Chapter 21 Exercises

Step-by-Step Exercises

First, calculate income and the value of ending inventory using absorption costing and report income in gross margin format.

Question 1

Homegrown Herbal Co. produces herbal tinctures for wellness stores. During the most recent quarter, the company produced 3,200 units and sold 2,900. Each unit incurs $18 in direct materials, $7 in direct labor, and $5 in variable manufacturing overhead. Total fixed manufacturing overhead for the quarter was $96,000. Variable operating costs totaled $43,500, and fixed operating costs were $55,000. Each unit sells for $100. There were no beginning inventories.

Calculate income and the value of ending inventory using absorption costing and report income in gross margin format.

Question 2

JetThread Athleticwear manufactures compression tops and leggings for distance runners. The following information relates to the company’s operations for the most recent quarter:

Calculate income and the value of ending inventory using absorption costing and report income in gross margin format.

Question 3

GlacierCool manufactures condenser coils for commercial HVAC systems. Information for last period was as follows:

• The company produced 4,200 units and sold 3,800 units.
• Total direct materials cost for the quarter was $201,600.
• Total direct labor cost was $109,200.
• Total variable manufacturing overhead was $75,600.
• Total fixed manufacturing overhead was $252,000.
• Total variable operating costs were $68,400.
• Total fixed operating costs were $75,000.
• Sales revenue for the quarter totaled $722,000.
• There were 1,100 units in beginning inventory, valued at $146,300.

Calculate income and the value of ending inventory using absorption costing and report income in gross margin format.

Next, calculate income and the value of ending inventory using variable costing and report income in contribution margin format.

Question 4

Orbitron Robotics builds robotic arms for automotive assembly lines. The company uses variable costing for internal analysis. At the beginning of the quarter, Orbitron had 2,200 units in inventory and ended with 2,500 units in inventory, valued at $1,400,000. The company sold 14,600 units. Each unit incurred $410 in direct materials, $180 in direct labor, and $100 in variable manufacturing overhead. Total variable operating costs were $1,752,000. Fixed manufacturing overhead was $7,500,000, and fixed operating costs were $3,800,000. Total revenue for the quarter was $24,000,000.

Calculate income and the value of ending inventory using variable costing and report income in contribution margin format.

Question 5

NovaSteel manufactures structural supports for commercial construction. The following data are for the current quarter:

Calculate income and the value of ending inventory using variable costing and report income in contribution margin format.

Question 6

AriaGlass produces aerospace-grade optical lenses. The company uses variable costing for internal analysis.

• Beginning inventory: 2,800 units, valued at $2,300,000
• Production this quarter: 21,000 units
• Ending inventory: 4,600 units
• Total variable production costs: $17,220,000
• Total variable operating cost: $2,496,000
• Fixed manufacturing overhead: $10,920,000
• Fixed operating costs: $4,400,000
• Sales revenue: $41,700,000

Calculate income and the value of ending inventory using variable costing and report income in contribution margin format.

Next, reconcile the difference between income under absorption costing and income under variable costing by comparing it to the change in fixed manufacturing overhead in absorption costing inventory.

Question 7

HelioWeld Tools produces industrial soldering equipment. For the most recent quarter, the company reported operating income of $1,733,200 under absorption costing and $1,690,000 under variable costing. Inventory increased over the quarter. The total value of beginning inventory was $158,400, of which $52,800 was fixed manufacturing overhead. The total value of ending inventory was $288,000, and $96,000 of that amount was fixed.

Reconcile the difference between income under absorption costing and income under variable costing by comparing it to the change in fixed manufacturing overhead in absorption costing inventory.

Question 8

BlueRise manufactures architectural glass panels for sunrooms. The following information is for last quarter:

Reconcile the difference between income under absorption costing and income under variable costing by comparing it to the change in fixed manufacturing overhead in absorption costing inventory.

Question 9

StoneBay Ceramics produces artisan wall tiles. The following information is for the previous period:

• Absorption costing income: $4,436,400
• Variable costing income: $4,410,000
• Total beginning inventory value: $216,000
• Total ending inventory value: $312,000
• Variable portion of beginning inventory: $158,400
• Variable portion of ending inventory: $228,000

Reconcile the difference between income under absorption costing and income under variable costing by comparing it to the change in fixed manufacturing overhead in absorption costing inventory.

Finally, interpret the results. Was income higher under absorption costing or variable costing, and why?

Question 10

AltaBrew produces canned sparkling teas. Information from last period is as follows:

Was income higher under absorption costing or variable costing, and why?

Question 11

PeakWorks Skiwear reported an operating income of $2,540,000 under variable costing, compared to $2,110,000 under absorption costing. Inventory decreased during the quarter.

Was income higher under absorption costing or variable costing, and why?

Question 12

Nimbus builds wind turbine control units. Information from last quarter is as follows:

• Units in beginning inventory: 5,400
• Units in ending inventory: 6,600
• Income under absorption costing: $6,210,000
• Income under variable costing: $5,850,000

Was income higher under absorption costing or variable costing, and why?

Complete Problems

Question 13

Hearthstone Modular builds modular housing units for eco-conscious developers. The company uses absorption costing for financial reporting and variable costing for internal planning and control. During the most recent quarter, the company produced more than 3,000 modular units, relying on $540,000 of direct materials and $270,000 of direct labor. Inventory decreased during the quarter, and the CFO has asked for an income comparison across the two costing systems to better understand the impact on reported profits.

Prepare income statements using both absorption costing and variable costing, calculate the value of ending inventory under each method, and reconcile the difference in operating income between the two approaches.

Question 14

AeroVista Drones assembles professional-grade aerial drones for agricultural and industrial applications. The company uses absorption costing for external reporting and variable costing internally to support decision-making and performance analysis. The CEO has asked the accounting team to compare results under both systems for the most recent quarter.

Data for the quarter ended December 31:

• Units in beginning inventory: 1,000 units
• Units in ending inventory: 1,600 units
• Units sold during the quarter: 4,400 units
• Direct materials and direct labor (combined): $770,000
• Total variable production costs (including variable manufacturing overhead): $924,000
• Fixed manufacturing overhead: $396,000
• Variable operating costs: $264,000
• Fixed operating costs: $210,000
• Sales revenue: $3,960,000
• Variable portion of beginning inventory: $210,000
• Fixed portion of beginning inventory: $120,000

Prepare income statements using both absorption costing and variable costing, calculate the value of ending inventory under each method, and reconcile the difference in operating income between the two approaches.

Question 15

Verde Organics produces shelf-stable plant-based meal kits for natural grocery stores. The company uses absorption costing for external reporting and variable costing for internal planning and performance evaluation. In an effort to streamline operations and reduce storage costs, the company produced fewer units than it sold during the most recent quarter. The VP of Finance has requested a side-by-side income comparison using both costing methods to help evaluate the financial effect of the inventory reduction.

At the beginning of the quarter, Verde Organics had 1,300 units in finished goods inventory. During the quarter, the company produced 4,000 units and sold 4,500 units. The company incurred $420,000 in direct materials, $168,000 in direct labor, and $96,000 in variable manufacturing overhead. Fixed manufacturing overhead incurred was $312,000. Total operating costs were $338,000, of which $140,000 was fixed. The company earned $2,880,000 in sales revenue for the quarter. The variable portion of beginning inventory was $221,000, and the fixed portion was $143,000.

Prepare income statements using both absorption costing and variable costing, calculate the value of ending inventory under each method, and reconcile the difference in operating income between the two approaches.

Question 16

StoneRiver Ceramics manufactures ceramic tiles used in high-end commercial construction. The company uses absorption costing for external financial reporting and variable costing for internal performance analysis. Management is evaluating profitability trends and has requested a comparative income statement under both costing methods for the most recent quarter.

Data for the quarter ended March 31:

Prepare income statements using both absorption costing and variable costing, calculate the value of ending inventory under each method, and reconcile the difference in operating income between the two approaches.

Question 17

Caldera Furniture manufactures modern office furniture for commercial clients. The company uses absorption costing for financial reporting and variable costing for internal decision-making. Due to a recent shift in customer timelines, the company experienced a drawdown in inventory this quarter. Management has asked for a comparative income analysis under both costing methods.

Data for the quarter ended June 30:

• Units in beginning inventory: 1,600 units
• Units produced during the quarter: 4,800 units
• Units in ending inventory: 900 units
• Direct materials cost: $864,000
• Direct labor cost: $384,000
• Variable manufacturing overhead: $192,000
• Fixed manufacturing overhead: $624,000
• Variable operating costs: $420,000
• Fixed operating costs: $330,000
• Sales revenue: $6,580,000
• Variable portion of beginning inventory: $259,200
• Fixed portion of beginning inventory: $187,200

Prepare income statements using both absorption costing and variable costing, calculate the value of ending inventory under each method, and reconcile the difference in operating income between the two approaches.

Assignment Problem

Note: Check figures are not provided for assignment problems so your instructor may use them for homework.

Question 18

SolarSkye Panels produces high-efficiency solar panels for commercial rooftops. The company uses absorption costing for external financial statements and variable costing internally to support operational decisions. Because of favorable weather conditions for field installation, customer deliveries lagged behind production this quarter, increasing inventory. The COO has requested a comparison of income under both costing methods to assess how the inventory change affected reported profitability.

At the start of the quarter, SolarSkye had 1,200 units in finished goods inventory. During the quarter, it produced 5,400 units and sold 5,100 units. The variable cost to produce each unit was $380. Fixed manufacturing overhead cost $648,000, while variable manufacturing overhead cost per unit was $30. Variable operating costs averaged $50 per unit sold, and fixed operating costs for the quarter totaled $310,000. The variable portion of beginning inventory was valued at $456,000, and the fixed portion was $144,000. Sales revenue for the quarter totaled $7,905,000.

Prepare income statements using both absorption costing and variable costing, calculate the value of ending inventory under each method, and reconcile the difference in operating income between the two approaches.

Challenge Problem

Question 19

Wafflesaurus Rex is a boutique bakery known for its dinosaur-shaped waffle irons and gourmet waffle mix kits. The company uses absorption costing for external reporting and variable costing for internal decision-making.

For the most recent quarter, the following information was gathered (though some of it was scribbled on a frosting-covered notepad and may need to be pieced together):

• Units in beginning inventory: 3,200 units
• Total value of beginning inventory: $470,400, of which $352,000 is variable
• Units produced during the quarter: 18,000 units
• Units in ending inventory: 5,100 units
• Sales revenue for the quarter: $1,210,430
• Variable Production Costs (per unit):
• Direct materials: $6.80
• Direct labor: $4.20
• Budgeted Variable Manufacturing Overhead (VOH) rate: $2.60 per unit
• VOH spending variance (favorable): $9,000
• VOH efficiency variance (unfavorable): $3,600
• Budgeted total Fixed Manufacturing Overhead (FOH): $396,000
• Budgeted production: 18,000 units
• FOH spending variance (unfavorable): $18,000
• Variable operating cost: $3.90 per unit sold
• Fixed operating costs: $168,000

Prepare income statements using both absorption costing and variable costing, calculate the value of ending inventory under each method, and reconcile the difference in operating income between the two approaches.

Pre-Assessment Problem

Use this problem to check whether you are fully prepared for the assessment. Work the problem under assessment conditions – don’t use any notes or other materials!

Question 20

MeadowLite Fixtures manufactures precision LED lighting components for architectural and industrial lighting systems. The company uses absorption costing for financial reporting and variable costing for internal decision-making. This quarter, MeadowLite reduced its inventory in response to warehousing constraints and rising holding costs. The CFO has asked the accounting team to prepare a side-by-side income comparison under both methods.

Data for the quarter ended September 30:

Prepare income statements using both absorption costing and variable costing, calculate the value of ending inventory under each method, and reconcile the difference in operating income between the two approaches.