobeperiodcosts.
d.Absorptioncostingincludesallfixedmanufacturingcostsin
productcosts,butvariablecostingexpensesallfixed
manufacturingcosts.

22.
C
Easy

Undervariablecosting,costswhicharetreatedasperiodcosts
include:
a.onlyfixedmanufacturingcosts.
b.bothvariableandfixedmanufacturingcosts.
c.allfixedcosts.
d.onlyfixedsellingandadministrativecosts.

ManagerialAccounting,9/e

223

23.
C
Medium

Whichofthefollowingstatementsistrueforafirmthatuses
variablecosting?
a.Theunitproductcostchangesasaresultofchangesinthe
numberofunitsmanufactured.
b.Bothvariablesellingcostsandvariableproductioncosts
are
includedintheunitproductcost.
c.Netincomemovesinthesamedirectionassales.
d.Netincomeisgreatestinperiodswhenproductionis
highest.

24.
B
Easy

Whichofthefollowingareconsideredtobeproductcostsunder
absorptioncosting?
I.Variablemanufacturingoverhead.
II.Fixedmanufacturingoverhead.
III.Sellingandadministrativeexpenses.
a.I,II,andIII.
b.IandII.
c.IandIII.
d.I.

25.
C
Easy

Theterm"grossmargin"foramanufacturingcompanyreferstothe
excessofsalesover
a.costofgoodssold,excludingfixedmanufacturingoverhead.
b.allvariablecosts,includingvariablesellingand
administrativeexpenses.
c.costofgoodssold,includingfixedmanufacturingoverhead.
d.variablecosts,excludingvariablesellingand
administrative
expenses.

26.
A
Medium
CPA
adapted

Netincomedeterminedusingfullabsorptioncostingcanbereconciled
tonetincomedeterminedusingvariablecostingbycomputingthe
differencebetween:
a.Fixedmanufacturingoverheadcostsdeferredinorreleased
from
inventories.
b.Inventorieddiscretionarycostsinthebeginningandending
inventories.
c.Grossmargin(absorptioncostingmethod)andcontribution
margin(variablecostingmethod).
d.Salesasrecordedunderthevariablecostingmethodand salesas
recordedundertheabsorptioncostingmethod.

27.
B
Medium
CMA
adapted

Netincomereportedunderabsorptioncostingwillexceednetincome
reportedundervariablecostingforagivenperiodif:
a.productionequalssalesforthatperiod.
b.productionexceedssalesforthatperiod.
c.salesexceedproductionforthatperiod.
d.thevariablemanufacturingoverheadexceedsthefixed
manufacturingoverhead.

224ManagerialAccounting,9/e

28.
D
Medium
CPA
adapted

Whatwillbethedifferenceinnetincomebetweenvariablecostingand
absorptioncostingifthenumberofunitsinworkinprocessand
finishedgoodsinventoriesincrease?
a.Therewillbenodifferenceinnetincome.
b.Netincomecomputedusingvariablecostingwillbehigher.
c.Thedifferenceinnetincomecannotbedeterminedfromthe
informationgiven.
d.Netincomecomputedusingvariablecostingwillbelower.

29.
A
Easy

Thecostingmethodthatcanbeusedmosteasilywithbreakeven
analysisandothercostvolumeprofittechniquesis:
a.variablecosting.
b.absorptioncosting.
c.processcosting.
d.jobordercosting.

30.
C
Hard

Forthemostrecentyear,AtlanticCompany'snetincomecomputedby
theabsorptioncostingmethodwas$7,400,anditsnetincomecomputed
bythevariablecostingmethodwas$10,100.Thecompany'sunitproduct
costwas$17undervariablecostingand$22underabsorptioncosting.
Iftheendinginventoryconsistedof1,460units,thebeginning
inventorymusthavebeen:
a.920units.
b.1,460units.
c.2,000units.
d.12,700units.

31.
B
Hard

Duringthemostrecentyear,EvansCompanyhadanetincomeof$90,000
usingabsorptioncostingand$84,000usingvariablecosting.Thefixed
overheadapplicationratewas$6perunit.Therewerenobeginning
inventories.If22,000unitswereproducedlastyear,thensalesfor
lastyearwere:
a.15,000units.
b.21,000units.
c.23,000units.
d.28,000units.

32.
D
Hard

Duringtheyearjustended,RobertsCompany'incomeunderabsorption
costingwas$3,000lowerthanitsincomeundervariablecosting.The
companysold9,000unitsduringtheyear,anditsvariablecostswere
$9perunit,ofwhich$3wasvariablesellingexpense.Ifproduction
costis$11perunitunderabsorptioncostingeveryyear,thenhow
manyunitsdidthecompanyproduceduringtheyear?
a.8,000.
b.10,000.
c.9,600.
d.8,400.

ManagerialAccounting,9/e

225

33.
C
Hard

Lastyear,SilverCompany'svariableproductioncoststotaled$7,500
anditsfixedmanufacturingoverheadcoststotaled$4,500.Thecompany
produced3,000unitsduringtheyearandsold2,400units.Therewere
nounitsinthebeginninginventory.Whichofthefollowingstatements
istrue?
a.Undervariablecosting,theunitsintheendinginventory
will
becostedat$4each.
b.Thenetincomeunderabsorptioncostingfortheyearwillbe
$900
lowerthanthenetincomeundervariablecosting.
c.Theendinginventoryundervariablecostingwillbe$900
lowerthantheendinginventoryunderabsorptioncosting.
d.Underabsorptioncosting,theunitsinendinginventorywill
be
costedat$2.50each.

34.
D
Hard

Duringthelastyear,HansenCompanyhadnetincomeunderabsorption
costingthatwas$5,500lowerthanitsincomeundervariablecosting.
Thecompanysold9,000unitsduringtheyear,anditsvariablecosts
were$10perunit,ofwhich$6wasvariablesellingexpense.Iffixed
productioncostis$5perunitunderabsorptioncostingeveryyear,
thenhowmanyunitsdidthecompanyproduceduringtheyear?
a.7,625units.
b.8,450units.
c.10,100units.
d.7,900units.

35.
B
Medium
CMA
adapted

IndianaCorporationproducesasingleproductthatitsellsfor$9per
unit.Duringthefirstyearofoperations,100,000unitswereproduced
and90,000unitsweresold.Manufacturingcostsandsellingand
administrativeexpensesfortheyearwereasfollows:
FixedCostsVariableCosts
Rawmaterials............$1.75perunitproduced
Directlabor.............1.25perunitproduced
Factoryoverhead.........$100,0000.50perunitproduced
Sellingandadministrative70,0000.60perunitsold
WhatwasIndianaCorporation'snetincomefortheyearusingvariable
costing?
a.$181,000.
b.$271,000.
c.$281,000.
d.$371,000.

226ManagerialAccounting,9/e

36.
C
Medium

Lastyear,fixedmanufacturingoverheadwas$30,000,variable
productioncostswere$48,000,fixedsellingandadministrationcosts
were$20,000,andvariablesellingadministrativeexpenseswere
$9,600.Therewasnobeginninginventory.Duringtheyear,3,000units
wereproducedand2,400unitsweresoldatapriceof$40perunit.
Undervariablecosting,netincomewouldbe:
a.aprofitof$6,000.
b.aprofitof$4,000.
c.alossof$2,000.
d.alossof$4,400.

37.
D
Easy
CPA
adapted

WestCo.'smanufacturingcostsareasfollows:
Directmaterialsanddirectlabor.......$700,000
Othervariablemanufacturingcosts......100,000
Depreciationoffactorybuildingand
manufacturingequipment.............80,000
Otherfixedmanufacturingoverhead......18,000
Whatamountshouldbeconsideredproductcostsforexternalreporting
purposes?
a.$700,000.
b.$800,000.
c.$880,000.
d.$898,000.

38.
C
Hard

Attheendoflastyear,LeeCompanyhad30,000unitsinitsending
inventory.Lee'svariableproductioncostsare$10perunitandits
fixedmanufacturingoverheadcostsare$5peruniteveryyear.The
company'snetincomefortheyearwas$12,000higherundervariable
costingthanunderabsorptioncosting.Giventhesefacts,thenumber
ofunitsofproductininventoryatthebeginningoftheyearmust
havebeen:
a.28,800units.
b.27,600units.
c.32,400units.
d.42,000units.

39.
B
Medium

Duringthelastyear,MooreCompany'svariableproductioncosts
totaled$10,000anditsfixedmanufacturingoverheadcoststotaled
$6,800.Thecompanyproduced5,000unitsduringtheyearandsold
4,600units.Therewerenounitsinthebeginninginventory.Whichof
thefollowingstatementsistrue?
a.Thenetincomeunderabsorptioncostingfortheyearwillbe
$800
higherthannetincomeundervariablecosting.
b.Thenetincomeunderabsorptioncostingfortheyearwillbe
$544
higherthannetincomeundervariablecosting.
c.Thenetincomeunderabsorptioncostingfortheyearwillbe
$544
lowerthannetincomeundervariablecosting.
d.Thenetincomeunderabsorptioncostingfortheyearwillbe
$800
lowerthannetincomeundervariablecosting.

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227

40.
B
Hard

Lastyear,BenCompany'sincomeunderabsorptioncostingwas$4,400
lowerthanitsincomeundervariablecosting.Thecompanysold8,000
unitsduringtheyear,anditsvariablecostswere$8perunit,of
which$3wasvariablesellingexpense.Fixedmanufacturingoverhead
was$1perunitinbeginninginventoryunderabsorptioncosting.How
manyunitsdidthecompanyproduceduringtheyear?
a.12,400units.
b.3,600units.
c.7,120units.
d.7,450units.

41.
C
Hard

Lastyear,StephenCompanyhad20,000unitsinitsendinginventory.
Duringtheyear,Stephen'svariableproductioncostswere$12per
unit.Thefixedmanufacturingoverheadcostwas$8perunitinthe
beginninginventory.Thecompany'snetincomefortheyearwas$9,600
higherundervariablecostingthanitwasunderabsorptioncosting.
Giventhesefacts,thenumberofunitsofproductinthebeginning
inventorylastyearmusthavebeen:
a.21,200.
b.19,200.
c.18,800.
d.19,520.

Reference:71
AakerCompany,whichhasonlyoneproduct,hasprovidedthefollowingdataconcerning
itsmostrecentmonthofoperations:
Sellingprice............................$99
Unitsinbeginninginventory.............0
Unitsproduced...........................6,300
Unitssold...............................6,000
Unitsinendinginventory................300
Variablecostsperunit:
Directmaterials.......................$12
Directlabor...........................42
Variablemanufacturingoverhead........6
Variablesellingandadministrative....6
Fixedcosts:
Fixedmanufacturingoverhead...........$170,100
Fixedsellingandadministrative.......24,000

228ManagerialAccounting,9/e

42.
D
Easy
ReferTo:
71

Whatistheunitproductcostforthemonthundervariablecosting?
a.$66
b.$93
c.$87
d.$60

43.
A
Easy
ReferTo:
71

Whatistheunitproductcostforthemonthunderabsorptioncosting?
a.$87
b.$60
c.$66
d.$93

44.
D
Medium
ReferTo:
71

Thetotalcontributionmarginforthemonthunderthevariablecosting
approachis:
a.$72,000.
b.$27,900.
c.$234,000.
d.$198,000.

45.
C
Medium
ReferTo:
71

Thetotalgrossmarginforthemonthundertheabsorptioncosting
approachis:
a.$98,100.
b.$198,000.
c.$72,000.
d.$12,000.

46.
A
Hard
ReferTo:
71

Whatisthetotalperiodcostforthemonthunderthevariablecosting
approach?
a.$230,100
b.$194,100
c.$170,100
d.$60,000

47.
B
Hard
ReferTo:
71

Whatisthetotalperiodcostforthemonthundertheabsorption
costingapproach?
a.$170,100
b.$60,000
c.$230,100
d.$24,000

48.
B
Medium
ReferTo:
71

Whatisthenetincomeforthemonthundervariablecosting?
a.$8,100
b.$3,900
c.$12,000
d.($14,100)

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229

49.
C
Medium
ReferTo:
71

Whatisthenetincomeforthemonthunderabsorptioncosting?
a.$3,900
b.($14,100)
c.$12,000
d.$8,100

Reference:72
Lastyear,WalshCompanymanufactured25,000unitsandsold22,000units.Production
costswereasfollows:
Directmaterial..................$100,000
Directlabor.....................75,000
Variablemanufacturingoverhead..50,000
Fixedmanufacturingoverhead.....75,000
Salestotaled$440,000,variablesellingandadministrativeexpenseswere$110,000,
andfixedsellingandadministrativeexpenseswere$45,000.Therewasnobeginning
inventory.Assumethatdirectlaborisavariablecost.
50.
B
Easy
ReferTo:
72

Underabsorptioncosting,theunitproductcostwouldbe:
a.$9.00.
b.$12.00.
c.$13.40.
d.$14.00.

51.
A
Medium
ReferTo:
72

Underabsorptioncosting,thegrossmarginwouldbe:
a.$176,000.
b.$242,000.
c.$66,000.
d.$21,000.

52.
D
Medium
ReferTo:
72

Thecontributionmarginperunitwouldbe:
a.$15.00.
b.$11.00.
c.$8.00.
d.$6.00.

53.
A
Easy
ReferTo:
72

Undervariablecosting,thetotalamountoffixedmanufacturingcost
intheendinginventorywouldbe:
a.$0.
b.$9,000.
c.$14,400.
d.$27,000.

54.
C
Medium
ReferTo:
72

Thenetincomeundervariablecostingwouldbe:
a.$2,000.
b.$21,000.
c.$12,000.
d.$9,000.

230ManagerialAccounting,9/e

55.
D
Medium
ReferTo:
72

Thenetincomeunderabsorptioncostingwouldbe:
a.$9,000.
b.$12,000.
c.$2,000.
d.$21,000.

Reference:73
FarronCompany,whichhasonlyoneproduct,hasprovidedthefollowingdata
concerningitsmostrecentmonthofoperations:
Sellingprice............................$92
Unitsinbeginninginventory.............0
Unitsproduced...........................8,700
Unitssold...............................8,300
Unitsinendinginventory................400
Variablecostsperunit:
Directmaterials.......................$13
Directlabor...........................55
Variablemanufacturingoverhead........1
Variablesellingandadministrative....5
Fixedcosts:
Fixedmanufacturingoverhead...........$130,500
Fixedsellingandadministrative.......8,300
56.
A
Easy
ReferTo:
73

Whatistheunitproductcostforthemonthundervariablecosting?
a.$69
b.$84
c.$89
d.$74

57.
D
Easy
ReferTo:
73

Whatistheunitproductcostforthemonthunderabsorptioncosting?
a.$74
b.$89
c.$69
d.$84

58.
A
Medium
ReferTo:
73

Whatisthenetincomeforthemonthundervariablecosting?
a.$10,600
b.($17,000)
c.$16,600
d.$6,000

ManagerialAccounting,9/e

231

59.
B
Medium
ReferTo:
73

Whatisthenetincomeforthemonthunderabsorptioncosting?
a.($17,000)
b.$16,600
c.$6,000
d.$10,600

Reference:74
JarvixCompany,whichhasonlyoneproduct,hasprovidedthefollowingdata
concerningitsmostrecentmonthofoperations:
Sellingprice............................$111
Unitsinbeginninginventory.............400
Unitsproduced...........................8,800
Unitssold...............................8,900
Unitsinendinginventory................300
Variablecostsperunit:
Directmaterials.......................$34
Directlabor...........................37
Variablemanufacturingoverhead........3
Variablesellingandadministrative....9
Fixedcosts:
Fixedmanufacturingoverhead...........$61,600
Fixedsellingandadministrative.......169,100
Thecompanyproducesthesamenumberofunitseverymonth,althoughthesalesin
unitsvaryfrommonthtomonth.Thecompany'svariablecostsperunitandtotalfixed
costshavebeenconstantfrommonthtomonth.
60.
B
Medium
ReferTo:
74

Whatistheunitproductcostforthemonthundervariablecosting?
a.$83
b.$74
c.$90
d.$81

61.
C
Medium
ReferTo:
74

Whatistheunitproductcostforthemonthunderabsorptioncosting?
a.$90
b.$74
c.$81
d.$83

62.
D
Medium
ReferTo:
74

Whatisthenetincomeforthemonthundervariablecosting?
a.$25,900
b.$2,100
c.$17,800
d.$18,500

232ManagerialAccounting,9/e

63.
D
Medium
ReferTo:
74

Whatisthenetincomeforthemonthunderabsorptioncosting?
a.$2,100
b.$25,900
c.$18,500
d.$17,800

Reference:75
HatfieldCompany,whichhasonlyoneproduct,hasprovidedthefollowingdata
concerningitsmostrecentmonthofoperations:
Sellingprice............................$123
Unitsinbeginninginventory.............0
Unitsproduced...........................6,400
Unitssold...............................6,100
Unitsinendinginventory................300
Variablecostsperunit:
Directmaterials.......................$45
Directlabor...........................30
Variablemanufacturingoverhead........1
Variablesellingandadministrative....8
Fixedcosts:
Fixedmanufacturingoverhead...........$140,800
Fixedsellingandadministrative.......91,500
64.
C
Easy
ReferTo:
75

Whatistheunitproductcostforthemonthundervariablecosting?
a.$98
b.$84
c.$76
d.$106

65.
A
Medium
ReferTo:
75

Thetotalcontributionmarginforthemonthunderthevariablecosting
approachis:
a.$237,900.
b.$97,100.
c.$152,500.
d.$286,700.

66.
D
Hard
ReferTo:
75

Whatisthetotalperiodcostforthemonthunderthevariablecosting
approach?
a.$140,300
b.$140,800
c.$232,300
d.$281,100

ManagerialAccounting,9/e

233

67.
B
Medium
ReferTo:
75

Whatisthenetincomeforthemonthundervariablecosting?
a.$6,600
b.$5,600
c.($17,200)
d.$12,200

Reference:76
IancuCompany,whichhasonlyoneproduct,hasprovidedthefollowingdataconcerning
itsmostrecentmonthofoperations:
Sellingprice............................$149
Unitsinbeginninginventory.............0
Unitsproduced...........................4,200
Unitssold...............................3,900
Unitsinendinginventory................300
Variablecostsperunit:
Directmaterials.......................$27
Directlabor...........................46
Variablemanufacturingoverhead........5
Variablesellingandadministrative....9
Fixedcosts:
Fixedmanufacturingoverhead...........$155,400
Fixedsellingandadministrative.......70,200
68.
C
Easy
ReferTo:
76

Whatistheunitproductcostforthemonthundervariablecosting?
a.$124
b.$115
c.$78
d.$87

69.
B
Medium
ReferTo:
76

Whatisthenetincomeforthemonthundervariablecosting?
a.$27,300
b.$16,200
c.($7,200)
d.$11,100

234ManagerialAccounting,9/e

Reference:77
ThePacificCompanymanufacturesasingleproduct.Thefollowingdatarelatetothe
yearjustcompleted:
Variablecostperunit:
Production....................$43
Sellingandadministrative....$15
Fixedcostsintotal:
Production....................$145,000
Sellingandadministrative....$95,000
Duringthelastyear,5,000unitswereproducedand4,800unitsweresold.Therewere
nobeginninginventories.
70.
D
Easy
ReferTo:
77

Undervariablecosting,theunitproductcostwouldbe:
a.$91.00.
b.$72.00.
c.$58.00.
d.$43.00.

71.
C
Medium
ReferTo:
77

Thecarryingvalueoffinishedgoodsinventoryattheendoftheyear
undervariablecostingwouldbe:
a.$8,800greaterthanunderabsorptioncosting.
b.$8,800lessthanunderabsorptioncosting.
c.$5,800lessthanunderabsorptioncosting.
d.Thesameasabsorptioncosting.

72.
B
Medium
ReferTo:
77

Underabsorptioncosting,thecostofgoodssoldfortheyearwould
be:
a.$206,400.
b.$345,600.
c.$278,400.
d.$360,000.

ManagerialAccounting,9/e

235

Reference:78
CrystalCompany'svariablecostingincomestatementforthemonthofMayappears
below:
CrystalCompany
IncomeStatement
ForthemonthendedMay31
Sales($10perunit)..............$900,000
Lessvariablecosts:
Variablecostofgoodssold:
Beginninginventory.........$125,000
Addvariablecostofgoods
manufactured..............400,000
GoodsavailableforSale....525,000
Lessendinginventory.......75,000
Variablecostofgoodssold.450,000
Variablesellingexpense.....90,000
Totalvariablecosts.....540,000
Contributionmargin...............360,000
Fixedcosts:
Fixedmanufacturingoverhead...240,000
Fixedsellingandadmin........90,000
Totalfixedcosts........330,000
Netincome........................$30,000
Thecompanyproduces80,000unitseachmonth.Variableproductioncostsperunitand
totalfixedcostshaveremainedconstantoverthepastseveralmonths.
73.
A
Hard
ReferTo:
78

Thedollarvalueofthecompany'sinventoryonMay31underthe
absorptioncostingmethodwouldbe:
a.$120,000.
b.$90,000.
c.$75,000.
d.$60,000.

74.
B
Hard
ReferTo:
78

Underabsorptioncosting,forthemonthendedMay31,thecompany
wouldreporta:
a.$30,000loss.
b.$0profit.
c.$30,000profit.
d.$60,000profit.

236ManagerialAccounting,9/e

Reference:79
ThefollowingdatawereprovidedbyGreenEnterprisesforthemostrecentperiod:
Unitsinbeginninginventory........0
Unitsproduced......................8,000
Unitssold..........................6,000

Variablecostsperunit:
Manufacturing.....................$15
Sellingandadministrative........5
Fixedcosts,intotal:
Manufacturing.....................$24,000
Sellingandadministrative........16,000
75.
C
Easy
ReferTo:
79

Undervariablecosting,theunitproductcostis:
a.$20.
b.$18.
c.$15.
d.$22.

76.
B
Easy
ReferTo:
79

Underabsorptioncosting,theunitproductcostis:
a.$20.
b.$18.
c.$15.
d.$25.

77.
A
Easy
ReferTo:
79

Fortheperiodabove,onewouldexpectthenetincomeunderabsorption
costingtobe:
a.higherthanthenetincomeundervariablecosting.
b.lowerthanthenetincomeundervariablecosting.
c.thesameasthenetincomeundervariablecosting.
d.Therelationbetweenabsorptioncostingnetincomeand variable
costingnetincomecannotbedetermined.

Reference:710
Thefollowingdatapertaintoonemonth'soperationsofWhitney,Inc.:
Unitsinbeginninginventory.......0
Unitsproduced.....................9,000
Unitssold.........................8,000
Variablecostsperunit:
Manufacturing....................$10
Sellingandadministrative.......6
Fixedcostsintotal:
Manufacturing....................$18,000
Sellingandadministrative.......27,000

ManagerialAccounting,9/e

237

78.
B
Easy
ReferTo:
710

Thecarryingvalueonthebalancesheetoftheendingfinishedgoods
inventoryundervariablecostingwouldbe:
a.$16,000.
b.$10,000.
c.$19,000.
d.$12,000.

79.
C
Easy
ReferTo:
710

Thecarryingvalueonthebalancesheetoftheendingfinishedgoods
inventoryunderabsorptioncostingwouldbe:
a.$16,000.
b.$10,000.
c.$12,000.
d.$21,000.

80.
B
Medium
ReferTo:
710

Forthemonthreferredtoabove,netincomeundervariablecosting
willbe:
a.higherthannetincomeunderabsorptioncosting.
b.lowerthannetincomeunderabsorptioncosting.
c.thesameasnetincomeunderabsorptioncosting.
d.Therelationbetweenvariablecostingandabsorptioncosting
net
incomecannotbedetermined.

Reference:711
BatemanCompany,whichhasonlyoneproduct,hasprovidedthefollowingdata
concerningitsmostrecentmonthofoperations:
Sellingprice............................$117
Unitsinbeginninginventory.............0
Unitsproduced...........................4,700
Unitssold...............................4,400
Unitsinendinginventory................300
Variablecostsperunit:
Directmaterials.......................$36
Directlabor...........................38
Variablemanufacturingoverhead........4
Variablesellingandadministrative....11
Fixedcosts:
Fixedmanufacturingoverhead...........$89,300
Fixedsellingandadministrative.......26,400
81.
D
Easy
ReferTo:
711

Whatistheunitproductcostforthemonthundervariablecosting?
a.$89
b.$97
c.$108
d.$78

82.
A
Easy
ReferTo:
711

Whatistheunitproductcostforthemonthunderabsorptioncosting?
a.$97
b.$108
c.$78
d.$89

Reference:712

238ManagerialAccounting,9/e

Duringthelastyear,SnyderCo.produced10,000unitsofProductS.Costsincurred
bySnyderduringtheyearwereasfollows:
Directmaterials...................$11,000
Directlabor.......................21,000
Variablemanufacturingoverhead....6,100
Variablesellingandgeneral.......3,100
Fixedmanufacturingoverhead.......9,000
Fixedsellingandgeneral..........4,100
Total..............................$54,300
83.
C
Medium
ReferTo:
712

Theunitproductcostunderabsorptioncostingwouldhavebeen:
a.$5.43.
b.$3.81.
c.$4.71.
d.$4.12.

84.
B
Medium
ReferTo:
712

Theunitproductcostundervariablecostingwouldhavebeen:
a.$3.20.
b.$3.81.
c.$4.12.
d.$3.51.

Reference:713
Duringthepastyear,CarrCompanymanufactured25,000unitsandsold20,000units.
Productioncostsfortheyearwereasfollows:
Fixedmanufacturingoverhead......$250,000
Variablemanufacturingoverhead...$210,000
Directlabor......................$120,000
Directmaterials..................$180,000
Salestotaled$850,000,variablesellingexpensestotaled$110,000,andfixedselling
andadministrativeexpensestotaled$170,000.Therewerenounitsinbeginning
inventory.Assumethatdirectlaborisavariablecost.
85.
D
Medium
ReferTo:
713

Thecontributionmarginperunitwouldbe:
a.$12.10.
b.$22.10.
c.$17.70.
d.$16.60.

86.
D
Medium
ReferTo:
713

Underabsorptioncosting,theendinginventoryfortheyearwouldbe
valuedat:
a.$179,500.
b.$213,500.
c.$222,000.
d.$152,000.

87.
C
Medium
ReferTo:
713

Thenetincomefortheyearundervariablecostingwouldbe:
a.$28,000lowerthanunderabsorptioncosting.
b.$28,000higherthanunderabsorptioncosting.
c.$50,000lowerthanunderabsorptioncosting.
d.$50,000higherthanunderabsorptioncosting.

Reference:714

ManagerialAccounting,9/e

239

Lastyear,HarrisCompanymanufactured17,000unitsandsold13,000units.Production
costsfortheyearwereasfollows:
Directmaterials......................$153,000
Directlabor..........................110,500
Variablemanufacturingoverhead.......204,000
Fixedmanufacturingoverhead..........255,000
Saleswere$780,000fortheyear,variablesellingandadministrativeexpenseswere
$88,400,andfixedsellingandadministrativeexpenseswere$170,000.Therewasno
beginninginventory.Assumethatdirectlaborisavariablecost.
88.
D
Medium
ReferTo:
714

Thecontributionmarginperunitwas:
a.$17.50.
b.$32.50.
c.$27.30.
d.$25.70.

89.
B
Medium
ReferTo:
714

Underabsorptioncosting,thecarryingvalueonthebalancesheetof
theendinginventoryfortheyearwouldbe:
a.$190,800.
b.$170,000.
c.$230,800.
d.$0.

90.
d
Hard
ReferTo:
714

Undervariablecosting,thecompany'snetincomefortheyearwould
be:
a.$60,000higherthanunderabsorptioncosting.
b.$108,000higherthanunderabsorptioncosting.
c.$108,000lowerthanunderabsorptioncosting.
d.$60,000lowerthanunderabsorptioncosting.

240ManagerialAccounting,9/e

Reference:715
FaheyCompanymanufacturesasingleproductwhichitsellsfor$25perunit.The
companyhasthefollowingcoststructure:
Variablecostsperunit:
Manufacturing....................$9
SellingandAdministrative.......3
Fixedcostsintotal:
Manufacturing....................$72,000
SellingandAdministrative.......54,000
Therewerenounitsinbeginninginventory.Duringtheyear,18,000unitswere
producedand15,000unitsweresold.
91.
C
Easy
ReferTo:
715

Underabsorptioncosting,theunitproductcostwouldbe:
a.$9.
b.$12.
c.$13.
d.$16.

92.
D
Medium
ReferTo:
715

Thecompany'snetincomefortheyearundervariablecostingwouldbe:
a.$60,000.
b.$81,000.
c.$57,000.
d.$69,000.

Reference:716
ErieCompanymanufacturesasingleproduct.Assumethefollowingdatafortheyear
justcompleted:
Fixedcostsintotal:
SellingandAdministrative...$60,000
Production...................$82,500

Variablecostsperunit:
SellingandAdministrative...$5
Production...................$8
Therewerenounitsininventoryatthebeginningoftheyear.Duringtheyear30,000
unitswereproducedand25,000unitsweresold.Eachunitsellsfor$35.
93.
D
Easy
ReferTo:
716

Underabsorptioncosting,theunitproductcostwouldbe:
a.$8.
b.$17.75.
c.$13.
d.$10.75.

ManagerialAccounting,9/e

241

94.
A
Medium
ReferTo:
716

Thecompany'snetincomeundervariablecostingwouldbe:
a.$407,500.
b.$421,250.
c.$431,250.
d.$417,500.

Reference:717
ChownCompany,whichhasonlyoneproduct,hasprovidedthefollowingdataconcerning
itsmostrecentmonthofoperations:
Sellingprice............................$110
Unitsinbeginninginventory.............0
Unitsproduced...........................8,000
Unitssold...............................7,800
Unitsinendinginventory................200
Variablecostsperunit:
Directmaterials.......................$22
Directlabor...........................31
Variablemanufacturingoverhead........3
Variablesellingandadministrative....4
Fixedcosts:
Fixedmanufacturingoverhead...........$248,000
Fixedsellingandadministrative.......140,400
95.
B
Medium
ReferTo:
717

Thetotalcontributionmarginforthemonthunderthevariablecosting
approachis:
a.$179,400.
b.$390,000.
c.$421,200.
d.$142,000.

96.
B
Medium
ReferTo:
717

Thetotalgrossmarginforthemonthundertheabsorptioncosting
approachis:
a.$196,800.
b.$179,400.
c.$390,000.
d.$7,800.

242ManagerialAccounting,9/e

Reference:718
DelvinCompany,whichhasonlyoneproduct,hasprovidedthefollowingdata
concerningitsmostrecentmonthofoperations:
Sellingprice............................$120
Unitsinbeginninginventory.............0
Unitsproduced...........................1,800
Unitssold...............................1,500
Unitsinendinginventory................300
Variablecostsperunit:
Directmaterials.......................$40
Directlabor...........................42
Variablemanufacturingoverhead........2
Variablesellingandadministrative....9
Fixedcosts:
Fixedmanufacturingoverhead...........$7,200
Fixedsellingandadministrative.......28,500
97.
B
Hard
ReferTo:
718

Whatisthetotalperiodcostforthemonthunderthevariablecosting
approach?
a.$42,000
b.$49,200
c.$35,700
d.$7,200

98.
A
Hard
ReferTo:
718

Whatisthetotalperiodcostforthemonthundertheabsorption
costingapproach?
a.$42,000
b.$7,200
c.$49,200
d.$28,500

ManagerialAccounting,9/e

243

Reference:719
GabbertCompany,whichhasonlyoneproduct,hasprovidedthefollowingdata
concerningitsmostrecentmonthofoperations:
Sellingprice............................$90
Unitsinbeginninginventory.............0
Unitsproduced...........................3,600
Unitssold...............................3,400
Unitsinendinginventory................200
Variablecostsperunit:
Directmaterials.......................$23
Directlabor...........................11
Variablemanufacturingoverhead........2
Variablesellingandadministrative....8
Fixedcosts:
Fixedmanufacturingoverhead...........$93,600
Fixedsellingandadministrative.......61,200
99.
D
Medium
ReferTo:
719

Thetotalcontributionmarginforthemonthunderthevariablecosting
approachis:
a.$62,800.
b.$95,200.
c.$183,600.
d.$156,400.

100.
A
Medium
ReferTo:
719

Thetotalgrossmarginforthemonthundertheabsorptioncosting
approachis:
a.$95,200.
b.$156,400.
c.$6,800.
d.$107,600.

101.
D
Hard
ReferTo:
719

Whatisthetotalperiodcostforthemonthunderthevariablecosting
approach?
a.$93,600
b.$154,800
c.$88,400
d.$182,000

102.
A
Hard
ReferTo:
719

Whatisthetotalperiodcostforthemonthundertheabsorption
costingapproach?
a.$88,400
b.$182,000
c.$61,200
d.$93,600

244ManagerialAccounting,9/e

Reference:720
GordonCompanyproducesasingleproductthatsellsfor$10perunit.Lastyearthere
werenobeginninginventories,100,000unitswereproduced,and80,000unitswere
sold.Thecompanyhasthefollowingcoststructure:
FixedcostsVariablecosts
Rawmaterials................$2.00perunitproduced
Directlabor.................1.25perunitproduced
Factoryoverhead.............$120,0000.75perunitproduced
Sellingandadministrative...70,0001.00perunitsold
103.
B
Medium
ReferTo:
720

Netincomeundervariablecostingwouldbe:
a.$114,000.
b.$210,000.
c.$234,000.
d.$330,000.

104.
B
Medium
ReferTo:
720

Thecarryingvalueonthebalancesheetoftheendingfinishedgoods
inventoryunderabsorptioncostingwouldbe:
a.$80,000.
b.$104,000.
c.$110,000.
d.$124,000.

Reference:721
ElliotCompany,whichhasonlyoneproduct,hasprovidedthefollowingdata
concerningitsmostrecentmonthofoperations:
Sellingprice............................$112
Unitsinbeginninginventory.............0
Unitsproduced...........................4,900
Unitssold...............................4,500
Unitsinendinginventory................400
Variablecostsperunit:
Directmaterials.......................$19
Directlabor...........................45
Variablemanufacturingoverhead........6
Variablesellingandadministrative....9
Fixedcosts:
Fixedmanufacturingoverhead...........$117,600
Fixedsellingandadministrative.......22,500
105.
D
Medium
ReferTo:
721

Whatisthenetincomeforthemonthundervariablecosting?
a.$18,000
b.($19,600)
c.$9,600
d.$8,400

106.
D
Medium
ReferTo:
721

Whatisthenetincomeforthemonthunderabsorptioncosting?
a.($19,600)
b.$9,600
c.$8,400
d.$18,000

ManagerialAccounting,9/e

245

Reference:722
KhanamCompany,whichhasonlyoneproduct,hasprovidedthefollowingdata
concerningitsmostrecentmonthofoperations:
Sellingprice............................$97
Unitsinbeginninginventory.............500
Unitsproduced...........................8,400
Unitssold...............................8,500
Unitsinendinginventory................400
Variablecostsperunit:
Directmaterials.......................$20
Directlabor...........................37
Variablemanufacturingoverhead........1
Variablesellingandadministrative....11
Fixedcosts:
Fixedmanufacturingoverhead...........$67,200
Fixedsellingandadministrative.......161,500
Thecompanyproducesthesamenumberofunitseverymonth,althoughthesalesin
unitsvaryfrommonthtomonth.Thecompany'svariablecostsperunitandtotalfixed
costshavebeenconstantfrommonthtomonth.
107.
B
Medium
ReferTo:
722

Whatisthenetincomeforthemonthundervariablecosting?
a.$8,500
b.$9,300
c.$3,200
d.$15,100

108.
A
Medium
ReferTo:
722

Whatisthenetincomeforthemonthunderabsorptioncosting?
a.$8,500
b.$9,300
c.$3,200
d.$15,100

246ManagerialAccounting,9/e

Reference:723
DeAnneCompany'svariablecostingincomestatementforAugustappearsbelow:
DeAnneCompany
IncomeStatement
ForthemonthendedAugust31
Sales($15perunit)................$600,000
Lessvariablecosts:
Variablecostofgoodssold:
Beginninginventory..............$72,000
Addvariablecostof
goodsmanufactured.............315,000
Goodsavailableforsale.........387,000
Lessendinginventory............27,000
Variablecostofgoodssold......360,000
Variablesellingexpense.........80,000
Totalvariablecosts..........440,000
Contributionmargin.................160,000
Fixedcosts:
Fixedmanufacturing..............105,000
Fixedsellingandadministrative.35,000
Totalfixedcosts.............140,000
Netincome..........................$20,000
Thecompanyproduces35,000unitseachmonth.Variableproductioncostsperunitand
totalfixedcostshaveremainedconstantoverthepastseveralmonths.
109.
C
Hard
ReferTo:
723

Thedollarvalueofthecompany'sinventoryonAugust31underthe
absorptioncostingmethodwouldbe:
a.$27,000.
b.$42,000.
c.$36,000.
d.$47,000.

110.
D
Hard
ReferTo:
723

Underabsorptioncosting,forthemonthendedAugust31,thecompany
wouldreporta:
a.$20,000profit.
b.$5,000loss.
c.$35,000profit.
d.$5,000profit.

ManagerialAccounting,9/e

247

Essay
111.
Hard

LeeCompany,whichhasonlyoneproduct,hasprovidedthefollowingdata
concerningitsmostrecentmonthofoperations:
Sellingprice............................$95
Unitsinbeginninginventory.............100
Unitsproduced...........................6,200
Unitssold...............................5,900
Unitsinendinginventory................400
Variablecostsperunit:
Directmaterials.......................$42
Directlabor...........................28
Variablemanufacturingoverhead........1
Variablesellingandadministrative....5
Fixedcosts:
Fixedmanufacturingoverhead...........$62,000
Fixedsellingandadministrative.......35,400
Thecompanyproducesthesamenumberofunitseverymonth,althoughthe
salesinunitsvaryfrommonthtomonth.Thecompany'svariablecosts
perunitandtotalfixedcostshavebeenconstantfrommonthtomonth.
Required:
a.Whatistheunitproductcostforthemonthundervariable
costing?
b.Whatistheunitproductcostforthemonthunderabsorption
costing?
c.Prepareanincomestatementforthemonthusingthe
contribution
formatandthevariablecostingmethod.
d.Prepareanincomestatementforthemonthusingthe
absorption
costingmethod.
e.Reconcilethevariablecostingandabsorptioncostingnet
incomesforthemonth.

248ManagerialAccounting,9/e

Answer:
a.&b.Unitproductcosts
Variablecosting:
Directmaterials.......................$42
Directlabor...........................28
Variablemanufacturingoverhead........1
Unitproductcost......................$71
Absorptioncosting:
Directmaterials.......................$42
Directlabor...........................28
Variablemanufacturingoverhead........1
Fixedmanufacturingoverhead...........10
Unitproductcost......................$81
c.&d.Incomestatements
Variablecostingincomestatement
Sales......................................$560,500
Lessvariableexpenses:
Variablecostofgoodssold:
Beginninginventory....................$7,100
Addvariablemanufacturingcosts.......440,200
Goodsavailableforsale...............447,300
Lessendinginventory..................28,400
Variablecostofgoodssold............418,900
Variablesellingandadministrative....29,500448,400
Contributionmargin........................112,100
Lessfixedexpenses:
Fixedmanufacturingoverhead...........62,000
Fixedsellingandadministrative.......35,40097,400
Netincome.................................$14,700
Absorptioncostingincomestatement
Sales......................................$560,500
Costofgoodssold:
Beginninginventory......................$8,100
Addcostofgoodsmanufactured...........502,200
Goodsavailableforsale.................510,300
Lessendinginventory....................32,400477,900
Grossmargin...............................82,600
Lesssellingandadministrativeexpenses:
Variablesellingandadministrative......29,500
Fixedsellingandadministrative.........35,40064,900
Netincome.................................$17,700

ManagerialAccounting,9/e

249

e.Reconciliation
Variablecostingnetincome................$14,700
Addfixedmanufacturingoverheadcosts
deferredininventoryunderabsorption
costing..................................3,000
Deductfixedmanufacturingoverheadcosts
releasedfrominventoryunderabsorption
costing..................................0
Absorptioncostingnetincome..............$17,700
112.
Medium

MahughCompany,whichhasonlyoneproduct,hasprovidedthefollowing
dataconcerningitsmostrecentmonthofoperations:
Sellingprice..............................$122
Unitsinbeginninginventory.............0
Unitsproduced...........................8,300
Unitssold...............................8,200
Unitsinendinginventory................100
Variablecostsperunit:
Directmaterials.......................$27
Directlabor...........................46
Variablemanufacturingoverhead........4
Variablesellingandadministrative....7
Fixedcosts:
Fixedmanufacturingoverhead...........$199,200
Fixedsellingandadministrative.......106,600
Required:
a.Whatistheunitproductcostforthemonthundervariable
costing?
b.Whatistheunitproductcostforthemonthunderabsorption
costing?
c.Prepareanincomestatementforthemonthusingthe
contribution
formatandthevariablecostingmethod.
d.Prepareanincomestatementforthemonthusingthe
absorption
costingmethod.
e.Reconcilethevariablecostingandabsorptioncostingnet
incomesforthemonth.

250ManagerialAccounting,9/e

Answer:
a.&b.Unitproductcosts
Variablecosting:
Directmaterials.....................$27
Directlabor.........................46
Variablemanufacturingoverhead......4
Unitproductcost....................$77
Absorptioncosting:
Directmaterials.....................$27
Directlabor.........................46
Variablemanufacturingoverhead......4
Fixedmanufacturingoverhead.........24
Unitproductcost....................$101
c.&d.Incomestatements
Variablecostingincomestatement
Sales....................................$1,000,400
Lessvariableexpenses:
Variablecostofgoodssold:
Beginninginventory..................$0
Addvariablemanufacturingcosts.....639,100
Goodsavailableforsale.............639,100
Lessendinginventory................7,700
Variablecostofgoodssold..........631,400
Variablesellingandadministrative..57,400688,800
Contributionmargin......................311,600
Lessfixedexpenses:
Fixedmanufacturingoverhead.........199,200
Fixedsellingandadministrative.....106,600305,800
Netincome...............................$5,800
Absorptioncostingincomestatement
Sales....................................$1,000,400
Costofgoodssold:
Beginninginventory....................$0
Addcostofgoodsmanufactured.........838,300
Goodsavailableforsale...............838,300
Lessendinginventory..................10,100828,200
Grossmargin.............................172,200
Lesssellingandadministrativeexpenses:
Variablesellingandadministrative....57,400
Fixedsellingandadministrative.......106,600164,000
Netincome...............................$8,200
e.Reconciliation
Variablecostingnetincome................$5,800
Addfixedmanufacturingoverheadcosts
deferredininventoryunderabsorption
costing..................................2,400
Deductfixedmanufacturingoverheadcosts
releasedfrominventoryunderabsorption
costing..................................0

Absorptioncostingnetincome..............$8,200

ManagerialAccounting,9/e

251

113.
Medium

TheEGCompanyproducesandsellsoneproductamicrowaveoven.The
followingdatarefertotheyearjustcompleted:
Beginninginventory.......................$0
Unitsproduced............................25,000
Unitssold................................20,000
Salespriceperunit......................$400
Sellingandadministrativeexpenses:
Variableperunit......................$15
Fixed(total)..........................$275,000
Manufacturingcosts:
Directmaterialscostperunit.........$200
Directlaborcostperunit.............$50
Variableoverheadcostperunit........$30
Fixedoverhead(total).................$300,000
Assumethatdirectlaborisavariablecost.
Required:
a.Computethecostofasingleunitofproductunderboththe
absorptioncostingandvariablecostingapproaches.
b.Prepareanincomestatementfortheyearusingabsorption
costing.
c.Prepareanincomestatementfortheyearusingvariable costing.
d.Reconciletheabsorptioncostingandvariablecostingnet
incomefiguresin(b)and(c)above.
Answer:
a.Costperunitunderabsorptioncosting:
Directmaterials....................$200
Directlabor........................50
Variableoverhead...................30
Fixedoverhead($300,00025,000)..12
Totalcostperunit.................$292
Costperunitundervariablecosting:
Directmaterials....................$200
Directlabor........................50
Variableoverhead...................30
Totalcostperunit.................$280
b.Absorptioncostingincomestatement:
Sales...............................$8,000,000
Costofgoodssold:
Beginninginventory.................$0
Costofgoodsmanufactured
(25,000@$292)7,300,000
Costofgoodsavailable.............7,300,000
Lessendinginventory
(5,000units@$292).............1,460,0005,840,000
Grossprofit........................2,160,000
Lesssellingandadministrativeexpenses:
[($15x20,000)+$275,000].......575,000
Netincome..........................$1,585,000

252ManagerialAccounting,9/e

c.Variablecostingincomestatement:
Sales...............................$8,000,000
Costofgoodssold:
Beginninginventory.................$0
Costofgoodsmanufactured
(25,000@$280)7,000,000
Costofgoodsavailable.............7,000,000
Lessendinginventory
(5,000units@$280)1,400,000
Variablecostofgoodssold.........5,600,000
Variablesellingandadmin.expenses:
(20,000x$15).................300,0005,900,000
Contributionmargin.................2,100,000
Lessfixedexpenses:
Manufacturingoverhead..............300,000
Sellingandadministrative..........275,000575,000
Netincome..........................$1,525,000

114.
Medium

d.
Netincomeundervariablecosting...$1,525,000
Addfixedmanufacturingoverhead
costsdeferredininventory
underabsorptioncosting
(5,000unitsX$12)..............60,000
Netincomeunderabsorptioncosting$1,585,000
TheDeanCompanyproducesandsellsasingleproductamicrowaveoven.
Thefollowingdatarefertotheyearjustcompleted:
Beginninginventory....................$0
Unitsproduced.........................20,000
Unitssold.............................19,000
Salespriceperunit...................$350
Sellingandadministrativeexpenses:
Variableperunit....................$10
Fixed(total)........................$225,000
Manufacturingcosts:
Directmaterialscostperunit.......$190
Directlaborcostperunit...........$40
Variableoverheadcostperunit......$25
Fixedoverhead(total)...............$250,000
Assumethatdirectlaborisavariablecost.
Required:
a.Computethecostofasingleunitofproductunderboththe
absorptioncostingandvariablecostingapproaches.
b.Prepareanincomestatementfortheyearusingabsorption
costing.
c.Prepareanincomestatementfortheyearusingvariable costing.
d.Reconciletheabsorptioncostingandvariablecostingnet
incomefiguresin(b)and(c)above.

ManagerialAccounting,9/e

253

Answer:
a.Costperunitunderabsorptioncosting:
Directmaterials....................$190.00
Directlabor........................40.00
Variableoverhead...................25.00
Fixedoverhead($250,00020,000)..12.50
Totalcostperunit.................$267.50
Costperunitundervariablecosting:
Directmaterials....................$190.00
Directlabor........................40.00
Variableoverhead...................25.00
Totalcostperunit.................$255.00
b.Absorptioncostingincomestatement:
Sales.................................$6,650,000
Costofgoodssold:
Beginninginventory...................$0
Costofgoodsmanufactured
(20,000@$267.50).................5,350,000
Costofgoodsavailable...............5,350,000
Lessendinginventory
(1,000units@$267.50)............267,5005,082,500
Grossprofit..........................1,567,500
Lesssellingandadministrativeexpenses:
[($10x19,000)+$225,000].........415,000
Netincome............................$1,152,500
c.Variablecostingincomestatement:
Sales.................................$6,650,000
Costofgoodssold:
Beginninginventory...................$0
Costofgoodsmanufactured
(20,000@$255)....................5,100,000
Costofgoodsavailable...............5,100,000
Lessendinginventory
(1,000units@$255)...............255,000
Variablecostofgoodssold...........4,845,000
Variablesellingandadministrative
expenses:(19,000x$10)............190,0005,035,000
Contributionmargin...................1,615,000
Lessfixedexpenses:
Manufacturingoverhead................$250,000
Sellingandadministrative............225,000475,000
Netincome............................$1,140,000
d.
Netincomeundervariablecosting.....$1,140,000
Addfixedmanufacturingoverheadcosts
deferredininventoryunderabsorption
costing(5,000unitsX$12).........12,500
Netincomeunderabsorptioncosting...$1,152,500

254ManagerialAccounting,9/e

115.
Medium

OperatingdataforFowlerCompanyanditsabsorptioncostingincome
statementsforthelasttwoyearsarepresentedbelow:
Year1Year2
Unitsinbeginninginventory...03,000
Unitsproduced.................18,00018,000
Unitssold.....................15,00020,000
Year1Year2
Sales............................$240,000$320,000
Costofgoodssold:
Beginninginventory............030,000
Addcostofgoodsmanufactured.180,000180,000
Goodsavailableforsale.......180,000210,000
Lessendinginventory..........30,00010,000
Costofgoodssold...........150,000200,000
Grossmargin.....................90,000120,000
Selling&admin.expenses........80,00090,000
Netincome.......................$10,000$30,000
Variablemanufacturingcostsare$6perunit.Fixedmanufacturing
overheadtotals$72,000ineachyear.Thisoverheadisappliedatthe
rateof$4perunit.Variablesellingandadministrativeexpenseswere
$2perunitsold.
Required:
a.Whatwastheunitproductcostineachyearundervariable
costing?
b.Preparenewincomestatementsforeachyearusingvariable
costing.
c.Reconciletheabsorptioncostingandvariablecostingnet
incomeforeachyear.
Answer:
a.Themanufacturingcostof$6perunitistheunitproduct
undervariablecostinginbothyears.

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255

b.Year1Year2
Sales...................................$240,000$320,000
Lessvariableexpenses:
Variablecostofgoodssold:
Beginninginventory.................018,000
Addvariablemanufacturingcosts@$6108,000108,000
Goodsavailableforsale............108,000126,000
Lessendinginventory@$6..........18,0006,000
Variablecostofgoodssold.........90,000120,000
Variablesellingandadministrative@$230,00040,000
Totalvariableexpenses...............120,000160,000
Contributionmargin.....................120,000160,000
Lessfixedexpenses:
Fixedmanufacturingoverhead..........72,00072,000
Fixedsellingandadministrative*.....50,00050,000
Total................................122,000122,000
Netincome..............................$(2,000)$38,000
Year1:$80,000$2x15,000=$50,000
c.Year1Year2
Variablecostingnetincome.............$(2,000)$38,000
Addfixedfactoryoverheaddeferred
ininventoryunderabsorption
costing(3,000unitsx$4perunit)...12,000
Lessfixedfactoryoverheadreleased
frominventoryunderabsorption
costing(2,000unitsx$4perunit)...(8,000)
Absorptioncostingnetincome...........$10,000$30,000
116.
Hard

PabbattiCompany,whichhasonlyoneproduct,hasprovidedthefollowing
dataconcerningitsmostrecentmonthofoperations:
Sellingprice............................$112
Unitsinbeginninginventory.............500
Unitsproduced...........................2,800
Unitssold...............................2,900
Unitsinendinginventory................400
Variablecostsperunit:
Directmaterials.......................$37
Directlabor...........................19
Variablemanufacturingoverhead........7
Variablesellingandadministrative....5
Fixedcosts:
Fixedmanufacturingoverhead...........$109,200
Fixedsellingandadministrative.......5,800

Thecompanyproducesthesamenumberofunitseverymonth,although
thesalesinunitsvaryfrommonthtomonth.Thecompany'svariable
costsperunitandtotalfixedcostshavebeenconstantfrommonthto
month.

256ManagerialAccounting,9/e

Required:
a.Whatistheunitproductcostforthemonthundervariable
costing?
b.Prepareanincomestatementforthemonthusingthe
contribution
formatandthevariablecostingmethod.
c.Withoutpreparinganincomestatement,determinethe
absorption
costingnetincomeforthemonth.
(Hint:Usethereconciliationmethod.)
Answer:
a.Variablecostingunitproductcost
Directmaterials......................$37
Directlabor..........................19
Variablemanufacturingoverhead.......7
Unitproductcost.....................$63
b.Variablecostingincomestatement
Sales...................................$324,800
Lessvariableexpenses:
Variablecostofgoodssold:
Beginninginventory.................$31,500
Addvariablemanufacturingcosts....176,400
Goodsavailableforsale............207,900
Lessendinginventory...............25,200
Variablecostofgoodssold.........182,700
Variablesellingandadministrative.14,500197,200
Contributionmargin.....................127,600
Lessfixedexpenses:
Fixedmanufacturingoverhead........109,200
Fixedsellingandadministrative....5,800115,000
Netincome..............................$12,600
c.Computationofabsorptioncostingnetincome
Fixedmanufacturingoverheadperunit....$39.00
Changeininventories(units)............(100)
Variablecostingnetincome..............$12,600
Addfixedmanufacturingoverheadcosts
deferredininventoryunderabsorption
costing................................0
Deductfixedmanufacturingoverheadcosts
releasedfrominventoryunderabsorption
costing................................(3,900)
Absorptioncostingnetincome............$8,700
117.
Medium

QabarCompany,whichhasonlyoneproduct,hasprovidedthefollowing
dataconcerningitsmostrecentmonthofoperations:
Sellingprice............................$110
Unitsinbeginninginventory.............0
Unitsproduced...........................4,600
Unitssold...............................4,200
Unitsinendinginventory................400

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Variablecostsperunit:
Directmaterials.......................$46
Directlabor...........................28
Variablemanufacturingoverhead........5
Variablesellingandadministrative....10
Fixedcosts:
Fixedmanufacturingoverhead...........$55,200
Fixedsellingandadministrative.......25,200
Required:
a.Whatistheunitproductcostforthemonthunder
variablecosting?
b.Prepareanincomestatementforthemonthusingthe
formatandthevariablecostingmethod.
c.Withoutpreparinganincomestatement,determinethe
costingnetincomeforthemonth.
(Hint:Usethereconciliationmethod.)

contribution
absorption

Answer:
a.Variablecostingunitproductcost
Directmaterials.......................$46
Directlabor...........................28
Variablemanufacturingoverhead........5
Unitproductcost......................$79
b.Variablecostingincomestatement
Sales....................................$462,000
Lessvariableexpenses:
Variablecostofgoodssold:
Beginninginventory..................$0
Addvariablemanufacturingcosts.....363,400
Goodsavailableforsale.............363,400
Lessendinginventory................31,600
Variablecostofgoodssold..........331,800
Variablesellingandadministrative..42,000373,800
Contributionmargin......................88,200
Lessfixedexpenses:
Fixedmanufacturingoverhead...........55,200
Fixedsellingandadministrative.......25,20080,400
Netincome...............................$7,800
c.Computationofabsorptioncostingnetincome
Fixedmanufacturingoverheadperunit....$12.00
Changeininventories(units)............400
Variablecostingnetincome..............$7,800
Addfixedmanufacturingoverheadcosts
deferredininventoryunderabsorption
costing................................4,800
Deductfixedmanufacturingoverheadcosts
releasedfrominventoryunderabsorption
costing................................0

Absorptioncostingnetincome............$12,600
118.
Medium

UHFAntennas,Inc.,producesandsellsauniquetelevisionantenna.The
companyhasjustopenedanewplanttomanufacturetheantenna,andthe

258ManagerialAccounting,9/e

followingcostandrevenuedatahavebeenreportedforthefirstmonth
ofthenewplant'soperation:
Beginninginventory....................0
Unitsproduced.........................35,000
Unitssold.............................30,000
Sellingpriceperunit.................$50
Sellingandadministrativeexpenses:
Variableperunit...................$2
Fixed(total).......................$360,000
Manufacturingcosts:
Directmaterialcostperunit.......$9
Directlaborcostperunit..........$8
Variableoverheadcostperunit.....$3
Fixedoverheadcost(total).........$350,000
Managementisanxioustoseehowprofitablethenewantennawillbeand
hasaskedthatanincomestatementbepreparedforthemonth.Assume
thatdirectlaborisavariablecost.
Required:
a.Assumingthatthecompanyusesabsorptioncosting,compute
the
unitproductcostandprepareanincomestatement.
b.Assumingthatthecompanyusesvariablecosting,computethe
unit
productcostandprepareanincomestatement.
c.Explainthereasonforanydifferenceintheending
inventories
underthetwocostingmethodsandtheimpactof
thisdifferenceon
reportednetincome.
Answer:
a.
Unitproductcostunderabsorptioncosting:
Directmaterialscostperunit...............$9
Directlaborcostperunit...................$8
Variableoverheadcostperunit..............$3
Fixedoverheadcostperunit:
$350,000/35,000units......................$10
Totalcostperunitunderabsorptioncosting.$30
Incomestatementunderabsorptioncosting:
Sales($50x30,000)...................$1,500,000
Costofgoodssold:
Beginninginventory....................$0
Costofgoodsmanufactured.............1,050,000
Costofgoodsavailable................1,050,000
Endinginventory(5,000x$30).........150,000900,000
Grossmargin...........................600,000
Sellingandadministrativeexpense:
[360,000+($2x30,000).............420,000
Netincome.............................$180,000
Costofgoodsmanufactured:$30x35,000=$1,050,000.

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b.
Unitproductcostundervariablecosting:
Directmaterialscostperunit...............$9
Directlaborcostperunit...................$8
Variableoverheadcostperunit..............$3
Totalcostperunitundervariablecosting...$20
Incomestatementundervariablecosting:
Sales($50x30,000)....................$1,500,000
Costofgoodssold:
Beginninginventory.....................$0
Costofgoodsmanufactured
($20x35,000units).................700,000
Costofgoodsavailable.................700,000
Endinginventory(5,000x$20)..........100,000
Variablecostofgoodssold.............600,000
Variablesellingandadministrative
expenses:($2x30,000)...............60,000660,000
Contributionmargin.....................840,000
Fixedexpenses:
Fixedoverhead........................$350,000
Fixedsellingandadministrative......360,000710,000
Netincome..............................$130,000
c.
Netincomeundervariablecosting.......$130,000
Addfixedmanufacturingoverheadcosts
deferredininventoryunderabsorption
costing(5,000unitsX$10)...........50,000
Netincomeunderabsorptioncosting.....$180,000
119.
Medium

DataconcerningSondereggerCompanysoperationslastyearappearbelow:
Unitsinbeginninginventory............0
Unitsproduced..........................70,000
Unitssold..............................60,000
Sellingpriceperunit..................$12.00
Variablecostsperunit:
Directmaterials......................$2.00
Directlabor..........................1.00
Variablemanufacturingoverhead.......1.00
Variablesellingandadministrative...1.50
Fixedcostsintotal:
Fixedmanufacturingoverhead..........$140,000
Fixedsellingandadministrative......150,000
Required:
a.Prepareanincomestatementfortheyearusingabsorption
costing.
b.Prepareanincomestatementfortheyearusingvariable costing.
c.Prepareareportreconcilingthedifferenceinnetincome
betweenabsorptionandvariablecostingfortheyear.

260ManagerialAccounting,9/e

Answer:
a.
Sales....................................$720,000
Costofgoodssold:
Beginninginventory....................$0
Addcostofgoodsmanufactured@$6*...420,000
Goodsavailableforsale...............420,000
Lessendinginventory@$6*............60,000360,000
Grossmargin.............................360,000
Sellingandadministrativeexpenses*.....240,000
Netincome...............................$120,000
*$6=$2.00+$1.00+$1.00+$140,000/70,000
**60,000unitsx$1.50perunitvariableplus
$150,000fixed.
b.
Sales.....................................$720,000
Lessvariableexpenses:
Variablecostofgoodssold:
Beginninginventory...................0
Addvariablemanuf.costs@$4........280,000
Goodsavailableforsale..............280,000
Lessendinginventory@$4............40,000
Variablecostofgoodssold...........240,000
Variableselling&admin.@$1.50.......90,000330,000
Contributionmargin.......................390,000
Lessfixedexpenses:
Fixedmanufacturingoverhead............140,000
Fixedselling&admin...................150,000290,000
Netincome................................$100,000
c.
Variablecostingnetincome...............$100,000
Addfixedfactoryoverheaddeferredin
inventoryunderabsorptioncosting
(10,000unitsx$2perunit)............20,000
Absorptioncostingnetincome.............$120,000
120.
Hard

NelsonCompany,whichhasonlyoneproduct,hasprovidedthefollowing
dataconcerningitsmostrecentmonthofoperations:
Sellingprice............................$84
Unitsinbeginninginventory.............500
Unitsproduced...........................1,900
Unitssold...............................2,100
Unitsinendinginventory................300
Variablecostsperunit:
Directmaterials.......................$25
Directlabor...........................10
Variablemanufacturingoverhead........7
Variablesellingandadministrative....10

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Fixedcosts:
Fixedmanufacturingoverhead...........$38,000
Fixedsellingandadministrative.......21,000
Thecompanyproducesthesamenumberofunitseverymonth,although
thesalesinunitsvaryfrommonthtomonth.Thecompany'svariable
costsperunitandtotalfixedcostshavebeenconstantfrommonthto
month.

262ManagerialAccounting,9/e

Required:
a.Prepareanincomestatementforthemonthusingthe
formatandthevariablecostingmethod.
b.Prepareanincomestatementforthemonthusingthe
costingmethod.

contribution
absorption

Answer:
a.Variablecostingincomestatement
Sales...................................$176,400
Lessvariableexpenses:
Variablecostofgoodssold:
Beginninginventory.................$21,000
Addvariablemanufacturingcosts....79,800
Goodsavailableforsale............100,800
Lessendinginventory...............12,600
Variablecostofgoodssold.........88,200
Variablesellingandadministrative.21,000109,200
Contributionmargin.....................67,200
Lessfixedexpenses:
Fixedmanufacturingoverhead..........38,000
Fixedsellingandadministrative......21,00059,000
Netincome..............................$8,200
b.Absorptioncostingincomestatement
Sales...................................$176,400
Costofgoodssold:
Beginninginventory...................$31,000
Addcostofgoodsmanufactured........117,800
Goodsavailableforsale..............148,800
Lessendinginventory.................18,600130,200
Grossmargin............................46,200
Lesssellingandadministrativeexpenses:
Variablesellingandadministrative...21,000
Fixedsellingandadministrative......21,00042,000
Netincome..............................$4,200
121.
Medium

OakesCompany,whichhasonlyoneproduct,hasprovidedthefollowing
dataconcerningitsmostrecentmonthofoperations:
Sellingprice............................$108
Unitsinbeginninginventory.............0
Unitsproduced...........................1,100
Unitssold...............................900
Unitsinendinginventory................200
Variablecostsperunit:
Directmaterials.......................$28
Directlabor...........................30
Variablemanufacturingoverhead........7
Variablesellingandadministrative....11
Fixedcosts:
Fixedmanufacturingoverhead...........$14,300
Fixedsellingandadministrative.......1,800

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263

Required:
a.Prepareanincomestatementforthemonthusingthe
formatandthevariablecostingmethod.
b.Prepareanincomestatementforthemonthusingthe
costingmethod.

contribution
absorption

Answer:
a.Variablecostingincomestatement
Sales....................................$97,200
Lessvariableexpenses:
Variablecostofgoodssold:
Beginninginventory..................$0
Addvariablemanufacturingcosts.....71,500
Goodsavailableforsale.............71,500
Lessendinginventory................13,000
Variablecostofgoodssold..........58,500
Variablesellingandadministrative..9,90068,400
Contributionmargin......................28,800
Lessfixedexpenses:
Fixedmanufacturingoverhead...........14,300
Fixedsellingandadministrative.......1,80016,100
Netincome...............................$12,700
b.Absorptioncostingincomestatement
Sales....................................$97,200
Costofgoodssold:
Beginninginventory....................$0
Addcostofgoodsmanufactured.........85,800
Goodsavailableforsale...............85,800
Lessendinginventory..................15,60070,200
Grossmargin.............................27,000
Lesssellingandadministrativeexpenses:
Variablesellingandadministrative....9,900
Fixedsellingandadministrative.......1,80011,700
Netincome...............................$15,300
122.
Medium

TheMillerCompanyhadthefollowingresultsforitsfirsttwoyearsof
operation:
Year1Year2
Sales................................$1,200,000$1,200,000
Costofgoodssold...................800,000680,000
Grossmargin.........................400,000520,000
Sellingandadministrativeexpense...300,000300,000
Netincome...........................$100,000$220,000
InYear1,thecompanyproducedandsold40,000unitsofitsonly
product;inYear2,thecompanyagainsold40,000units,butincreased
productionto50,000units.Thecompanysvariableproductioncostis
$5perunitanditsfixedmanufacturingoverheadcostis$600,000a
year.Fixedmanufacturingoverheadcostsareappliedtotheproducton
thebasisofeachyear'sunitproduction(i.e.,anewfixedoverhead
rateiscomputedeachyear).Variablesellingandadministrative
expensesare$2perunitsold.

264ManagerialAccounting,9/e

Required:
a.Computetheunitproductcostforeachyearunderabsorption
costingandundervariablecosting.
b.Prepareanincomestatementforeachyear,usingthe
contribution
approachwithvariablecosting.
c.Reconcilethevariablecostingandabsorptioncostingincome
figuresforeachyear.
d.ExplainwhythenetincomeforYear2underabsorption costing
washigherthanthenetincomeforYear1,although thesamenumber
ofunitsweresoldineachyear.
Answer:
a.Costperunitunderabsorptioncosting:
Year1Year2
Variableproductioncostperunit.....$5$5
Fixedmanufacturingoverheadcost:
($600,000/40,000)................$15
($600,000/50,000)................___$12
Unitproductcost.....................$20$17
Costperunitundervariablecosting:
Year1Year2
Variableproductioncostperunit......$5$5
b.Incomestatementsforeachyearundervariablecosting:
Year1Year2
Sales.................................$1,200,000$1,200,000
Costofgoodssold($5x40,000)......200,000200,000
Variablesellingandadministrative
expense($2x40,000)...............80,00080,000
Contributionmargin...................920,000920,000
Fixedexpenses:
Fixedmanufacturingoverhead........600,000600,000
Fixedsellingandadministrative
expense.........................220,000220,000
Netincome............................$100,000$100,000
c.Reconciliationofabsorptioncostingandvariablecostingnet
incomes:
Year1Year2
Netincomeundervariablecosting.......$100,000$100,000
Fixedmanufacturingoverheaddeferredin
(releasedfrom)inventory:
Year1.............................0
Year2(10,000unitsx$12perunit)________120,000
Netincomeunderabsorptioncosting.....$100,000$220,000
d.TheincreaseinproductioninYear2,inthefaceoflevel
sales,causedabuildupofinventoryandadeferralofa
portionoftheoverheadcostsofYear2tothenextyear.
This
deferralofcostrelievedYear2of$120,000offixed
manufacturingoverhead.IncomeforYear2was$120,000higher than
incomeofYear1,eventhoughthesamenumberofunits
wassold
eachyear.Byincreasingproductionandbuildingup inventory,the
companywasabletoincreaseprofitswithout increasingsales.Thisis

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265

majorcriticismoftheabsorption
123.
Hard

costingapproach.

TheHadfieldCompanymanufacturesandsellsauniqueelectronicpart.
Thecompany'splantishighlyautomatedwithlowvariableandhighfixed
manufacturingcosts.Operatingresultsonanabsorptioncostingbasis
forthefirstthreeyearsofactivitywereasfollows:

Year1Year2Year3
Sales........................$704,000$528,000$704,000
Costofgoodssold:
Beginninginventory..........00220,000
Costofgoodsmanufactured...520,000550,000496,000
Goodsavailableforsale.....520,000550,000716,000
Lessendinginventory........0220,000186,000
Costofgoodssold...........520,000330,000530,000
Grossmargin.................184,000198,000174,000
Lesssellingand
administrativeexpense.....180,000160,000180,000
Netincome(loss)............$4,000$38,000$(6,000)

Additionalinformationaboutthecompanyisasfollows:
-

Variablemanufacturingcosts(directlabor,directmaterials,and
variablemanufacturingoverhead)total$3perunit,andfixed
manufacturingoverheadcoststotal$400,000.
Fixedmanufacturingcostsareappliedtounitsofproductonthe
basisofthenumberofunitsproducedeachyear(i.e.,anewfixed
overheadrateiscomputedeachyear).
ThecompanyusesaFIFOinventoryflowassumption.
Variablesellingandadministrativeexpensesare$2perunitsold.
Fixedsellingandadministrativeexpensestotal$100,000.
Productionandsalesinformationforthethreeyearsisasfollows:

Year1Year2Year3
Productioninunits....40,00050,00032,000
Salesinunits.........40,00030,00040,000

266ManagerialAccounting,9/e

Required:
a.Computenetincomeforeachyearunderthevariablecosting
approach.
b.Referringtotheabsorptioncostingincomestatementsabove,
explainwhynetincomewashigherinYear2thaninYear1
under
absorptioncosting,inlightofthefactthatfewer unitsweresoldin
Year2thaninYear1.
c.Referringagaintotheabsorptioncostingincomestatements,
explainwhythecompanysufferedalossinYear3but
reporteda
profitinYear1,althoughthesamenumberof unitswassoldineach
year.
d.IfthecompanyhadusedJITduringYear2andYear3and
producedonlywhatcouldbesold,whatwouldthecompany's
net
income(loss)havebeeneachyearunderabsorption costing.
Answer:
a.

Year1Year2Year3
Sales..........................$704,000$528,000$704,000
Lessvariableexpenses:
Variablecostofgoodssold:
Beginninginventory..........0060,000
Variablemanufacturingcosts.120,000150,00096,000
Goodsavailableforsale.....120,000150,000156,000
Lessendinginventory........060,00036,000
Variablecostofgoodssold..120,00090,000120,000
Variablesellingexpense......80,00060,00080,000
Totalvariableexpenses.....200,000150,000200,000
Contributionmargin............504,000378,000504,000
Lessfixedexpenses:
Fixedmanufacturingoverhead..400,000400,000400,000
Fixedselllingandadmin......100,000100,000100,000
Totalfixedexpenses........500,000500,000500,000
Netincome(loss)..............$4,000$(122,000)$4,000
b.ProductionincreasedsharplyinYear2eventhoughunitsales
declined.Theincreaseinproductionresultedinalowerunit
productcostinYear2thaninYear1.Furthermore,because
productionexceededsales,fixedmanufacturingoverheadcosts were
deferredininventories.Theseeffectsmorethanoffset
thelossof
revenueduetolowersales.Thecompany'sincome
thusroseeven
thoughsalesweredown.
c.ProductiondecreasedsharplyinYear3.Thisresultedinan
increaseintheunitproductcost.Inaddition,inventories
decreasedandasaresultfixedmanufacturingoverhead deferredin
inventoriesinYear2werereleasedtotheincome
statementinYear
3.
d.IfJIThadbeeninuse,thenetincomeunderabsorption costing
wouldhavebeenthesameasundervariablecostingin
allthree
years.Withproductiongearedtosales,therewould havebeennoending
inventory,andtherefore,therewould havebeennofixedoverhead
costsdeferredininventoryto otheryears.

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267