Chapter 20 (5) : Variable Costing For Management Analysis
Chapter 20 (5) : Variable Costing For Management Analysis
OBJECTIVES
Obj1 Describe and illustrate income reporting under variable costing and absorption
costing.
Obj 2 Describe and illustrate income analysis under variable costing and absorption
costing.
Obj 3 Describe and illustrate management’s use of variable costing and absorption costing
for controlling costs, pricing products, planning production, analyzing contribution
margins, and analyzing market segments.
Obj 4 Use variable costing for analyzing market segments including product, territories,
and salespersons segments.
Obj 5 Use variable costing for analyzing and explaining changes in contribution margin as
a result of quantity and price factors.
Obj 6 Describe and illustrate the use of variable costing for service firms.
TRUE/FALSE
1. In determining cost of goods sold, two alternate costing concepts can be used: absorption
costing and variable costing.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
2. In determining cost of goods sold, two alternate costing concepts can be used: direct costing
and variable costing.
ANS: F DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
3. Fixed factory overhead costs are included as part of the cost of products manufactured under
the absorption costing concept.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
4. Under absorption costing, the cost of finished goods includes direct materials, direct labor,
and factory overhead.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
5. Under absorption costing, the cost of finished goods includes only direct materials, direct
labor, and variable factory overhead.
ANS: F DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
159
160 Chapter 20(5)/Variable Costing For Management Analysis
7. In variable costing, fixed costs do not become part of the cost of goods manufactured, but
are considered an expense of the period.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
9. Property taxes on a factory building would be included as part of the cost of products
manufactured under the absorption costing concept.
ANS: T DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
10. The factory superintendent's salary would be included as part of the cost of products
manufactured under the variable costing concept.
ANS: F DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
11. The factory superintendent's salary would be included as part of the cost of products
manufactured under the absorption costing concept.
ANS: T DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
12. Electricity purchased to operate factory machinery would be included as part of the cost of
products manufactured under the absorption costing concept.
ANS: T DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
13. The absorption costing income statement does not distinguish between variable and fixed
costs.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
14. In the absorption costing income statement, deduction of the cost of goods sold from sales
yields gross profit.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
Chapter 20(5)/Variable Costing For Management Analysis 161
15. In the absorption costing income statement, deduction of the cost of goods sold from sales
yields contribution margin.
ANS: F DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
16. In the absorption costing income statement, deduction of the cost of goods sold from sales
yields manufacturing margin.
ANS: F DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
17. On the variable costing income statement, deduction of the variable cost of goods sold from
sales yields gross profit.
ANS: F DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
18. On the variable costing income statement, deduction of the variable cost of goods sold from
sales yields manufacturing margin.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
19. On the variable costing income statement, all of the fixed costs are deducted from the
contribution margin.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
20. On the variable costing income statement, variable selling and administrative expenses are
deducted from manufacturing margin to yield contribution margin.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
21. On the variable costing income statement, variable costs are deducted from contribution
margin to yield manufacturing margin.
ANS: F DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
22. On the variable costing income statement, the figure representing the difference between the
contribution margin and income from operations is the fixed manufacturing costs and fixed
selling and administrative expenses.
ANS: T DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
23. The contribution margin and the manufacturing margin are usually equal.
ANS: F DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
162 Chapter 20(5)/Variable Costing For Management Analysis
24. For a period during which the quantity of inventory at the end was larger than that at the
beginning, income from operations reported under variable costing will be larger than
income from operations reported under absorption costing.
ANS: F DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
25. For a period during which the quantity of inventory at the end was larger than that at the
beginning, income from operations reported under variable costing will be smaller than
income from operations reported under absorption costing.
ANS: T DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
26. For a period during which the quantity of inventory at the end was smaller than that at the
beginning, income from operations reported under variable costing will be larger than
income from operations reported under absorption costing.
ANS: T DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
27. For a period during which the quantity of inventory at the end was smaller than that at the
beginning, income from operations reported under variable costing will be smaller than
income from operations reported under absorption costing.
ANS: F DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
28. For a period during which the quantity of inventory at the end equals the inventory at the
beginning, income from operations reported under variable costing will be smaller than
income from operations reported under absorption costing.
ANS: F DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
29. For a period during which the quantity of inventory at the end equals the inventory at the
beginning, income from operations reported under variable costing will equal income from
operations reported under absorption costing.
ANS: T DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
30. For a period during which the quantity of product manufactured exceeded the quantity sold,
income from operations reported under absorption costing will be smaller than income from
operations reported under variable costing.
ANS: F DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
Chapter 20(5)/Variable Costing For Management Analysis 163
31. For a period during which the quantity of product manufactured exceeded the quantity sold,
income from operations reported under absorption costing will be larger than income from
operations reported under variable costing.
ANS: T DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
32. For a period during which the quantity of product manufactured was less than the quantity
sold, income from operations reported under absorption costing will be larger than income
from operations reported under variable costing.
ANS: F DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
33. For a period during which the quantity of product manufactured was less than the quantity
sold, income from operations reported under absorption costing will be smaller than income
from operations reported under variable costing.
ANS: T DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
34. For a period during which the quantity of product manufactured equals the quantity sold,
income from operations reported under absorption costing will equal the income from
operations reported under variable costing.
ANS: T DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
35. For a period during which the quantity of product manufactured equals the quantity sold,
income from operations reported under absorption costing will be smaller than the income
from operations reported under variable costing.
ANS: F DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
36. Changes in the quantity of finished goods inventory, caused by differences in the levels of
sales and production, directly affects the amount of income from operations reported under
absorption costing.
ANS: T DIF: Difficult OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
37. Under absorption costing, the amount of income reported from operations can be increased
by producing more units than are sold.
ANS: T DIF: Difficult OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
164 Chapter 20(5)/Variable Costing For Management Analysis
38. Under absorption costing, increases or decreases in income from operations due to changes
in inventory levels could be misinterpreted to be the result of operating efficiencies or
inefficiencies.
ANS: T DIF: Difficult OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
39. Management may use both absorption and variable costing methods for analyzing a
particular product.
ANS: T DIF: Difficult OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
40. Property tax expense is an example of a controllable cost for the supervisor of a
manufacturing department.
ANS: F DIF: Difficult OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
41. Direct labor cost is an example of a controllable cost for the supervisor of a manufacturing
department.
ANS: T DIF: Difficult OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
42. In the short run, the selling price of a product should normally not be less than the variable
costs and expenses of making and selling it.
ANS: T DIF: Easy OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
43. In the long run, for a business to remain in operation, the selling price of a product should
normally cover all costs and expenses and provide a reasonable income.
ANS: T DIF: Easy OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
44. For short-run production planning, information in the variable costing format is more useful
to management than is information in the absorption costing concept format.
ANS: T DIF: Easy OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
45. For short-run production planning, information in the absorption costing format is more
useful to management than is information in the variable costing format.
ANS: F DIF: Easy OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
46. Sales mix is generally defined as the relative distribution of sales among the various
products sold.
ANS: T DIF: Easy OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
Chapter 20(5)/Variable Costing For Management Analysis 165
47. If the ability to sell and the amount of production facilities devoted to each of two products
is equal, it is profitable to increase the sales of that product with the lowest contribution
margin.
ANS: F DIF: Difficult OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
48. If the ability to sell and the amount of production facilities devoted to each of two products
is equal, it is profitable to increase the sales of that product with the highest contribution
margin.
ANS: T DIF: Difficult OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
49. The contribution margin ratio is computed as contribution margin divided by sales.
ANS: T DIF: Easy OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
50. In evaluating the performance of salespersons, the salesperson with the highest level of sales
should be evaluated as the best performer.
ANS: F DIF: Difficult OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
51. Companies prepare contribution margin reports by market segments and product segments
because products contribute to profitability in various ways.
ANS: T DIF: Easy OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
52. Ford’s Expedition sport utility vehicle is its most profitable model. Therefore Ford should
increase production levels and promotional efforts on its other models to increase their sales.
ANS: F DIF: Easy OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
53. The systematic examination of differences between planned and actual contribution margins
is termed contribution margin analysis.
ANS: T DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
54. In contribution margin analysis, the effect of a difference in the number of units sold,
assuming no change in unit sales price or cost, is termed the quantity factor.
ANS: T DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
55. In contribution margin analysis, the effect of a difference in the number of units sold,
assuming no change in unit sales price or cost, is termed the unit price or unit cost factor.
ANS: F DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
166 Chapter 20(5)/Variable Costing For Management Analysis
56. In contribution margin analysis, the effect of a difference in unit sales price or unit cost on
the number of units sold is termed the unit price or unit cost factor.
ANS: T DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
57. In contribution margin analysis, the effect of a difference in unit sales price or unit cost on
the number of units sold is termed the quantity factor.
ANS: F DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
58. In contribution margin analysis, the quantity factor is computed as the difference between
actual quantity sold and the planned quantity sold, multiplied by the planned unit sales price
or unit cost.
ANS: T DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
59. In contribution margin analysis, the unit price or unit cost factor is computed as the
difference between actual quantity sold and the planned quantity sold, multiplied by the
planned unit sales price or unit cost.
ANS: F DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
60. In contribution margin analysis, the unit price or unit cost factor is computed as the
difference between the actual unit price or unit cost and the planned unit price or unit cost,
multiplied by the actual quantity sold.
ANS: T DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
61. A change in the amount of sales can be due to either a change in the units sold or a change in
price or both.
ANS: T DIF: Difficult OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
62. Contribution margin reporting and analysis is appropriate only for manufacturing firms, not
for service firms.
ANS: F DIF: Moderate OBJ: 20(5)-06
NAT: AACSB Analytic | IMA-Performance Measurement
63. Service firms can only have one activity base for analyzing changes in costs.
ANS: F DIF: Moderate OBJ: 20(5)-06
NAT: AACSB Analytic | IMA-Performance Measurement
Chapter 20(5)/Variable Costing For Management Analysis 167
64. In a service firm it may be necessary to have several activity bases to properly match the
change in costs with the changes in various activities.
ANS: T DIF: Moderate OBJ: 20(5)-06
NAT: AACSB Analytic | IMA-Performance Measurement
65. Service firms are unable to use contribution margin report and analysis in their company
because these firms do not sell inventory.
ANS: F DIF: Easy OBJ: 20(5)-06
NAT: AACSB Analytic | IMA-Performance Measurement
MULTIPLE CHOICE
1. What term is commonly used to describe the concept whereby the cost of manufactured
products is composed of direct materials cost, direct labor cost, and factory overhead cost?
a. Standard costing
b. Variable costing
c. Absorption costing
d. Direct costing
ANS: C DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
2. What term is commonly used to describe the concept whereby the cost of manufactured
products is composed of direct materials cost, direct labor cost, and variable factory
overhead cost?
a. Absorption costing
b. Differential costing
c. Standard costing
d. Variable costing
ANS: D DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
4. Under absorption costing, which of the following costs would not be included in finished
goods inventory?
a. Direct labor cost
b. Direct materials cost
c. Variable and fixed factory overhead cost
d. Variable and fixed selling and administrative expenses
ANS: D DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
5. Under absorption costing, which of the following costs would not be included in finished
goods inventory?
a. Hourly wages of assembly worker
b. Straight-line depreciation on factory equipment
c. Overtime wages paid factory workers
d. Advertising costs for a furniture manufacturer
ANS: D DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
6. Under variable costing, which of the following costs would not be included in finished
goods inventory?
a. Direct labor cost
b. Direct materials cost
c. Variable factory overhead cost
d. Fixed factory overhead cost
ANS: D DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
7. Under variable costing, which of the following costs would be included in finished goods
inventory?
a. Selling costs
b. Salary of vice-president of finance
c. Variable factory overhead cost
d. Fixed factory overhead cost
ANS: C DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
8. Under variable costing, which of the following costs would be included in finished goods
inventory?
a. Advertising costs
b. Salary of vice-president of finance
c. Wages of carpenters in a furniture factory
d. Straight-line depreciation on factory equipment
ANS: C DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
Chapter 20(5)/Variable Costing For Management Analysis 169
9. Under variable costing, which of the following costs would not be included in finished
goods inventory?
a. Wages of machine operator
b. Steel costs for a machine tool manufacturer
c. Salary of factory supervisor
d. Oil costs used to lubricate machinery
ANS: C DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
10. Which of the following would be included in the cost of a product manufactured according
to absorption costing?
a. Advertising expense
b. Sales salaries
c. double declining balance depreciation expense on factory building
d. Office supplies costs
ANS: C DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
11. Which of the following would be included in the cost of a product manufactured according
to variable costing?
a. Sales commissions
b. Property taxes on factory buildings
c. Interest expense
d. Direct materials
ANS: D DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
12. On the variable costing income statement, the figure representing the difference between
manufacturing margin and contribution margin is the:
a. fixed manufacturing costs
b. variable cost of goods sold
c. fixed selling and administrative expenses
d. variable selling and administrative expenses
ANS: D DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
13. In the variable costing income statement, deduction of variable selling and administrative
expenses from manufacturing margin yields:
a. differential margin
b. contribution margin
c. gross profit
d. marginal expenses
ANS: B DIF: Easy OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
170 Chapter 20(5)/Variable Costing For Management Analysis
14. The amount of income under absorption costing will equal the amount of income under
variable costing when units manufactured:
a. exceed units sold
b. equal units sold
c. are less than units sold
d. are equal to or greater than units sold
ANS: B DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
15. The amount of income under absorption costing will be less than the amount of income
under variable costing when units manufactured:
a. exceed units sold
b. equal units sold
c. are less than units sold
d. are equal to or greater than units sold
ANS: C DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
16. Which of the following statements is correct using the direct costing concept?
a. All manufacturing costs are included in the calculation of cost of goods manufactured
b. Only fixed costs are included in the calculation of cost of goods manufactured while
variable costs are considered period costs.
c. Only variable costs are included in the calculation of cost of goods manufactured while
fixed costs are considered period costs.
d. All manufacturing costs are considered period costs.
ANS: C DIF: Moderate OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
17. The amount of income under absorption costing will be more than the amount of income
under variable costing when units manufactured:
a. exceed units sold
b. equal units sold
c. are less than units sold
d. are equal to or greater than units sold
ANS: A DIF: Difficult OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management
Chapter 20(5)/Variable Costing For Management Analysis 171
18. The level of inventory of a manufactured product has increased by 8,000 units during a
period. The following data are also available:
Variable Fixed
Unit manufacturing costs of the period $12.00 $5.00
Unit operating expenses of the period 4.00 1.50
What would be the effect on income from operations if absorption costing is used rather than
variable costing?
a. $40,000 decrease
b. $40,000 increase
c. $44,000 increase
d. $52,000 increase
ANS: B DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
19. The level of inventory of a manufactured product has increased by 8,000 units during a
period. The following data are also available:
Variable Fixed
Unit manufacturing costs of the period $24 $10
Unit operating expenses of the period 8 3
What would be the effect on income from operations if variable costing is used rather than
absorption costing?
a. $80,000 decrease
b. $80,000 increase
c. $88,000 increase
d. $104,000 increase
ANS: A DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
172 Chapter 20(5)/Variable Costing For Management Analysis
20. The level of inventory of a manufactured product has increased by 8,000 units during a
period. The following data are also available:
Variable Fixed
Unit manufacturing costs of the period $12.00 $5.00
Unit operating expenses of the period 4.00 1.50
What would be the effect on income from operations if variable costing is used rather than
absorption costing?
a. $40,000 decrease
b. $40,000 increase
c. $44,000 increase
d. $52,000 increase
ANS: A DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
21. The level of inventory of a manufactured product has increased by 8,000 units during a
period. The following data are also available:
Variable Fixed
Unit manufacturing costs of the period $24 $10
Unit operating expenses of the period 8 3
What would be the effect on income from operations if absorption costing is used rather than
variable costing?
a. $80,000 decrease
b. $80,000 increase
c. $88,000 increase
d. $104,000 increase
ANS: B DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
Chapter 20(5)/Variable Costing For Management Analysis 173
22. The level of inventory of a manufactured product has increased by 5,000 units during a
period. The following data are also available:
Variable Fixed
Unit manufacturing costs of the period $24 $10
Unit operating expenses of the period 8 3
What would be the effect on income from operations if variable costing is used rather than
absorption costing?
a. $50,000 decrease
b. $50,000 increase
c. $88,000 increase
d. $104,000 increase
ANS: A DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
23. The level of inventory of a manufactured product has increased by 5,000 units during a
period. The following data are also available:
Variable Fixed
Unit manufacturing costs of the period $24 $10
Unit operating expenses of the period 8 3
What would be the effect on income from operations if absorption costing is used rather than
variable costing?
a. $50,000 decrease
b. $50,000 increase
c. $88,000 increase
d. $104,000 increase
ANS: B DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
174 Chapter 20(5)/Variable Costing For Management Analysis
24. A business operated at 100% of capacity during its first month and incurred the following
costs:
Operating expenses:
Variable operating expenses $130,000
Fixed operating expenses 50,000 180,000
If 1,600 units remain unsold at the end of the month, what is the amount of inventory that
would be reported on the variable costing balance sheet?
a. $64,000
b. $56,000
c. $66,400
d. $68,000
ANS: B DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
25. A business operated at 100% of capacity during its first month and incurred the following
costs:
If 800 units remain unsold at the end of the month, what is the amount of inventory that
would be reported on the absorption costing balance sheet?
a. $32,000
b. $28,000
c. $33,200
d. $34,000
ANS: A DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
Chapter 20(5)/Variable Costing For Management Analysis 175
26. A business operated at 100% of capacity during its first month and incurred the following
costs:
Operating expenses:
Variable operating expenses $130,000
Fixed operating expenses 50,000 180,000
If 1,500 units remain unsold at the end of the month, what is the amount of inventory that
would be reported on the variable costing balance sheet?
a. $64,000
b. $56,000
c. $60,000
d. $52,500
ANS: D DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
27. A business operated at 100% of capacity during its first month and incurred the following
costs:
If 700 units remain unsold at the end of the month, what is the amount of inventory that
would be reported on the absorption costing balance sheet?
a. $32,000
b. $28,000
c. $24,500
d. $34,000
ANS: B DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
176 Chapter 20(5)/Variable Costing For Management Analysis
28. A business operated at 100% of capacity during its first month and incurred the following
costs:
Operating expenses:
Variable operating expenses $15,000
Fixed operating expenses 4,500 19,500
If 75 units remain unsold at the end of the month, what is the amount of inventory that
would be reported on the absorption costing balance sheet?
a. $5,625
b. $5,250
c. $5,760
d. $6,075
ANS: A DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
29. A business operated at 100% of capacity during its first month and incurred the following
costs:
Operating expenses:
Variable operating expenses $ 60,000
Fixed operating expenses 18,000 78,000
If 300 units remain unsold at the end of the month, what is the amount of inventory that
would be reported on the variable costing balance sheet?
a. $22,500
b. $21,000
c. $23,040
d. $24,300
ANS: B DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
Chapter 20(5)/Variable Costing For Management Analysis 177
30. A business operated at 100% of capacity during its first month and incurred the following
costs:
Operating expenses:
Variable operating expenses $ 34,000
Fixed operating expenses 2,000 36,000
If 2,000 units remain unsold at the end of the month and sales total $300,000 for the month,
what would be the amount of income from operations reported on the variable costing
income statement?
a. $108,000
b. $100,000
c. $114,800
d. $140,000
ANS: B DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
31. A business operated at 100% of capacity during its first month and incurred the following
costs:
Operating expenses:
Variable operating expenses $17,000
Fixed operating expenses 1,000 18,000
If 1,000 units remain unsold at the end of the month and sales total $150,000 for the month,
what would be the amount of income from operations reported on the absorption costing
income statement?
a. $50,400
b. $50,000
c. $52,000
d. $70,000
ANS: A DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
178 Chapter 20(5)/Variable Costing For Management Analysis
32. A business operated at 100% of capacity during its first month and incurred the following
costs:
Operating expenses:
Variable operating expenses $ 34,000
Fixed operating expenses 2,000 36,000
If 2,000 units remain unsold at the end of the month and sales total $300,000 for the month,
what is the amount of the manufacturing margin that would be reported on the variable
costing income statement?
a. $100,000
b. $108,000
c. $140,000
d. $114,800
ANS: C DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
33. A business operated at 100% of capacity during its first month and incurred the following
costs:
Operating expenses:
Variable operating expenses $17,000
Fixed operating expenses 1,000 18,000
If 1,000 units remain unsold at the end of the month and sales total $150,000 for the month,
what is the amount of the manufacturing margin that would be reported on the absorption
costing income statement?
a. $50,000
b. $54,000
c. not reported
d. $70,000
ANS: C DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
Chapter 20(5)/Variable Costing For Management Analysis 179
34. A business operated at 100% of capacity during its first month and incurred the following
costs:
Operating expenses:
Variable operating expenses $17,000
Fixed operating expenses 1,000 18,000
If 1,000 units remain unsold at the end of the month and sales total $150,000 for the month,
what is the amount of the contribution margin that would be reported on the variable costing
income statement?
a. $51,400
b. $52,000
c. $54,000
d. $53,000
ANS: D DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
35. A business operated at 100% of capacity during its first month, with the following results:
Operating expenses:
Variable operating expenses $ 12,000
Fixed operating expenses 2,000 14,000
What is the amount of the manufacturing margin that would be reported on the variable
costing income statement?
a. $30,000
b. $38,800
c. $56,000
d. $44,000
ANS: C DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
180 Chapter 20(5)/Variable Costing For Management Analysis
A business operated at 100% of capacity during its first month, with the following results:
Operating expenses:
Variable operating expenses $ 6,000
Fixed operating expenses 1,000 7,000
36. What is the amount of the contribution margin that would be reported on the variable costing
income statement?
a. $15,000
b. $19,400
c. $28,000
d. $22,000
ANS: D DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
37. What is the amount of the income from operations that would be reported on the variable
costing income statement?
a. $19,400
b. $19,000
c. $22,000
d. $28,000
ANS: B DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
38. What is the amount of the income from operations that would be reported on the absorption
costing income statement?
a. $21,000
b. $19,400
c. $22,000
d. $28,000
ANS: B DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
Chapter 20(5)/Variable Costing For Management Analysis 181
39. What is the amount of the gross profit that would be reported on the absorption costing
income statement?
a. $19,400
b. $21,000
c. $26,400
d. $22,000
ANS: C DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
40. Accountants prefer the variable costing method over absorption costing method for
evaluating the performance of a company because
a. by using the absorption costing method, income could appear to be higher by producing
more inventory.
b. by using the absorption method, more sales will be generated.
c. by using the variable costing method, the cost of goods sold will be higher as more units
are manufactured and sales remain the same.
d. by using the variable costing method, all fixed and variable costs are included in the unit
cost of the product manufactured.
ANS: A DIF: Moderate OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
41. Under which inventory costing method could increases or decreases in income from
operations be misinterpreted to be the result of operating efficiencies or inefficiencies?
a. Variable costing
b. Absorption costing
c. Incremental costing
d. Differential costing
ANS: B DIF: Easy OBJ: 20(5)-02
NAT: AACSB Analytic | IMA-Cost Management
42. It would be acceptable to have the selling price of a product just above the variable costs and
expenses of making and selling it in:
a. the long run
b. the short run
c. both the short run and long run
d. monopoly situations
ANS: B DIF: Moderate OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
182 Chapter 20(5)/Variable Costing For Management Analysis
43. Costs that can be influenced by management at a specific level of management are called:
a. direct costs.
b. indirect costs.
c. noncontrollable costs.
d. controllable costs.
ANS: D DIF: Easy OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
44. Under the variable costing method variable manufacturing costs are easier to identify and
control because:
a. Variable and fixed costs are reported separately.
b. Variable costs can be controlled by the operating management.
c. Fixed costs, such as property insurance, are normally the responsibility of higher
management not the operating management.
d. All of the above are true.
ANS: D DIF: Easy OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
45. Which of the following is not true when determining the selling price for a product?
a. Absorption costing should be used to determine routine pricing which include both fixed
and variable costs.
b. As long as the selling price is set above the variable costs, the company will make a
profit.
c. Variable costing is effective when determining short run decisions, but absorption costing
is generally used for long-term pricing policies.
d. Both variable and absorption pricing plans should be considered, to include several
pricing alternatives.
ANS: C DIF: Moderate OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
46. Management will use both variable and absorption costing in the following activities except:
a. Controlling Costs
b. Product Pricing
c. Planning of Production
d. Controlling Inventory Levels
ANS: D DIF: Easy OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Cost Management
47. The relative distribution of sales among various products sold is referred to as the:
a. by-product mix
b. joint product mix
c. profit mix
d. sales mix
ANS: D DIF: Easy OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
Chapter 20(5)/Variable Costing For Management Analysis 183
48. Management should concentrate its sales and production efforts on the product or products
with:
a. the highest sales
b. the lowest costs
c. the highest contribution margin
d. the highest contribution margin per unit
ANS: D DIF: Difficult OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
50. For a supervisor of a manufacturing department, which of the following costs are
controllable?
a. Direct materials
b. Insurance on factory building
c. Depreciation of factory building
d. Rent on factory building
ANS: A DIF: Easy OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
51. Sales territory profitability analysis can determine profit differences between territories due
to
a. Pricing, variable costs, and selling costs
b. Variable costs, selling costs, and types of products sold
c. Pricing, selling costs, and type of products sold
d. Sales volumes, pricing, and variable costs.
ANS: C DIF: Moderate OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
52. Contribution margin reporting can be beneficial for analyzing the following:
a. Sales personal
b. Products
c. Sales Territory
d. All of the above.
ANS: D DIF: Easy OBJ: 20(5)-04
NAT: AACSB Analytic | IMA-Performance Measurement
184 Chapter 20(5)/Variable Costing For Management Analysis
53. If sales totaled $200,000 for the current year (10,000 units at $20 each) and planned sales
totaled $150,000 (12,500 units at $12 each), the effect of the unit price factor on the change
in sales is a:
a. $80,000 increase
b. $20,000 decrease
c. $30,000 increase
d. $30,000 decrease
ANS: A DIF: Moderate OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
54. In contribution margin analysis, the effect of a change in the number of units sold, assuming
no change in unit sales price or unit cost, is referred to as the:
a. sales factor
b. cost of goods sold factor
c. quantity factor
d. price factor
ANS: C DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
55. In contribution margin analysis, the increase or decrease in unit sales price or unit cost on
the number of units sold is referred to as the:
a. sales factor
b. cost of goods sold factor
c. quantity factor
d. unit price or unit cost factor
ANS: D DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
58. In contribution margin analysis, the unit price or unit cost factor is computed as:
a. the difference between the actual unit price or unit cost and the planned unit price or cost,
multiplied by the planned quantity sold
b. the difference between the actual unit price or unit cost and the planned unit price or cost,
multiplied by the actual quantity sold
c. the difference between the actual quantity sold and the planned quantity sold, multiplied
by the planned unit sales price or unit cost
d. the difference between the actual quantity sold and the planned quantity sold, multiplied
by the actual unit sales price or unit cost
ANS: B DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
59. If variable cost of goods sold totaled $80,000 for the year (16,000 units at $5 each) and the
planned variable cost of goods sold totaled $84,000 (15,000 units at $5.60 each), the effect
of the quantity factor on the change in variable cost of goods sold is:
a. $4,000 decrease
b. $5,000 increase
c. $5,600 increase
d. $5,600 decrease
ANS: C DIF: Moderate OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
60. If variable cost of goods sold totaled $80,000 for the year (16,000 units at $5 each) and the
planned variable cost of goods sold totaled $84,000 (15,000 units at $5.60 each), the effect
of the unit cost factor on the change in variable cost of goods sold is:
a. $4,000 decrease
b. $5,000 increase
c. $9,600 decrease
d. $5,600 increase
ANS: C DIF: Moderate OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
186 Chapter 20(5)/Variable Costing For Management Analysis
61. If variable selling and administrative expenses totaled $120,000 for the year (80,000 units at
$1.50 each) and the planned variable selling and administrative expenses totaled $120,900
(78,000 units at $1.55 each), the effect of the quantity factor on the change in variable
selling and administrative expenses is:
a. $900 decrease
b. $3,100 decrease
c. $4,000 decrease
d. $3,100 increase
ANS: D DIF: Moderate OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
62. If variable selling and administrative expenses totaled $120,000 for the year (80,000 units at
$1.50 each) and the planned variable selling and administrative expenses totaled $120,900
(78,000 units at $1.55 each), the effect of the unit cost factor on the change in variable
selling and administrative expenses is:
a. $900 decrease
b. $3,100 decrease
c. $4,000 decrease
d. $3,100 increase
ANS: C DIF: Moderate OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
63. If sales totaled $800,000 for the year (80,000 units at $10 each) and the planned sales totaled
$819,000 (78,000 units at $10.50 each), the effect of the unit price factor on the change in
sales is:
a. $19,000 decrease
b. $21,000 increase
c. $40,000 decrease
d. $21,000 decrease
ANS: C DIF: Moderate OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
64. If sales totaled $800,000 for the year (80,000 units at $10 each) and the planned sales totaled
$819,000 (78,000 units at $10.50 each), the effect of the quantity factor on the change in
sales is:
a. $21,000 increase
b. $19,000 decrease
c. $21,000 decrease
d. $40,000 decrease
ANS: A DIF: Moderate OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
Chapter 20(5)/Variable Costing For Management Analysis 187
65. If variable cost of goods sold totaled $90,000 for the year (18,000 units at $5 each) and the
planned variable cost of goods sold totaled $88,000 (16,000 units at $5.50 each), the effect
of the quantity factor on the change in variable cost of goods sold is:
a. $2,000 decrease
b. $11,000 increase
c. $9.000 increase
d. $9,000 decrease
ANS: B DIF: Moderate OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
66. If variable cost of goods sold totaled $90,000 for the year (18,000 units at $5 each) and the
planned variable cost of goods sold totaled $88,000 (16,000 units at $5.50 each), the effect
of the unit cost factor on the change in variable cost of goods sold is:
a. $2,000 decrease
b. $2,000 increase
c. $11,000 increase
d. $9,000 decrease
ANS: D DIF: Moderate OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
67. The difference between the planned and actual contribution margin can be caused by:
a. an increase or decrease in the amount of sales
b. an increase in the amount of variable costs and expenses
c. a decrease in the amount of variable costs and expenses
d. A, B, or C
ANS: D DIF: Difficult OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
68. The systematic examination of the differences between planned and actual contribution
margin is termed:
a. gross profit analysis
b. contribution margin analysis
c. sales mix analysis
d. volume variance analysis
ANS: B DIF: Easy OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement
69. Mama’s Chocolate had planned to sell their chocolate covered strawberries for $3.00 each.
Due to various factors the actual price was $2.75. Mama’s was able to sell 1,000 more
strawberries than anticipated to 4,000. What is the a) quantity factor and b) the price factor
for sales?
a. a) $3,000, b) ($1,000)
b. a) $3,000, b) $2,000
c. a) $1,000 b) $2,000
d. a) ($3,000) b) ($2,000)
ANS: A DIF: Moderate OBJ: 20(5)-05
188 Chapter 20(5)/Variable Costing For Management Analysis
71. In which of the following types of firms would it be appropriate to prepare contribution margin
reporting and analysis?
a. Boat manufacturing
b. A chain of beauty salons.
c. Home building
d. A, B, and C
ANS: D DIF: Moderate OBJ: 20(5)-06
NAT: AACSB Analytic | IMA-Performance Measurement
72. Which of the following would not be an appropriate activity base for cost analysis in a service firm?
a. Lawns mowed.
b. Inventory produced
c. Customers served.
d. Haircuts given
ANS: B DIF: Moderate OBJ: 20(5)-06
NAT: AACSB Analytic | IMA-Performance Measurement
EXERCISE/OTHER
Sales $470,000
Variable cost of goods sold 225,000
Fixed manufacturing costs 80,000
Variable selling and administrative expenses 52,000
Fixed selling and administrating expenses 35,000
Determine the March (a) manufacturing margin, (b) contribution margin, and (c) income from
operations for Stanton Company.
ANS:
(a) $245,000 ($470,000 - $225,000)
(b) $193,000 ($245,000 - $52,000)
(c) $78,000 ($193,000 - $80,000 - $35,000)
DIF: Moderate OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management TOP: Example Exercise 20(5)-1
Sales $510,000
Variable cost of goods sold 245,000
Chapter 20(5)/Variable Costing For Management Analysis 189
Determine the March (a) manufacturing margin, (b) contribution margin, and (c) income from
operations for Telleron Company.
ANS:
(a) $265,000 ($510,000 - $245,000)
(b) $209,000 ($265,000 - $56,000)
(c) $84,000 ($209,000 - $85,000 - $40,000)
DIF: Moderate OBJ: 20(5)-01
NAT: AACSB Analytic | IMA-Cost Management TOP: Example Exercise 20(5)-1
3. Fixed costs are $10 per unit and variable costs are $25 per unit. Production was 13,000 units, while
sales were 12,000 units. Determine (a) whether variable cost income from operations is less than or
greater than absorption costing income from operations, and (b) the difference in variable costing
and absorption costing income from operations.
ANS:
(a) Variable costing income from operations is less than absorption cost income from
operations.
(b) $10,000 ($10 per unit 1,000 units)
4. Fixed costs are $50 per unit and variable costs are $125 per unit. Production was 130,000 units,
while sales were 125,000 units. Determine (a) whether variable cost income from operations is less
than or greater than absorption costing income from operations, and (b) the difference in variable
costing and absorption costing income from operations.
ANS:
(a) Variable costing income from operations is less than absorption cost income from
operations.
(b) $250,000 ($50 per unit 5,000 units)
5. The beginning inventory is 10,000 units. All of the units manufactured during the period and 8,000
units of the beginning inventory were sold. The beginning inventory fixed costs are $50 per unit, and
variable costs are $300 per unit. Determine (a) whether variable costing income from operations is
less than or greater than absorption costing income from operations, and (b) the difference in
variable costing and absorption income from operations.
ANS:
(a) Variable costing income from operations is greater than absorption costing income
from operations.
(b) $400,000 ($50 per unit 8,000 units)
6. The beginning inventory is 5,000 units. All of the units manufactured during the period and 3,000
units of the beginning inventory were sold. The beginning inventory fixed costs are $20 per unit, and
variable costs are $55 per unit. Determine (a) whether variable costing income from operations is
less than or greater than absorption costing income from operations, and (b) the difference in
variable costing and absorption income from operations.
ANS:
(a) Variable costing income from operations is greater than absorption costing income
from operations.
(b) $60,000 ($20 per unit 3,000 units)
7. Variable costs are $80 per unit, and fixed costs are $40,000. Sales are estimated to be 4,000 units. (a)
How much would absorption costing income from operations differ between a plan to produce 4,000
units and a plan to produce 5,000 units? (b) How much would variable costing income from
operations differ between the two production plans?
ANS:
(a) $8,000 greater 4,000 units x ($10.00 - $8.00), or [1,000 units $40,000/5,000)]
(b) There would be no difference in variable costing income from operations between the
two plans.
8. If variable manufacturing costs are $14 per unit and total fixed manufacturing costs are $200,000,
what is the manufacturing cost per unit if:h
(a) 20,000 units are manufactured and the company uses the variable costing concept?
(b) 25,000 units are manufactured and the company uses the variable costing concept?
(c) 20,000 units are manufactured and the company uses the absorption costing concept?
(d) 25,000 units are manufactured and the company used the absorption costing concept?
ANS:
(a) $14 (variable cost only)
10. The actual price for a product was $50 per unit, while the planned price was $44 per unit. The
volume increased by 4,000 to 60,000 total units. Determine the (a) quantity factor and the (b) price
factor for sales.
ANS:
(a) $200,000 increase (4,000 units $50 per unit)
(b) $360,000 increase ($50 - $44) 60,000 units
DIF: Difficult OBJ: 20(5)-05
NAT: AACSB Analytic | IMA-Performance Measurement TOP: Example Exercise 20(5)-6
PROBLEM
1. On January 1 of the current year, C. F. Hartley Co. commenced operations. It operated its plant at
100% of capacity during January. The following data summarized the results for January:
Units
Production: 50,000
Sales ($18 per unit) 42,000
Inventory, January 31 8,000
=====
ANS:
192 Chapter 20(5)/Variable Costing For Management Analysis
(a)
C. F. Hartley Co.
Absorption Costing Income Statement
For Month Ended January 31, 20--
Sales $756,000
Cost of goods sold:
Cost of goods manufactured $650,000
Less inventory, January 31, 20-- 104,000
Cost of goods sold 546,000
Gross profit $210,000
Selling and administrative expenses 44,100
Income from operations $165,900
=======
(b)
C. F. Hartley Co.
Variable Costing Income Statement
For Month Ended January 31, 20--
Sales $756,000
Variable cost of goods sold:
Variable cost of goods manufactured $575,000
Less inventory, January 31, 20-- 92,000
Variable cost of goods sold 483,000
Manufacturing margin $273,000
Variable selling and administrative expense 33,600
Contribution margin $239,400
Fixed costs:
Fixed manufacturing costs $ 75,000
Fixed selling and administrative expenses 10,500 85,500
Income from operations $153,900
=======
2. On October 31, the end of the first month of operations, Carswell & Co. prepared the following
income statement based on absorption costing:
========
If the fixed manufacturing costs were $42,000 and the variable selling and administrative expenses
were $15,600, prepare an income statement in accordance with the variable costing concept.
ANS:
Computations:
Variable cost of goods manufactured: $85,500 - $42,000 = $43,500
3. Presented below are the major categories or captions that would appear on an income statement
prepared in the variable costing format:
Contribution margin
Fixed costs
Income from operations
Manufacturing margin
Sales
Variable cost of goods sold
Variable selling and administrative expenses
(a) Arrange the above captions in the proper order in accordance with the variable
costing concept.
(b) Which of the captions represents (1) the difference between sales and the total of all
the variable costs and expenses and (2) the remaining amount of revenue available
194 Chapter 20(5)/Variable Costing For Management Analysis
ANS:
(a) Sales
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs
Income from operations
(b) (1) Contribution margin
(2) Contribution margin
4. On August 31, the end of the first year of operations, during which 18,000 units were manufactured
and 13,500 units were sold, Finberg Inc. prepared the following income statement based on the
variable costing concept:
Finberg Inc.
Income Statement
For Year Ended August 31, 20--
Sales $297,000
Variable cost of goods sold:
Variable cost of goods manufactured $279,000
Less ending inventory 67,500
Variable cost of goods sold 211,500
Manufacturing margin $ 85,500
Variable selling and administrative
expenses 40,500
Contribution margin $ 45,000
Fixed costs:
Fixed manufacturing costs $ 12,000
Fixed selling and administrative
expenses 10,800 22,800
Income from operations $ 22,200
========
Determine the unit cost of goods manufactured, based on (a) the variable costing concept and (b) the
absorption costing concept.
ANS:
(a) $15.50. ($279,000 total variable cost of goods manufactured/18,000 units manufactured.)
Product T Product W
Sales price $300 $325
Variable cost of goods sold 235 250
Manufacturing margin $ 65 $ 75
Variable selling and administrative
expenses 25 10
Contribution margin $ 40 $ 65
==== ====
Calculate the increase or decrease in total contribution margin if 1,000 additional units of Product W
are produced and sold.
ANS:
Additional contribution margin from sale of additional 1,000 units of
Product W (1,000 $65) $ 65,000
Less contribution margin from forgoing production and sale of 3,000 units
of Product T (3,000 $40) 120,000
Decrease in total contribution margin ($55,000)
=========
DIF: Moderate OBJ: 20(5)-03
NAT: AACSB Analytic | IMA-Performance Measurement
6. Based upon the following data taken from the records of Willis Inc., prepare a contribution margin
analysis report for the year ended December 31, 2008.
Per unit:
Sales price $2.60 $2.50 .10
Variable cost of goods sold 1.41 1.40 .01
196 Chapter 20(5)/Variable Costing For Management Analysis
Willis Inc.
Contribution Margin Analysis
For the Year Ended December 31, 2008
Decrease in amount of sales attributed to:
Quantity factor:
Decrease in number of units sold in 2008 10,000
Planned sales price in 2008 $2.50 $25,000
Price factor:
Increase in unit sales price in 2008 $ .10
Number of units sold in 2008 120,000 12,000
Net decrease in amount of sales $13,000
7. The Ambler Company has three salespersons. Below is given their average sales price per unit sold,
average variable manufacturing costs per unit, and number of units sold. Their commissions are
according to the following schedule: $0 to 49,999 - 5%; $50,000 to $52,999 - 7 %; $53,000+ 8%.