Question

15-2: At a production level of 100 units, the per unit cost under Absorption Costing is $8,

which consists of $2 of direct materials, $2 of direct labor, $2 of variable manufacturing

overhead, and $2 of fixed manufacturing overhead. Calculate the Absorption Costing per

unit cost assuming the production level is increased to 200 units?

15-3: Hank’s Hot Dog Factory manufactures hot dogs. The factory’s cost structure is as

follows: fixed manufacturing costs per month are $8,000. Variable manufacturing costs

are $0.40 per hot dog. Fixed non-manufacturing costs are $7,000 per month. Variable

non-manufacturing costs consist of a $0.20 sales commission for every hot dog sold. The

sales price per hot dog is $2.20.

Required: If the company begins the month with zero inventory, makes 10,000 hot dogs,

and sells 7,000 hot dogs, what is the total cost of inventory on the Balance Sheet at the

end of the month under Variable Costing? What is income (loss) for the month under

Variable Costing?

15-8: John Smith owned a flour mill. He started 1803 with no inventory, produced 50

tons of flour, and ended the year with five tons of flour. Sales were $22,500. He had no

variable manufacturing overhead. His only direct cost was grain, for which he paid

$8,000. Non-manufacturing variable costs were $5,000, non-manufacturing fixed costs

were $4,000, and manufacturing fixed costs were $6,000.

A) What was Smith’s contribution margin for 1803?

(A) $9,500

(B) $10,300

(C) $10,800

(D) The answer depends on whether Smith uses Absorption Costing or

Variable Costing

B) What was operating income for 1803 under Variable Costing?

(A) Loss of $500

(B) Income of $800

(C) Income of $900

(D) Income of $300

Answer 1

15-2:

Absorption Costing per unit assuming the production level is increased to 200 units

direct material-$2 per unit

direct labor-$2 per unit

variable manufacturing overhaed-$2 per unit

fixed manufacturing overhead-$2 per unit

total cost -$8 per unit

Reason: under absorbtion costing fixed overhead cost is allocated on per unit basis and it dosent remain fixed in totality and varies with the level of output however per unit fixed cost remains same as against variable costing where fixed overhead is a fixed charged irrespective of the volume.

15-3:

(loss) for the month under variable costing

sales-$15,400($2.20*7000 hot dogs)

- variable manufacturing cost-$2800($.40*7000 hot dogs)

- variable non manufacturing cost-$1400($.20*7000 hot dogs)

total contribution-$11200

-fixed manufacturing cost-$8000

-fixed non manufacturing cost-$7000

operating loss-($3800)

total cost of inventory on the Balance Sheet at the

end of the month under Variable Costing:

closing inventory*variable cost per unit

3000 hot dogs*$.60

=$1800

15-8:Smith’s contribution margin for 1803

sales-$22500

-variable cost ($8000+$5000)/50 tonnes*45 tonnes=$11,700

(grain cost+non manufacturing variable cost)

contribution-$10,800

operating income for 1803 under Variable Costing

sales-$22500

-variable cost ($8000+$5000)/50 tonnes*45 tonnes=$11,700

(grain cost+non manufacturing variable cost)

contribution-$10,800

-manufacturing fixed costs-$6000

-non manufacturing fixed costs-$4000

operating income-$800