Exam 7: Income Effects of Alternative Cost Accumulation Systems

What is the central theoretical issue in the variable costing debate?

Proponents of variable costing argue that inventories have value only to the extent that they:

What is the primary difference between variable and absorption costing?

Under which of the following conditions is net income higher under absorption costing (relative to variable costing)?

Inventory values calculated using variable costing as opposed to absorption costing will generally be

The following information pertains to Mayberry Ltd.: Beginning inventory 1,000 units Ending inventory 6,000 units Direct labour per unit \pm40 Direct materials per unit 20 Variable overhead per unit 10 Fixed overhead per unit 30 Variable selling and admin. costs per unit 6 Fixed selling and admin. costs per unit 14 What is the value of the ending inventory using the variable costing method?

Baker Company produced 30,000 units and sold 28,000 units in 2011. Beginning inventory was zero. During the period, the following costs were incurred: Indirect labour £60,000 Indirect materials 30,000 Other 90,000 Fixed manufacturing overhead 180,000 Fixed administrative expenses 150,000 Fixed selling expenses 120,000 Variable selling expenses, per unit 40 Direct labour, per unit 80 Direct materials, per unit 20 a.Absorption costing b.Variable costing

Figure 7-2 Steele Ltd. has the following information for January, February, and March 2011: January February March Units produced 10,000 10,000 10,000 Units sold 7,000 8,500 10,500 Production costs per unit (based on 10,000 units) are as follows: Direct materials £12 Direct labour 8 Variable factory overhead 6 Fixed factory overhead 4 Variable selling and admin. expenses 10 Fixed selling and admin. expenses 4 There were no beginning inventories for January 2011, and all units were sold for £50. Costs are stable over the three months. -Refer to Figure 7-2. What is the January ending inventory for Steele Ltd. using the variable costing method?

The method of accounting for inventory that assigns all manufacturing costs to inventory is sometimes referred to as:

Ramon Company reported the following units of production and sales for June and July 2011: Units Month Froduced Sold June 2011 100,000 90,000 July 2011 100,000 105,000 Net income under absorption costing for June was £40,000; net income under variable costing for July was £50,000. Fixed manufacturing costs were £600,000 for each month. How much was net income for June using variable costing?

Steele Ltd. has the following information for January, February, and March 2011: January February March Units produced 10,000 10,000 10,000 Units sold 7,000 8,500 10,500 $\text { Froduction costs per unit (based on } 10,000 \text { units) are as follows: }$ Direct materials £12 Direct labour 8 Variable factory overhead 6 Fixed factory overhead 4 Variable selling and admin. expenses 10 Fixed selling and admin. expenses 4 There were no beginning inventories for January 2011, and all units were sold for £50. Costs are stable over the three months. What is the February ending inventory for Steele Ltd. using the absorption costing method?

Assuming sales prices and cost behaviour remain unchanged, when variable costing is used, when does net income change in response to changes in unit sales?

Figure 7-1 The following information pertains to Mayberry Ltd.: Beginning inventory 1,000 units Ending inventory 6,000 units Direct labour per unit £40 Direct materials per unit 20 Variable overhead per unit 10 Fixed overhead per unit 30 Variable selling and admin. costs per unit 6 Fixed selling and admin. costs per unit 14 -Refer to Figure 7-1. What is the value of the ending inventory using the absorption costing method?

The following information pertains to Stark Ltd.: Beginning inventory 0 units Ending inventory 5,000 units Direct labour per unit £20 Direct materials per unit 16 Variable overhead per unit 4 Fixed overhead per unit 10 Variable selling costs per unit 12 Fixed selling costs per unit 16 What is the value of ending inventory using the variable costing method?

Toshi Company incurred the following costs in manufacturing desk calculators: Direct materials £14 Indirect materials (variable) 4 Direct labour 8 Indirect labour (variable 6 Other variable factory overhead 10 Fixed factory overhead 28 Variable selling expenses 20 Fixed selling expenses 14 During the period, the company produced and sold 1,000 units. What is the inventory cost per unit using variable costing?

Using absorption costing, a company can ____ net operating income by simply producing more than it sells.

The variable costing income statement for Jackson Company for 2011 is as follows: Sales (5,000 units) £100,000 Variable expenses: Cost of goods sold £30,000 Selling ( 10\% of sales) -10,000 40,000 Contributi on margin £60,000 Fixed expenses: Manufacturing overhead £24,000 Administrative -14,400 Net income $\text { Selected data for } 2011 \text { concerning the operations of the company are as follows: }$ Beginning inventory -0 - units Units produced 8,000 units $\text { Manufacturing costs: }$ Direct labour £3.00 per unit Direct materials 1.60 per unit Variable overhead 1.40 per unit

Which of the following costs would NOT be included in calculating inventory values under the absorption-costing basis?

Ivy, SA., produces a single product that sells for £60 per unit. There were no inventories of work in process or finished goods. Costs for the year were as follows: Variable costs: Direct materials £8 per unit Direct labour £12 per unit Manufacturing overhead £5 per unit Selling expenses £3 per unit Fixed costs: Manufacturing overhead $\quad$$\quad$$£ 36,000$ per month Selling and admini strative $\quad$$\quad$$£ 15,000$ per month During the first three months of the year, production and sales in units were as follows: Production Sales January 4,000 4,000 February 4,000 3,500 March 4,000 4,500 Total 4,000 4,500 The company uses an actual cost system. There were no work-in-process inventories at the end of any month, and the company uses FIFO costing. a.Determine the unit cost of production under variable costing for each of the three months. b.Determine the unit cost of production under absorption costing for each of the three months. c.Determine income under variable costing for each of the three months. d.Determine income under absorption costing for each of the three months.

Stannel Company had 5,200 units in its ending inventory last year. The fixed manufacturing overhead was £1.75 per unit in beginning inventory, and variable manufacturing cost is £5 per unit. Stannel's net income was £4,725 higher than variable costing. How many units did the company have in beginning inventory?