Manaerial Accounting Chapter 7 Solutions

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Chapter 7 Homework Solutions

Q7-1
Absorption and variable costing differ in how they handle fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is expensed on the current period’s income statement. Q7-2

Selling and administrative expenses are treated as period costs under both variable costing and absorption costing. Q7-3
Under absorption costing, fixed manufacturing overhead costs are included in product costs, along with direct materials, direct labor, and variable manufacturing overhead. If some of the units are not sold by the end of the period, then they are carried into the next period as inventory. The fixed manufacturing overhead cost attached to the units in ending inventory follow the units into the next period. When the units are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period’s cost of goods sold. Q7-6

If production and sales are equal, net operating income should be the same under absorption and variable costing. When production equals sales, inventories do not increase or decrease and therefore under absorption costing fixed manufacturing overhead cost cannot be deferred in inventory or released from inventory. Q7-7

If production exceeds sales, absorption costing will usually show higher net operating income than variable costing. When production exceeds sales, inventories increase and under absorption costing part of the fixed manufacturing overhead cost of the current period is deferred in inventory to the next period. In contrast, all of the fixed manufacturing overhead cost of the current period is immediately expensed under variable costing. Q7-11

Generally speaking, variable costing cannot be used externally for financial reporting purposes nor can it be used for tax purposes. It can, however, be used in internal reports. E7-5
1.Under variable costing, only the variable manufacturing costs are included in product costs.

Direct materials$ 60
Direct labor30
Variable manufacturing overhead 10
Unit product cost$100

Note that selling and administrative expenses are not treated as product costs; that is, they are not included in the costs that are inventoried. These expenses are always treated as period costs and are charged against the current period’s revenue.

2.The variable costing income statement appears below:

Sales$1,800,000
Variable expenses:
Variable cost of goods sold:
Beginning inventory$ 0
Add variable manufacturing costs
(10,000 units × $100 per unit) 1,000,000
Goods available for sale1,000,000
Less ending inventory (1,000 units × $100 per unit) 100,000 Variable cost of goods sold*900,000
Variable selling and administrative (9,000 units × $20 per unit) 180,000 1,080,000 Contribution margin720,000
Fixed expenses:
Fixed manufacturing overhead300,000
Fixed selling and administrative 450,000 750,000
Net operating loss$ (30,000)

*The variable cost of goods sold could be computed more simply as: 9,000 units sold × $100 per unit = $900,000. 3.The break-even point in units sold can be computed using the contribution margin per unit as follows:

Selling price per unit$200
Variable cost per unit 120
Contribution margin per unit$ 80

E7-6
1.Under absorption costing, all manufacturing costs (variable and fixed) are included in product costs.

Direct materials$ 60
Direct labor30
Variable manufacturing overhead10
Fixed manufacturing overhead
($300,000 ÷ 10,000 units) 30
Unit product cost$130

2.The absorption costing income statement appears below:

Sales (9,000 units × $200 per unit)$1,800,000
Cost of goods sold:
Beginning inventory$ 0
Add cost of...
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