CHAPTER 17

Absorption, Variable, and Throughput Costing

ANSWERS TO REVIEW QUESTIONS
17-6 Under absorption costing, all manufacturing-overhead costs (including fixed costs)
are assigned to units of product as product costs. Under variable costing, fixed
manufacturing-overhead costs are not assigned to units of product as product costs;
rather they are treated as period costs and expensed during the period in which they
are incurred. Under throughput costing, only the unit-level spending for direct costs
is assigned as a product cost.
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Some managerial accountants believe that absorption costing may provide an

incentive for managers to overproduce inventory so that the fixed manufacturing
overhead costs may be spread over a larger number of product units, thereby
lowering the reported product cost per unit. Throughput costing avoids this
potential problem by not assigning fixed manufacturing overhead as a product cost.

17-11 Variable costing is consistent with cost-volume-profit analysis because it properly

reflects the cost behavior of variable and fixed costs. Only variable manufacturing
costs are treated as inventoriable product costs. Fixed manufacturing costs are
recorded as a lump sum and expensed during the period incurred. CVP analysis also
properly maintains the cost-behavior distinction between variable and fixed costs. In
contrast, absorption costing is inconsistent with CVP analysis, because fixed
overhead is applied to manufactured goods as a product cost on a per-unit basis.

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SOLUTIONS TO EXERCISES
EXERCISE 17-19 (25 MINUTES)
Inventory calculations (units):
Finished-goods inventory, January 1 ..............................................
Add: Units produced ..........................................................................
Less: Units sold ..................................................................................
Finished-goods inventory, December 31 .........................................
1.

0
10,000
9,000
1,000

units
units
units
units

Variable costing:
Inventoriable costs under variable costing:
Direct material used ................................................................................
Direct labor incurred ...............................................................................
Variable manufacturing overhead .........................................................
Total ..........................................................................................................

$ 80,000
40,000
24,000
$144,000

Cost per unit produced = $144,000/10,000 units = $14.40 per unit

Ending inventory: 1,000 units $14.40 per unit ...............................
2.

$ 14,400

Absorption costing:
Predetermined fixed-overhead rate
=

fixed manufacturing overhead

$50,000
=
= $5.00 per unit
planned production
10,000 units

Difference in fixed
overhead expensed under
absorption and variable costing

change in predetermined

inventory fixed-overhead
in units

rate

(1,000 units) ($5.00 per unit)

$5,000

Difference in reported income:

Since inventory increased during the year, income reported under absorption
costing will be $5,000 higher than income reported under variable costing.

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EXERCISE 17-19 (CONTINUED)

3.

Throughput costing:
Inventoriable costs under throughput costing:
Direct material used ................................................................................
Total ..........................................................................................................

$80,000
$80,000

Cost per unit produced = $80,000/10,000 units = $8.00 per unit

Ending inventory: 1,000 units $8.00 per unit .................................

$ 8,000

EXERCISE 17-20 (10 MINUTES)

1.

Inventoriable costs under variable costing:

Direct material used ................................................................................
Direct labor ...............................................................................................
Variable manufacturing overhead .........................................................
Total ..........................................................................................................

2.

Inventoriable costs under absorption costing:

Direct material used ................................................................................
Direct labor ...............................................................................................
Variable manufacturing overhead .........................................................
Fixed manufacturing overhead ..............................................................
Total ..........................................................................................................

3.

$203,000
70,000
35,000
$308,000

$203,000
70,000
35,000
56,000
$364,000

Inventoriable costs under throughput costing:

Direct material used* ...............................................................................
Total ..........................................................................................................

$203,000
$203,000

*Under this scenario, direct material cost is the only throughput cost.

SOLUTIONS TO PROBLEMS
PROBLEM 17-27 (35 MINUTES)
1.

Total cost:

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2.

3.

Direct material (10,000 units x $36)...

$ 360,000
Direct labor..
135,000
Variable manufacturing overhead.
195,000
Fixed manufacturing overhead..
660,000
Variable selling and administrative costs
(9,600 units x $24)
230,400
Fixed selling and administrative costs
354,000
Total.
$1,934,400
The cost of the year-end inventory of 400 units (10,000 units produced 9,600 units
sold) is computed as follows:
Absorption Variable Throughput
Costing
Costing
Costing
$360,000 $360,000
Direct material.. $ 360,000
135,000
135,000
Direct labor
Variable manufacturing overhead..
195,000
195,000
660,000 ________ ________
Fixed manufacturing overhead
Total product cost $1,350,000
$690,000 $360,000
$69
$36
Cost per unit (total 10,000 units)
$135
Year-end inventory (400 units x cost
$ 27,600 $ 14,400
per unit)... $ 54,000
The total costs would be allocated between the current periods income statement
and the year-end inventory on the balance sheet. Thus:
Absorption costing: $1,934,400 - $54,000 = $1,880,400
Variable costing: $1,934,400 - $27,600 = $1,906,800
Throughput costing: $1,934,400 - $14,400 = $1,920,000
Alternatively, these amounts can be derived as follows:

Cost of goods sold:

9,600 units x $135 ...............................
9,600 units x $69 .................................
9,600 units x $36 .................................
Direct labor................................................
Variable manufacturing overhead ..........
Fixed manufacturing overhead ...............
Variable selling and administrative
costs ....................................................
Fixed selling and administrative costs ..
Total .....................................................
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Absorption
Costing
$1,296,000

Variable
Costing
$662,400

660,000
230,400
354,000
$1,880,400

Throughput
Costing

$345,600
135,000
195,000
660,000

230,400
230,400
354,000
354,000
$1,906,800 $1,920,000

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4.

Throughput-costing income statement:

Sales revenue (9,600 units x $216) .....................
Less: Cost of goods sold ....................................
Gross margin ........................................................
Less: Operating costs:
Direct labor......................................................
Variable manufacturing overhead.................
Fixed manufacturing overhead .....................
Variable selling and administrative costs....
Fixed selling and administrative costs ........
Total operating costs ...............................
Net income ............................................................

$2,073,600
345,600
$1,728,000
$ 135,000
195,000
660,000
230,400
_ 354,000
$1,574,400
$ 153,600*

*As a check: Net income = sales revenue - all costs expensed

= $2,073,600 - $1,920,000 (from req. 3)
= $153,600
PROBLEM 17-28 (35 MINUTES)
1.

Absorption-costing income statements:

Sales revenue ..................................................................................

Less: Cost of goods sold:
Beginning finished-goods inventory ................................
Cost of goods manufactured ............................................
Cost of goods available for sale .......................................
Ending finished-goods inventory .....................................
Cost of goods sold .............................................................
Gross margin ..................................................................................
Selling and administrative expenses ............................................
Operating income ...........................................................................

Year 1
$62,500a

Year 2
$62,500d

$
0
31,500b
$31,500
5,250c
$26,250
$36,250
22,500
$13,750

$ 5,250e
28,000f
$33,250
0
$33,250
$29,250
22,500
$ 6,750

units $25 per unit

+ $21,000 (i.e., both variable and fixed costs)
c500 units ($31,500/3,000 units)
d2,500 units $25 per unit
eSame as year 1 ending inventory
f$7,000 + $21,000 (i.e., both variable and fixed costs)
a2,500

b$10,500

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2.

Variable-costing income statements:

Sales revenue ..................................................................................

Less: Cost of goods sold:
Beginning finished-goods inventory ................................
Cost of goods manufactured ............................................
Cost of goods available for sale .......................................
Ending finished-goods inventory .....................................
Cost of goods sold .............................................................
Variable selling and administrative costs ........................
Total variable costs: .......................................................................
Contribution margin .......................................................................
Less: Fixed costs:
Manufacturing .....................................................................
Selling and administrative .................................................
Total fixed costs .................................................................
Operating income ...........................................................................
units $25 per unit
variable manufacturing cost only, $10,500
c500 units ($10,500/3,000 units)
d2,500 units $25 per unit
eSame as year 1 ending inventory
fThe variable manufacturing cost only, $7,000

Year 1
$62,500a

Year 2
$62,500d

$
0
10,500b
$10,500
1,750c
$ 8,750
$12,500

$ 1,750e
7,000f
$ 8,750
0
$ 8,750
$12,500

$21,250
$41,250

$21,250
$41,250

$21,000
10,000
$31,000
$10,250

$21,000
10,000
$31,000
$10,250

a2,500
bThe

3.

Reconciliation of reported income under absorption and variable costing:

Year
1
2

Change in
Inventory
(in units)
500 increase
500 decrease

Actual
FixedOverhead
Rate
$7
$7*

Difference in
Fixed
Overhead
Expensed
$ 3,500
$(3,500)

AbsorptionCosting Income
Minus VariableCosting Income
$3,500
(3,500)

*The 500 units which were sold in year 2, but which were manufactured in year 1,
include an absorption-costing product cost of $7 per unit for fixed overhead. Since
these 500 units were manufactured in year 1, it is the year 1 fixed-overhead rate that
is relevant to this calculation, not the year 2 rate.
Explanation: At the end of year 1, under absorption costing, $3,500 of fixed overhead
remained stored in finished-goods inventory as a product cost (year 1 fixed-overhead rate
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of $7 per unit 500 units = $3,500). However, in year 1, under variable costing, that fixed
overhead was expensed as a period cost.
In year 2, under absorption costing, that same $3,500 of fixed overhead was
expensed when the units were sold. However, under variable costing, that $3,500 of fixed
overhead cost had already been expensed in year 1 as a period cost.

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