An Absorption Costing Income Statement Calculates ______.

Which statement is TRUE?

a.Both variable costing and absorption costing income statements calculate gross profit.

b.Both variable costing and absorption costing income statements calculate contribution margin.

c.An absorption costing income statement calculates gross profit; a variable costing income statement calculates contribution margin.

d.A variable costing income statement calculates gross profit; an absorption costing income statement calculates contribution margin.

An absorption costing income statement calculates gross profit; a variable costing income statement calculates contribution margin.

Smith Taxi Service had the following information for the 160 customers served this month:

Sales Revenue
$13,000
Variable Costs
7,000
=
Contribution Margin
$6,000

What is the variable cost per customer (to the nearest cent)?

$43.75
(7000/160)

Jones Company incurred the following costs while producing 100 chairs:

Units produced
100
chairs
Direct materials
$10
per unit
Direct labor
15
per unit
Variable manufacturing overhead
3
per unit
Total fixed manufacturing overhead
2,000

Variable selling and administrative
4
per unit
Fixed selling and administrative
3,000

What is the ending balance in Finished Goods Inventory using absorption costing if 80 units are sold (assume no beginning inventory in Finished Goods Inventory)?

First, calculate the cost per unit.

Absorption costing for the cost of one unit
= direct materials + direct labor + variable manufacturing overhead + fixed manufacturing overhead per unit

= $10 + $15 + $3 + ($2,000 / 100 chairs)

= $48

There are 20 units left in ending inventory (100 units produced - 80 units sold). In this case, 20 units * $48 cost per unit = $960 in Finished Goods Inventory.

Jones Company incurred the following costs while producing 100 chairs:

Units produced
100
chairs
Direct materials
$10
per unit
Direct labor
15
per unit
Variable manufacturing overhead
3
per unit
Total fixed manufacturing overhead
2,000

Variable selling and administrative
4
per unit
Fixed selling and administrative
3,000

What is operating income using absorption costing if 80 units were sold for $150 each?

Absorption Costing

Sales
(80 units x $150)

$ 12,000
Cost of Goods Sold
(80 units x $48**)

3,840
Gross Profit

8,160
Selling and Administrative Costs:

Variable S&A Costs
(80 units x $4)
$320

Fixed S&A Costs

3,000
3,320
Operating Income

$4,840

Cost of Goods Sold
= direct materials + direct labor + variable manufacturing overhead + fixed manufacturing overhead

= $10 + $15 + $3 + $20

= $48

Fixed manufacturing overhead of $20 per unit
= total fixed manufacturing overhead / total units

= $2,000 / 100

= $20

Assumes ABC Company had 50 units in beginning Finished Goods Inventory and sold 1,213 units. Additional data includes:

Units produced
1,200
unit
Direct materials
$12
per unit
Direct labor
8
per unit
Variable manufacturing overhead
2
per unit
Fixed manufacturing overhead
7
per unit

Using absorption costing, what is the dollar amount of ending Finished Goods Inventory

First, calculate the cost per unit for absorption costing.

Absorption costing for the cost of one unit
= direct materials + direct labor + variable manufacturing overhead + fixed manufacturing overhead per unit

= $12 + $8 + $2 + $7

= $29 per unit

Next, calculate the number of units in Finished Goods Inventory.

Finished Goods Inventory
= beginning finished goods + units produced - units sold

= 50 + 1,200 - 1,213

= 37 units

Last, take $29 cost per unit x 37 units in ending finished goods = $1,073 in ending Finished Goods Inventory.

Abby Cleaning Services planned to provide cleaning services to 50 customers for $30 per hour during the month. Each job was expected to take 4 hours. The company actually served 5 less customers than expected and spent an average on each job of 4.5 hours.
What is Abby Cleaning Services Revenue for the month?

Planned revenues for month were 50 customers x $30 per hour x 4 hours average per job = $6,000.

Actual revenues were 45 customers x $30 per hour x 4.5 hours average per job = $6,075.

Therefore, the company made $75 more than expected ($6,075 actual - $6,000 expected).

Jones Company incurred the following costs while producing 100 chairs:

Units produced
100 chairs

Direct materials $10 per unit

Direct labor 15 per unit

Variable manufacturing overhead 3 per unit

Total fixed manufacturing overhead
2,000

Variable selling and administrative
4 per unit

Fixed selling and administrative
8,000

What is the unit product cost using absorption costing?

Absorption costing for the cost of one unit
= direct materials + direct labor + variable manufacturing overhead + fixed manufacturing overhead per unit

= $10 + $15 + $3 + ($2,000 / 100 chairs)

= $48

Jones Company sells an average of 200 chairs per week, of which 30% are regular chairs and 70% are executive chairs. Regular chairs sell for $100 each and incur variable costs of $62. Executive chairs sell for $170 each and incur variable costs of $125.

Which type of chair should Jones Company promote to maximize profits?

A. Regular chair because it contributes the highest contribution margin.

B. Cannot determine from information given.

C. Both should be promoted equally.

D. Executive chair because it contributes the highest contribution margin.

Executive chair because it contributes the highest contribution margin.

$38 per unit and $2,280 total

Which method is required by GAAP for external financial statements?
Variable costing

Both absorption and variable costing

Neither absorption or variable costing

Absorption costing

Absorption Costing

Absorption costing income statements are prepared primarily for __________.

investors

creditors

all listed

government

all listed

What is the primary difference when calculating the cost per unit between the variable costing and absorption costing?

Variable costing includes fixed selling and administrative as a product cost.

Absorption costing includes fixed selling and administrative as a product cost.

Variable costing includes fixed manufacturing overhead as a product cost.

Absorption costing includes fixed manufacturing overhead as a product cost.

Absorption costing includes fixed manufacturing overhead as a product cost.

Explanation:
Absorption costing includes fixed manufacturing overhead as a product cost. Fixed manufacturing overhead is not part of the product cost in variable costing. Fixed selling and administrative costs are not part of the product cost in either absorption or variable costing, as they are period costs.

Smith Company sells hot tub covers. The price of a cover is $200. Variable product costs are $120 per unit and commissions are $10 per unit. Fixed overhead is $20,000. 2,000 units were produced and sold.

Smith Company's contribution margin ratio is:

Variable costs are $120 for variable product cost + $10 in sales commissions = $130.

The contribution margin ratio is ($200 selling price - $130 total variable costs) / $200 selling price = 35%.

The fixed manufacturing overhead is a fixed costs and not part of contribution margin or contribution margin ratio.

Assumes ABC Company had 50 units in beginning Finished Goods Inventory and sold 1,213 units. Additional data includes:

Units produced
1,200
unit
Direct materials
$12
per unit
Direct labor
8
per unit
Variable manufacturing overhead
2
per unit
Fixed manufacturing overhead
7
per unit

Using variable costing, what is the dollar amount of ending Finished Goods Inventory?

First, calculate the cost per unit for variable costing.

Variable costing for the cost of one unit
= direct materials + direct labor + variable manufacturing overhead

= $12 + $8 + $2

= $22

Next, calculate the number of units in Finished Goods Inventory.

Finished Goods Inventory
= beginning finished goods + units produced - units sold

= 50 + 1,200 - 1,213

= 37 units

Last, take $22 cost per unit x 37 units in ending finished goods = $814 in ending Finished Goods Inventory.

Note: Fixed manufacturing overhead is only included in the absorption costing method.

Smith Taxi Service had the following information for the 160 customers served this month:

Sales Revenue
$13,000
Variable Costs
7,000
Contribution Margin
$6,000

What is the average amount charged to each customer (to nearest cent)?

Sales/ # of customers

13000/160= $81.25

Jones Company incurred the following costs while producing 100 chairs:

Units produced
100
chairs
Direct materials
$ 10
per unit
Direct labor
15
per unit
Variable manufacturing overhead
3
per unit
Total fixed manufacturing overhead
2,000

Variable selling and administrative
4
per unit
Fixed selling and administrative
8,000

What is the unit product cost using variable costing?

Variable costing for the cost of one unit
= direct materials + direct labor + variable manufacturing overhead

= $10 + $15 + $3

= $28

Jones Company incurred the following costs while producing 100 chairs:

Units produced
100
chairs
Direct materials
$10
per unit
Direct labor
15
per unit
Variable manufacturing overhead
3
per unit
Total fixed manufacturing overhead
2,000

Variable selling and administrative
4
per unit
Fixed selling and administrative
3,000

What is the ending balance in Finished Goods Inventory using variable costing if 75 units are sold (assume no beginning inventory in Finished Goods Inventory)?

$700

First, calculate the cost per unit for variable costing.

Variable costing for the cost of one unit
= direct materials + direct labor + variable manufacturing overhead

= $10 + $15 + $3

= $28

There are 25 units left in ending inventory (100 units produced - 75 units sold). In this case, 25 units * $28 cost per unit = $700 in Finished Goods Inventory.

Jones Company incurred the following costs while producing 100 chairs:

Units produced
100
chairs
Direct materials
$10
per unit
Direct labor
15
per unit
Variable manufacturing overhead
3
per unit
Total fixed manufacturing overhead
2,000

Variable selling and administrative
4
per unit
Fixed selling and administrative
3,000

What is operating income using variable costing if 90 units were sold for $150 each?

Variable Costing

Sales
(90 units x $150)

$13,500
Variable Costs:

Variable Cost of Goods Sold
(90 units x $28**)
$2,520

Variable S&A Costs
(90 units x $4)
360
2,880
Contribution Margin

10,620
Fixed Costs:

Fixed Manufacturing Overhead

$2,000

Fixed S&A Costs

3,000
5,000
Operating Income

$5,620

**Cost of Goods Sold
= direct materials + direct labor + variable manufacturing overhead

= $10 + $15 + $3

= $28

An identifiable part of the company for which financial information is available is called __________.

business segment

Abby Cleaning Service had the following information for the 200 customers served this month:

Sales Revenue
$20,000
Variable Costs
8,000

What is the contribution margin ratio?

60%
20000-8000/20000

Review your computations from Requirement 1 and Requirement 2. Note that BeckerBecker has the highest contribution margin percentage. When breaking down numbers into per-customer amounts we see that each customer is being charged the same amount. The reason, then, for BeckerBecker being the most profitable is that this segment has the lowest variable costs per customer (and thus the highest contribution margin per customer).

List some possible reasons why this segment was most profitable. How might the various reasons affect the company in the long term?

Why might one segment's variable costs be lower than the others?
Possible reasons for the profitability of this business segment include lower employee wages, better routes with shorter drive times allowing more customers to be served, employees cutting corners when performing service calls, and reducing the amount of pool chemicals used in service calls.

The possible side effects of these items could be increased employee turnover because of low wages, less fuel and maintenance costs because of efficient routes, dissatisfied customers because of inadequate service, or increased service costs because of reduceb d pool chemical usage causing poor water quality and additional service calls.