variable costing sm7 libre

Topics: Variable cost, Costs, Fixed cost Pages: 51 (8831 words) Published: January 8, 2015
Chapter 7
Variable Costing: A Tool for Management

Solutions to Questions
7-1
The basic difference between absorption
and variable costing is due to the handling of
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 charged in full against the current
period’s income.
7-2
Selling and administrative expenses are
treated as period costs under both variable costing and absorption costing. 7-3
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 as part of
their inventory cost. When the units carried over
as inventory 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.
7-4
Absorption costing advocates believe
that absorption costing does a better job of
matching costs with revenues than variable costing. They argue that all manufacturing costs must be assigned to products to properly match
the costs of producing units of product with the
revenues from the units when they are sold.
They believe that no distinction should be made
between variable and fixed manufacturing costs
for the purposes of matching costs and revenues.

7-5
Advocates of variable costing argue that
fixed manufacturing costs are not really the cost
of any particular unit of product. If a unit is
made or not, the total fixed manufacturing costs
will be exactly the same. Therefore, how can
one say that these costs are part of the costs of
the products? These costs are incurred to have
the capacity to make products during a particular period and should be charged against that period as period costs according to the matching
principle.
7-6
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.
7-7
If production exceeds sales, absorption
costing will usually show higher net operating
income than variable costing. When production
exceeds sales, inventories increase and therefore under absorption costing part of the fixed manufacturing overhead cost of the current period will be deferred in inventory to the next period. In contrast, all of the fixed manufacturing overhead cost of the current period will be

charged immediately against income as a period
cost under variable costing.
7-8
If fixed manufacturing overhead cost is
released from inventory, then inventory levels
must have decreased and therefore production
must have been less than sales.
7-9
Inventory decreased. The decrease resulted in fixed manufacturing overhead cost being released from inventory and charged against income as part of cost of goods sold. This added
fixed manufacturing overhead cost resulted in a

© The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 7

347

loss even though the company operated at its
breakeven.
7-10 Under absorption costing it is possible to
increase net operating income simply by increasing the level of production without any increase in sales. If production exceeds sales, units of
product are added to inventory. These units
carry a portion of the current period’s fixed
manufacturing overhead costs into the inventory
account, thereby reducing the current...
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