Problems for Absorption and
Variable Costing
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Unit/Module
Absorption and Variable Costing
Week
 Shu Corporation manufactures and sells a hand held calculator. The following
information relates to Shun's operation for last year:
Unit product cost under variable costing
$5.20 per unit
Fixed manufacturing overhead cost for the year
$260,000
Fixed selling and administrative cost for the year
$180,000
Units (calculators) produced and sold
400,000
What is Shun's unit product cost under absorption costing for last year?
Solution:
Unit product cost under VC
FMOH cost/unit $260,000/400,000
Unit produced cost under AC
$5.20
0.65
$5.85
 A manufacturing company that produces a single product has provided the
following data concerning its most recent month of operations:
Problems for Absorption and Variable Costing
1
What is the total period cost for the month under the variable costing
approach?
Solution:
Variable selling & administrative 8 x 6,300
50,400
Fixed selling & administrative
88,200
FMOH
46,200
Period cost under VC
$184,800
 A manufacturing company that produces a single product has provided the
following data concerning its most recent month of operations:
Units in beginning inventory
0
Units produced
7,100
Units sold
7,000
Units in ending inventory
100
Variable cost per unit:
Problems for Absorption and Variable Costing
2
Direct materials
$33
Direct labor
$53
Variable manufacturing overhead
$1
Variable selling & administrative
$7
Fixed costs:
Fixed manufacturing overhead
$170,400
Fixed selling & administrative
$7,000
What is the unit product cost for the month under variable costing?
Solution:
Direct materials
$33
Direct labor
$53
Variable manufacturing overhead
$1
Product cost
$87
 A manufacturing company that produces a single product has provided the
following data concerning its most recent month of operations:
Selling price
Units in beginning inventory
$97
0
Units produced
2,200
Units sold
2,100
Units in ending inventory
100
Variable costs per unit:
Problems for Absorption and Variable Costing
3
Direct materials
$32
Direct labor
$25
Variable manufacturing overhead
$2
Variable selling & administrative
$9
Fixed costs:
Fixed manufacturing overhead
$8,800
Fixed selling & administrative
$37,800
What is the total period cost for the month under the absorption costing
approach?
Solution:
Fixed selling & administrative
$37,800
Variable selling & administrative $9 x 2,100
18,900
Period cost under AC
$56,700
 The following data pertain to last year's operations at Clarkson, Incorporated,
a company that produces a single product:
Units in beginning inventory
0
Units produced
100,000
Units sold
98,000
Selling price per unit
$10
Variable costs per unit:
Direct materials
Problems for Absorption and Variable Costing
$1.50
4
Direct labor
$2.50
Variable manufacturing overhead
$1
Variable selling & administrative
$2
7
Fixed costs per year:
Fixed manufacturing overhead
$200,000
Fixed selling & administrative
$50,000
What was the absorption costing net operating income last year?
Solution:
Sales 98,000 x $10
$980,000
COGS
Beg. inventory
0
COGM 100,000 x 7
700,000
TGAS
700,000
End. Inventory 2,000 x 7
14,000
Gross margin
686,000
$294,000
Selling & Administrative expense
Variable selling & admin. expense
$2 x 98,000
196,000
Fixed selling & admin. expense
50,000
Operating income under AC
246,000
$48,000
 A manufacturing company that produces a single product has provided the
following data concerning its most recent month of operations:
Selling price
Problems for Absorption and Variable Costing
$135
5
Units in beg. inventory
0
Units produced
6,400
Units sold
6,200
Units in ending inventory
200
Variable cost per unit:
Direct materials
$49
Direct labor
$38
Variable manufacturing overhead
$6
Variable selling & administrative
$11
$93
Fixed costs:
Fixed manufacturing overhead
$108,800
Fixed selling & administrative
$74,400
The total contribution margin for the month under the variable costing
approach is:
Solution:
Sales $135 x 6,200
$837,000
Variable Cost of Sales:
Beg. inventory
0
COGM 6,400 x $93
$595,200
TGAS
595,200
End. inventory 200 x $93
18,600
VCOGS
576,600
Variable S & E expense 11 x 6,200
68,200
Problems for Absorption and Variable Costing
644,800
6
Contribution margin
$192,200
 Blake Company produces a single product. Last year, Blake's net operating
income under absorption costing was $3,600 lower than under variable
costing. The company sold 10,000 units during the year, and its variable costs
were $9 per unit, of which $1 was variable selling expense. If production cost
was $11 per unit under absorption costing, then how many units did the
company produce during the year?
Solution:
VC/unit
$9
VSE
1
Product cost FMOH
8
Product cost per unit
11
FMOH per unit
$3
Difference in NOI
3,600
Divide: FMOH
3
Units difference
1,200 unit
Units sold
10,000
Unit difference
1,200
Units produced
8,800 units
 Pungent Corporation manufactures and sells a spice rack. Shown below are
the actual operating results for the first two years of operation:
Year 1
Year 2
Units (spice racks) produced
40,000
40,000
Problems for Absorption and Variable Costing
7
Units (spice racks) sold
37,000
41,000
Absorption costing net operating income
$52,000
$44,000
Variable costing net operating income
???
$38,000
Pungent's cost structure and selling price were the same for both years.
What is Pungent's variable costing net operating income for Year 2?
Solution:
Unit FMOH Cost: 44,000 - 38,000 = 6,000 = $2 per unit
40,000 - 37,000
NOI under AC
3,000
$52,000
Add: FMOH cost released
from inventory under AC 1,000 x $2
NOI under VC
2,000
$54,000
 Sipho Corporation manufactures a variety of products. Last year, the
company's variable costing net operating income was $90,900. Fixed
manufacturing overhead costs released from inventory under absorption
costing amounted to $21,900. What was the absorption costing net operating
income last year?
Solution:
NOI under VC
$90,900
Deduct: FMOH cost
21,900
NOI under AC
$69,000
Problems for Absorption and Variable Costing
8
 Phearsum Corporation manufactures a parachute. Shown below is Phearsum's
cost structure:
Variable cost per parachute
Total
fixed cost for the year
Manufacturing cost
$342,000
$160
Selling and administrative
$171,000
$10
In its first year of operation, Phearsum produced and sold 4,000 parachutes.
The parachutes sold for $310 each.
If Phearsum would have sold only 3,800 parachutes in its first year, what total
amount of cost would have been assigned to the 200 parachutes in finished
goods inventory under the variable costing method?
Solution:
Units in ending inventory
200
Variable Manufacturing cost
$160
FGI under VC
$32,000
 Swifton Company produces a single product. Last year, the company had net
operating income of $40,000 using variable costing. Beginning and ending
inventories were 22,000 and 27,000 units, respectively. If the fixed
manufacturing overhead cost was $3.00 per unit, what was the income using
absorption costing?
Solution:
NOI under VS
$40,000
Add: FMOH cost deferral in inventory under AC
27,000 - 22,000 x 3
NOI under AC
Problems for Absorption and Variable Costing
15,000
$55,000
9
Problems for Absorption and Variable Costing
10