1. Sydney's Barbecue reported the following information:
Sydney's Barbecue
Period Ending December 31, 20XX
Manufacturing costs $5,400,000
Units manufactured $54,000
Beginning inventory in Units $ 0
Note: 45,600 units sold during year at $300 per unit
What is the amount of ending finished goods inventory for theperiod ending December 31, 20XX?
$860,000 $830,000 $840,000 $850,000 $820,000
2.Net income reported under absorption costing will exceed netincome reported under variable costing for a given period if
production equals sales for thatperiod. variable overhead exceeds fixedoverhead for that period. production exceeds sales for thatperiod. sales exceed production for that period.
3.
A company manufactures wallets. Last month's costs were aslisted below:
Direct materials $246,000
Direct labor $175,000
Manufacturing Overhead $73,000
What were the conversion costs for the month?
$248,000 $494,000 $421,000 $246,000
4. Which of the following are classified as manufacturingoverhead?
Indirect labor and indirectmaterials Direct materials and directlabor Factory rent and direct labor All materials
5.Baxter Company produces Frisbees using a three-step sequentialprocess that includes molding, coloring, and finishing. At whatstage would the sets be allocated Manufacturing Overhead?
When the Frisbees are in WIPInventory-Coloring When the Frisbees are in WIPInventory-Finishing When the Frisbees are in WIPInventory-Molding All of the above
6.Which method are managers using when they use their judgmentto classify costs as variable, fixed, or mixed?
Low-high method Regression analysis Account analysis High-low method
7.Which of the following is not a way in which management canuse job cost information?
Determining the balance in rawmaterials inventory Preparing the financialstatements Assessing and comparing theprofitability of each product type Using the cost information in determining the bid price forcustom orders
8.A factory janitor's wages would be classified as _________when determining the cost of a manufactured product.
an indirect cost a period cost a direct cost none of the above
9.
Tall Timbers reports the following data for its first year ofoperation:
Work in process inventory, beginning
$ 0
Work in process inventory, ending
$50,200
Manufacturing overhead
$25,400
Direct materials used
$7,700
Direct Labor
$60,000
Finished goods inventory, beginning
$ 0
Finished goods inventory, ending
$20,000
Cost of goods manufactured
$42,900
What is the cost of goods sold?
$22,900 $76,000 $73,100 $42,900
10.
A deodorant manufacturer offers the following information:
WIP Inventory, January 1 0 units
Units started 33,600 units
Units completed and transferred out 11,200 units
WIP Inventory, December 31 22,400 units
Direct materials $276,480
Direct labor $585,000
Manufacturing Overhead $328,920
The units in ending WIP Inventory were 60% complete formaterials and 40% complete for conversion costs.
On December 31, what are the total equivalent units for directmaterials?
47,040 33,600 20,160 24,640
11. How is the cost of indirect materials used in the factoryrecorded?
Credit to Raw Materials Inventoryaccount Credit to Manufacturing Overheadaccount Credit to Direct Materials Expenseaccount Credit to Work-in-Process Inventory account
12. XYZ uses job costing. Actual manufacturing overhead for theperiod is $20,300 while allocated manufacturing overhead is$18,200. What entry will close the manufacturing overheadbalance?
Debit the Cost of Goods Soldaccount and credit the Finished Goods Inventory account for$2,100. Debit the Manufacturing Overheadaccount and credit the Work-in-Process account for $2,100. Debit the Cost of Goods Soldaccount and credit the Manufacturing Overhead account for$2,100. Debit the Manufacturing Overhead account and credit the Cost ofGoods Sold account for $2,100.
1. Sydney's Barbecue reported the following information:
Sydney's Barbecue
Period Ending December 31, 20XX
| Manufacturing costs | $5,400,000 |
| Units manufactured | $54,000 |
| Beginning inventory in Units | $ 0 |
Note: 45,600 units sold during year at $300 per unit
What is the amount of ending finished goods inventory for theperiod ending December 31, 20XX?
| $860,000 | |
| $830,000 | |
| $840,000 | |
| $850,000 | |
| $820,000 |
2.Net income reported under absorption costing will exceed netincome reported under variable costing for a given period if
| production equals sales for thatperiod. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| variable overhead exceeds fixedoverhead for that period. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| production exceeds sales for thatperiod. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| sales exceed production for that period. 3. A company manufactures wallets. Last month's costs were aslisted below:
What were the conversion costs for the month?
|
Related questions
Sparrow Inc. uses absorption costing in a FIFO inventory system.Sparrow had opening inventory of 170 units at a cost of $35 perunit. Ending inventory is 120 units. During 2017 Sparrow sold 1,600units at $55 each. The following costs apply to Sparrow'soperations for the year ended December 31, 2017.
| Direct material used in production | $ 12 per unit |
| Direct labour incurred | 5 per unit |
| Fixed manufacturing overhead | $ 17,050 |
| Variable manufacturing overhead | $ 4 per unit |
| Selling costs (40% variable) | $ 20,000 |
| Admin costs (10% variable) | $ 30,000 |
Round to the nearest whole number. Do not use decimals or commasin your answer.
(a) What amounts will be reported on Sparrow's Income Statementfor:
Costof goods sold $?
Gross profit $?
Period costs $?
(b) Sparrow also prepares a variable costing income statementfor internal purposes. Assume the fixed manufacturing overheadattached to each unit in beginning inventory was $14 per unit. Willtheir variable costing net income be higher or lower than underabsorption costing and by how much? and low or higher
*you'll have to calculate FMOH released from beginning inventoryAND FMOH stored in ending inventory?
Variable Costing
An approach to measuring profitability that avoids the problemsinherent in making fixed overhead look like a variable cost isvariable costing. Variable costing (sometimes called directcosting) assigns only unit-level variable manufacturing costs tothe product; these costs include direct materials, direct labor,and variable overhead. Fixed overhead is treated as a period costand is not inventoried with the other product costs. Instead, it isexpensed in the period incurred.
The result of treating fixed manufacturing overhead as a periodexpense is to reduce the factory costs that are inventoriable.Under variable costing, only direct materials, direct labor, andvariable overhead are inventoried. (Remember that marketing andadministrative expenses are never inventoried-whether variable orfixed.)
Example: Fender Company showed the followingunit costs for its product:
| Direct materials | $1.15 |
| Direct labor | 0.60 |
| Variable overhead | 0.22 |
| Fixed overhead* | 2.44 |
| *Based on capacity of 29,800units. |
Last year, Fender made 29,800 units and sold 27,700 units at aprice of $9.01. Selling and administrative expense equaled $49,170(all fixed). Beginning Finished Goods Inventory contained 410 unitswith cost of $1,808.10.
| Cost of one unit under variablecosting | = Direct materials + Direct labor +Variable overhead |
| = $1.15 + $0.60 + $0.22 =$1.97 | |
| Units in ending Finished GoodsInventory | = 410 + 29,800 - 27,700 = 2,510units |
| Ending Finished GoodsInventory | = 2,510 Ã $1.97 = $4,944.70 |
The income statement for Fender Company is as follows:
| Sales | $249,577 | |
| Variable cost of Goods Sold ($1.97Ã 27,700) | 54,569 | |
| Contribution margin | $195,008 | |
| Less: | ||
| Fixed overhead | 72,712 | |
| Selling andadministrative expense | 49,170 | 121,882 |
| Variable-costing operatingincome | $73,126 |
Notice that all of the fixed factory overhead of $72,712 ($2.44Ã 29,800) and the variable cost of manufacturing for the units sold($1.97 Ã 27,700 units sold) appear on the variable-costing incomestatement. None of the fixed factory overhead is attached to unsoldunits added to Finished Goods inventory because the fixed overheadis treated as a period expense. Only the variable cost ofmanufacturing ($1.97 Ã 2,100) is added to Finished Goods inventory- attached to the 2,100 units that were produced but not sold.
| 1. | Under variable costing, ifbeginning Finished Goods Inventory equaled zero, the value ofending Finished Goods Inventory would be $?? . |
| 2. | Ignoring question 1 above,if Fender Company sold 30,020 units, there wouldbe units in ending Finished Goods Inventory with a valueof $?? (round to the nearest cent). |
Reconciling the Difference Between Absorption andVariable Costing
When inventories change from the beginning to the end of theperiod, the two costing approaches will give different operatingincomes. The reason for this is that absorption costing assignsfixed manufacturing overhead to units produced. If those units aresold, the fixed overhead appears on the income statement under costof goods sold. If the units are not sold, the fixed overhead goesinto inventory. Under variable costing, however, all fixed overheadfor the period is expensed. As a result, absorption costing allowsmanagers to manipulate operating income by producing for inventory.Let's compare the income statements under the two methods forFender Company.
Example: Fender Company showed the followingunit costs for its product:
| Direct materials | $1.15 |
| Direct labor | 0.60 |
| Variable overhead | 0.22 |
| Fixed overhead* | 2.44 |
| *Based on capacity of 29,800units. |
Last year, Fender made 29,800 units and sold 27,700 units at aprice of $9.01. Selling and administrative expense equaled $49,170(all fixed). Beginning Finished Goods Inventory contained 410 unitswith cost of $1,808.1.
| Absorption-CostingIncome | Variable CostingIncome | |||
|---|---|---|---|---|
| Sales | $249,577.00 | Sales | $249,577.00 | |
| COGS ($4.41 Ã 27,700) | 122,157.00 | Variable COGS ($1.97 Ã 27,700) | 54,569.00 | |
| Gross margin | $127,420.00 | Contribution margin | $195,008.00 | |
| Less: | Fixed overhead | 72,712 | ||
| Selling & admin.exp | 49,170 | Selling & admin. exp. | 49,170 | |
| Operating income | $78,250.00 | Operating income | $73,126.00 | |
There is a difference of $5,124 between the absorption-costingoperating income and the variable-costing operating income. This$5,124 is caused by the different treatment of fixed factoryoverhead. Under absorption costing, the 2,100 units added to endinginventory took not only the $1.97 of variable manufacturing cost,but also $2.44 per unit in fixed overhead. Under variable costing,however, all the fixed factory overhead of $72,712 was expensed.None of it was added to units going into ending inventory.
| Absorption-costing income -Variable-costing income | = Change in inventory à fixedoverhead rate |
| = 2,100 units à $2.44 = $5,124 |
What if more units are sold than are produced? That is, what ifending inventory is less than beginning inventory? Let's look atthe comparative income statement assuming Fender sells 29,890units.
| Absorption-CostingIncome | Variable CostingIncome | |||
|---|---|---|---|---|
| Sales | $269,308.9 | Sales | $269,308.9 | |
| COGS ($4.41 Ã 29,890) | 131,814.9 | Variable COGS ($1.97 Ã 29,890) | 58,883.3 | |
| Gross margin | $137,494 | Contribution margin | $210,425.6 | |
| Less: | Fixed overhead | 72,712 | ||
| Selling & admin.exp | 49,170 | Selling & admin. exp. | 49,170 | |
| Operating income | $88,324 | Operating income | $88,543.6 | |
Now we see that variable-costing income is higher thanabsorption costing income. This is because each of the 90 unitsthat came out of inventory had $2.44 of fixed overhead attached.However, this did not occur under variable costing.
| Absorption-costing income -Variable-costing income | = Change in inventory à fixedoverhead rate |
| = 90 units à $2.44 = $219.60 |
The following table summarizes the impact of changes ininventory on the difference between absorption-costing income andvariable-costing income.
| Changes in Inventoryunder Absorption and Variable Costing | |
|---|---|
| If | Then |
| Production > Sales | Absorption-costing income >Variable-costing income |
| Production < Sales | Variable-costing income >Absorption-costing income |
| Production = Sales | Absorption-costing income =Variable-costing income |
The variable-costing income statement has an advantage inaddition to providing better signals regarding performance. It alsoprovides more useful information for management decision making.For example, how much more will Fender Company earn if it sells onemore unit? Under absorption costing, the per-unit gross profit is$4.60 ($9.01 - $4.41). However, that figure includes some fixedoverhead, and fixed overhead will not change if another unit isproduced and sold. The variable-costing gives more usefulinformation. Additional contribution margin of the extra unit is$7.04 ($9.01 - $1.97). The key insight of variable costing is thatfixed expenses do not change as units produced and sold change.Therefore, while the variable-costing income statement cannot beused for external reporting, it is a valuable tool for somemanagement decisions.
| Outback, Ltd., manufactures tactical LED flashlights in Melbourne, Australia. The firm uses an absorption-costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding planned and actual operations for 20x4 follow: |
|
| Budgeted Costs | ||||||||
|
| |||||||||
| Per Unit | Total | Actual Costs | |||||||
| Direct material | $ | 12.20 | $ | 1,634,800 | $ | 1,512,800 | |||
| Direct labor | 9.30 | 1,246,200 | 1,153,200 | ||||||
| Variable manufacturing overhead | 4.30 | 576,200 | 533,200 | ||||||
| Fixed manufacturing overhead | 4.50 | 603,000 | 613,000 | ||||||
| Variable selling expenses | 7.50 | 1,005,000 | 877,500 | ||||||
| Fixed selling expenses | 7.80 | 1,045,200 | 1,045,200 | ||||||
| Variable administrative expenses | 2.80 | 375,200 | 327,600 | ||||||
| Fixed administrative expenses | 2.80 | 375,200 | 384,200 | ||||||
|
| |||||||||
| Total | $ | 51.20 | $ | 6,860,800 | $ | 6,446,700 | |||
|
| |||||||||
| Planned Activity | Actual Activity | |||
| Sales in units | 134,000 | 117,000 | ||
| Production in units | 134,000 | 124,000 | ||
| Beginning finished-goods inventory in units | 43,000 | 43,000 | ||
| The budgeted per-unit cost figures were based on the company producing and selling 134,000 units in 20x4. Outback uses a predetermined overhead rate for applying manufacturing overhead to its product. A total manufacturing overhead rate of $8.80 per unit was employed for absorption costing purposes in 20x4. Any overapplied or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the year. The 20x4 beginning finished-goods inventory for absorption costing purposes was valued at the 20x3 budgeted unit manufacturing cost, which was the same as the 20x4 budgeted unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price for 20x4 was $72.00 per unit. |
| Required: |
| 1. | Compute the value of Outbackâs 20x4 ending finished-goods inventory under absorption costing. (Do not round intermediate calculations.) |
| 2. | Compute the value of Outbackâs 20x4 ending finished-goods inventory under variable costing. (Do not round intermediate calculations.) |
| 3. | Compute the difference between Outbackâs 20x4 reported operating income calculated under absorption costing and calculated under variable costing. (Do not round intermediate calculations.) |
