Chapter 05

CH APTE R 5
Marginal or Variable Costing

TRUE-FALSE
1. The cost of ending inventory using full costing is always greater than or equal to variable
costing inventory.
2. The cost of goods sold is always higher using varible costing than full costing.
3. Sales is higher using full costing than using variable costing if inventory levels are
increasing.
4. The units sold are higher using variable costing than using full costing.
5. If a company has no fixed costs, then variable costing income will equal full costing
income.
6. Variable costing income is more useful for decision making.
7. Variable costing is required for external reporting under generally accepted accounting
principles.
8. Full costing defers fixed costs of production into ending inventory.
9. The total selling and administrative expense is the same using variable and full costing.
10. In variable costing, fixed manufacturing overhead is considered a period cost.
11. Income statements of manufacturing firms prepared for external purposes use variable
costing.
12. Full costing ending inventory includes fixed and variable production costs.
13. Variable costing ending inventory includes variable production costs and variable selling
and administrative costs.
14. Contribution margin is reported on a variable costing income statement.
15. If sales equals production, then contribution margin will equal gross profit (margin).
16. Full costing income can be increased by increasing production without increasing sales.
17. When the number of units produced exceeds the number of units sold, variable costing
yields a higher income than full costing.
18. Variable costing income can be increased by increasing production without increasing sales.
5-2 Test Bank to accompany Jiambalvo Managerial Accounting 4th Edition
19. The inventory cost per unit under variable costing will be reduced if the number of units
produced increases.
20. When the number of units produced is less than the number sold, variable costing yields
higher income than full costing.
21. Full costing can give higher income than variable costing as long as inventory levels
continue to increase.
22. There are no cash flow consequences associated with increasing full costing income through
increasing production.
23. Just-in-time (JIT) inventory management systems cause a much larger difference between
variable costing income and full costing income.
24. The use of variable costing encourages management of earnings by adjusting production
volume.
25. Variable costing facilitates C-V-P analysis.
Answers
1 T 6 T 11 F 16 T 21 T
2 F 7 F 12 T 17 F 22 F
3 F 8 T 13 F 18 F 23 F
4 F 9 T 14 T 19 F 24 F
5 T 10 T 15 F 20 T 25 T
Chapter 5 Variable Costing 5-3
MULTIPLE CHOICE
26. Full costing

A. is the same as absorption costing.
B. considers fixed manufacturing overhead as part of the cost of inventory.
C. often does not provide the information needed for C-V-P analysis.
D. All of the above choices are correct.
27. Which of the following is treated differently in full costing than in variable costing?
A. Direct materials
B. Fixed manufacturing overhead
C. Direct labor
D. Variable manufacturing overhead
28. Which of the following is treated as a product cost in variable costing?

A. Sales commissions
B. Administrative salaries
C. Fixed manufacturing overhead
D. Direct labor
29. Which of the following is treated as a product cost in full costing?

A. Sales commissions
B. Administrative salaries
C. Security at the factory
D. Security at corporate headquarters
30. Full costing is

A. more useful for decision making.
B. required for financial reporting under generally accepted accounting principles.
C. better because income cannot be affected by increasing production.
D. All of the above.
31. In variable costing, when does fixed manufacturing overhead become an expense?
A. Never.
B. In the period when the product is sold.
C. In the period when the expense is incurred.
D. In the period when other expenses are at the lowest level.
32. In full costing, when does fixed manufacturing overhead become an expense?
A. In the period when other fixed costs are at the highest level.
B. In the period when the product is sold.
C. In the period when the expense is incurred.
D. When the controller decides that the expense should be recognized.
33. In variable costing, which of the following would be included in inventory?

A. Fixed production cost
B. Variable selling cost
C. Fixed selling costs
D. none of the above items would be in inventory in variable costing
34. In full costing, which of the following would be included in inventory?

A. Fixed production cost
B. Variable selling cost
C. Fixed selling costs
D. None of the above items would be in inventory in full costing
35. Noth Company’s manufacturing costs for 2010 are as follows:
Direct materials $86,000

Direct labor $102,000
Depreciation of factory equipment $41,000
Other fixed manufacturing overhead $72,000
What amount should be considered product costs for external reporting purposes?
A. $260,000
B. $188,000
C. $229,000
D. $301,000
36. Train Company’s fixed manufacturing overhead costs totaled $220,000 and variable selling
costs totaled $190,000. Under full costing, how should these costs be classified?
Period Costs Product Costs

A. $190,000 $220,000
B. $410,000 $0
C. $0 $410,000
D. $220,000 $190,000
37. West Company’s manufacturing costs for 2010 are as follows:

Depreciation of factory equipment $30,000
Other fixed manufacturing overhead $50,000
What amount should be considered product costs for external reporting purposes?
A. $430,000
B. $380,000
C. $350,000
D. $400,000
38. Wilson Company’s fixed manufacturing overhead costs totaled $400,000 and variable
selling costs totaled $250,000. Under full costing, how should these costs be classified?
Period Costs Product Costs

A. $400,000 $250,000
B. $0 $650,000
C. $650,000 $0
D. $250,000 $400,000
39. Peak Manufacturing produces snow blowers. The selling price per snow blower is $100.
Costs involved in production are:
Direct Material per unit $20

Direct Labor per unit 12
Variable manufacturing overhead per unit 10
Fixed manufacturing overhead per year $148,500
In addition, the company has fixed selling and administrative costs of $150,000 per year.
During the year, Peak produces 45,000 snow blowers and sells 30,000 snow blowers.
Ignoring taxes, how much will full costing profit differ from variable costing profit?
A. $148,500
B. $49,500
C. $94,500
D. $74,250
40. Which of the following items appears on a variable costing income statement but not on a
full costing income statement?
A. Sales
B. Gross margin
C. Net income
D. Contribution margin
41. Variable costing income is a function of:

A. units sold only
B. units produced only
C. both units sold and units produced
D. neither units sold nor units produced
42. Which of the following items on a variable costing income statement will change in direct
proportion to a change in sales?
A. Sales, contribution margin, income.
B. Sales, variable costs, contribution margin.
C. Sales, variable costs, contribution margin, fixed costs and income.
D. Sales, variable costs, and fixed costs.
43. If income is positive and fixed costs exist, which will increase or decrease at a greater rate
than sales changes on a variable costing income statement?
A. Variable costs
B. Fixed costs
C. Contribution margin
D. Income
44. Nilsan Company experienced the following costs in 2010:
Direct materials $2.25 / unit

Direct labor $4.10 / unit
Variable manufacturing overhead $0.75 / unit
Variable selling $3.00 / unit
Fixed manufacturing overhead $60,000
Fixed selling $35,000
Fixed administrative $20,000
During 2010 the company manufactured 120,000 units and sold 145,000 units. Assume the
same unit costs in all years. Total variable costs on the company’s 2010 contribution income
statement will be:
A. $1,464,500
B. $1,029,500
C. $1,102,000
D. $1,537,000
45. Washington Supply Company experienced the following costs in 2010:

Manufacturing Overhead Costs
Variable $1.50 / unit
Fixed $20,000
Selling & Administrative Costs
Variable selling $2.15 / unit
During the year the company manufactured 95,000 units and sold 80,000 units. If the
average selling price per unit was $20, how much was the company’s contribution margin?
A. $996,000
B. $776,000
C. $824,000
D. $1,116,000
46. Spacet Excavating Company experienced the following costs in 2010:

Variable manufacturing overhead $2.50 / unit
Variable selling $.75 / unit
During the year the company manufactured 100,000 units and sold 80,000 units. If the
average selling price per unit was $22.65 what is the company’s contribution margin per
unit?
A. $16.40
B. $15.65
C. $18.90
D. $13.65
47. Data from Madison Company for 2010 is as follows:
Sales $20 / unit

Variable cost of goods sold ??
Variable selling & administrative ??
Fixed selling & administrative $150,000
The company produced 145,000 units during the year and sold 130,000 units. Variable
production costs per unit and fixed costs have remained constant all year. Profit for the year
was $1,000,000. How much was the company’s contribution margin?
A. $765,000
B. $1,235,000
C. $1,365,000
D. Not enough information provided to determine the answer.
48. During the past year, Cutt Company manufactured 25,000 units and sold 20,000 units.
Production costs during the year were as follows:

Variable manufacturing overhead $380,000
Sales totaled $1,270,000, variable selling and administrative costs totaled $110,000, and
fixed selling and administrative costs totaled $170,000. There were no units in beginning
inventory. How much is the contribution margin per unit?
A. $6.62
B. $23.12
C. $28.62
D. $24.22
Direct material per unit $20

Direct labor per unit 12
During the year, Peak produces 45,000 snow blowers and sells 30,000 snow blowers. What
is variable cost of goods sold?
A. $1,408,500
B. $1,260,000
C. $1,359,900
D. $2,038,500

Direct labor per unit 12
During the year, Peak produces 45,000 snow blowers and sells 30,000 snow blowers. How
much is net income using variable costing?
A. $1,440,000
B. $1,740,000
C. $1,491,000
D. $1,441,500
51. The following information relates to Carmin Industries for fiscal 2011, the company’s first
year of operations:
Units produced 100,000

Units sold 80,000
Units in ending inventory 20,000
How much fixed manufacturing overhead would be expensed in 2011 using variable
costing?
A. $520,000
B. $130,000
C. $650,000
D. $0
52. Lenat’s contribution income statement utilizing variable costing appears below:
Lenat Company
Income Statement
For the Year ended December 31, 2010
Sales ($28 / unit) $1,120,000
Less variable costs:
Cost of goods sold 560,000
Selling & administrative costs 96,000 656,000
Contribution margin 464,000
Less fixed costs:
Manufacturing overhead 80,000
Selling & administrative costs 90,000 170,000
Profit $294,000
Lenat Company produced 50,000 units during the year. Variable costs per unit and fixed
production costs have remained constant the entire year. There were no beginning
inventories. How much is the dollar value of the ending inventory using full costing?
A. $140,000
B. $160,000
C. $156,000
D. $128,000
Multiple Choice Answers

26 D 41 C
27 B 42 B
28 D 43 D
29 C 44 A
30 B 45 C
31 C 46 B
32 B 47 B
33 D 48 B
34 A 49 B
35 D 50 D
36 A 51 C
37 A 52 C
38 D
39 B
40 D
EXERCISES
110. Bud Cooling Company is a small manufacturer of window air conditioners. The units sell
for $150 each. In 2011, the company produced 1,000 units and sold 800 units. Below are
variable and full costing income statements for 2011.
Bud Cooling Company

Variable Costing Income Statement
For the Year Ending December 31, 2011
Sales $120,000
Variable cost of goods sold $15,000
Variable selling expense 5,000 20,000
Less fixed costs:
Fixed manufacturing expense 25,000
Fixed selling expense 10,000
Fixed administrative expense 15,000 50,000
Net income $50,000
Bud Cooling Company

Full Costing Income Statement
Sales $120,000
Less cost of goods sold 35,000
Gross margin 85,000
Less selling and administrative expenses:
Selling expense $15,000
Administrative expense 15,000 30,000
Net income $55,000
Reconcile the difference in profit between the two income statements.
Answer
Divided by units produced 1,000
Fixed manufacturing overhead per unit $ 25.00
Amount of fixed manufacturing overhead in ending inventory:

$25 × 200 units = $5,000
111. The following information is available for Captain Spa, a manufacturer of above-ground spa
kits:
2011 2012 Total
Units produced 20,000 16,000 36,000
Units sold 18,000 18,000 36,000
Selling price per unit $8,000 $8,000

Direct material per unit $1,600 $1,600
Direct labor per unit $3,000 $3,000
Variable manufacturing overhead per unit $600 $600

Fixed manufacturing overhead per year $4,800,000 $4,800,000
Fixed selling and administrative expense per year$3,000,000 $3,000,000
In its first year of operations, the company produced 20,000 units, but was only able to sell
18,000 units. In its second year, the company needed to get rid of excess inventory (the
extra 2,000 units produced but not sold in 2011) so it cut back production to 16,000 units.
a. Calculate profit for both years using variable costing.

b. Does variable costing profit present a more realistic view of firm performance in the
two years? Explain.
Answer
a. 2011 2012 Total
Variable manufacturing costs per unit $5,200 $5,200
Sales ($8,000 × 18,000 units) $144,000,000 $144,000,000

Less cost of goods sold:
($5,200 × 18,000 units) 93,600,000 93,600,000
Contribution margin 50,400,000 50,400,000
Less fixed costs:
Manufacturing 4,800,000 4,800,000
Selling and administrative 3,000,000 3,000,000
Net income $42,600,000 $42,600,000 $85,200,000
Ending inventory ($5,200 × 2,000) $10,400,000 $0
b. Variable costing presents a more realistic view of firm performance in that income is
the same in both years which is consistent with the firm having the same cost
structure and level of sales in both years.
112. Raeon, Inc. produces car radios. The selling price per radio is $1,000. Costs involved in
production are:
Direct material $100

Direct labor 100
Variable manufacturing overhead 50
In addition, the company has fixed selling and administrative costs:
Fixed selling costs per year $175,000

Fixed administrative costs per year $75,000
During the year, Raeon produces 1,000 car radios and sells 800 radios. What is the value of
ending inventory using variable costing?
Answer
Ending inventory under variable costing: $250 × 200 = $50,000
production are:

Direct labor 100

During the year, Raeon produces 1,000 car radios and sells 800 radios. How much is profit
using variable costing?
Answer
Sales ($1,000 × 800) $ 800,000
Less variable cost of goods sold ($250 × 800) 200,000
Less Fixed manufacturing overhead $250,000
Selling expense 175,000
Profit $100,000
production are:

Direct labor 100

During the year, Raeon produces 1,000 car radios and sells 800 radios.
a. How much is profit using full costing?
b. How much fixed manufacturing overhead is in ending inventory under full costing?
Answer
a. VC: $1,000 - $250 = $750
$750 × 800 = $600,000

Less FC = $175,000 + $75,000 = 250,000
Profit = $ 350,000
b. $250 × 200 = $50,000

115. Below is a variable costing income statement for Wilner Glass Company, a maker of bottles
for the beverage industry. For the coming year, the company is considering hiring two
additional sales representatives at $80,000 each for base salary plus 5 percent of their sales
for commissions. The company anticipates that each sales representative will generate
$900,000 of incremental sales. The budget for 2011 follows:
Wilner Glass Company

Budgeted Variable Costing Income Statement
Sales $15,000,000
Cost of goods sold $5,000,000
Selling expense 4,000,000 9,000,000
Contribution margin 6,000,000
Less fixed costs:
Manufacturing expense 2,300,000
Selling expense 1,200,000
Administrative expense 2,000,000 5,500,000
Net income $ 500,000
Calculate the impact on profit of the proposed hiring decision. Should the company hire the
two additional sales representatives?
Answer
Contribution margin ÷ sales = contribution margin ratio
$6,000,000 ÷ $15,000,000 = 0.40
(Incremental sales × CMR) – incremental salaries = incremental profit

($1,800,000 × .40) - $160,000 – ($1,800,000 × .05) = $470,000 profit increase
Since profit increases, Wilner Glass Company should hire the two additional sales
representatives.
116. Superior Electronics produces a wireless home security device that allows consumers to
arm/disarm their security system from their cars. Information on the first three years of
business is as follows:
2011 2012 2013 Total

Units sold 20,000 20,000 20,000 60,000
Units produced 20,000 25,000 15,000 60,000
Fixed production costs $500,000 $500,000 $500,000
Variable production costs per unit $100 `$100 $100
Selling price per unit $200 $200 $200
Fixed selling and administrative
expense $150,000 $150,000 $150,000
a. Calculate profit and the value of ending inventory for each year using variable
costing.
b. Explain why, using variable costing, profit does not fluctuate from year to year.
Answer
a. 2011 2012 2013
Units sold 20,000 20,000 20,000
Selling price per unit $ 200 $ 200 $ 200
Sales $4,000,000 $4,000,000 $4,000,000
Less variable cost of goods sold:
($100 × 20,000) 2,000,000 2,000,000 2,000,000
Contribution margin 2,000,000 2,000,000 2,000,000
Less fixed costs:
Production 500,000 500,000 500,000
Selling and administrative 150,000 150,000 150,000
Profit $1,350,000 $1,350,000 $1,350,000
Ending inventory ($100 × 5,000) $0 $500,000 $0
c. Profit does not fluctuate each period. Fixed manufacturing overhead is treated as a
period cost and expensed each year even if units produced differ from the units sold.
117. The following information is available for Captain Spa, a manufacturer of above-ground spa
kits:
2011 2012 Total
Units produced 20,000 16,000 36,000
Units sold 18,000 18,000 36,000
Selling price per unit $8,000 $8,000
Direct material per unit $1,600 $1,600
Direct labor per unit $3,000 $3,000
Variable manufacturing overhead per unit $600 $600

Fixed manufacturing overhead per year $4,800,000 $4,800,000
Fixed selling and administrative expenseper year $3,000,000 $3,000,000
In its first year of operation, the company produced 20,000 units, but was only able to sell
18,000 units. In its second year, the company needed to get rid of excess inventory (the
extra 2,000 units produced but not sold in 2011) so it cut back production to 16,000 units.
Calculate profit for both years using full costing.
Answer
2011 2012
Fixed manufacturing overhead $4,800,000 $4,800,000
Divided by units produced 20,000 16,000
Fixed manufacturing overhead per unit 240 300
Variable manufacturing costs per unit 5,200 5,200
Full cost per unit $ 5,440 $ 5,500
Sales ($8,000 × 18,000 units) $144,000,000 $144,000,000

($5,440 × 18,000) 97,920,000
($5,440 × 2,000 + $5,500 × 16,000) 98,880,000
Gross margin 46,080,000 45,120,000
Less selling and administrative expense 3,000,000 3,000,000
Net income $43,080,000 $42,120,000
118. The following information relates to Ixim Production for fiscal year 2011, the company’s
first year of operations:
Units produced 20,000

Units sold 17,000
Selling price per unit $30
Direct labor per unit $5
Variable manufacturing overhead per unit $2
Variable selling cost per unit $3
Annual fixed manufacturing overhead $160,000
Annual fixed selling and administrative expense $80,000
a. Prepare an income statement using full costing.

b. Prepare an income statement using variable costing.
Answer
a.
Ixim Production
Full Costing Income Statement
Sales ($30 × 17,000) $510,000
Less cost of goods sold ($20 × 17,000)* 340,000
Gross margin 170,000
Less selling and administrative expenses:
Fixed selling and administrative expense $80,000
Variable selling expenses ($3 × 17,000) 51,000 131,000
Profit $39,000
* Product cost per unit: $5 + $5 + $2 + $8 = $20
b.
Ixim Production
Variable Income Statement
Sales ($30 × 17,000) $510,000
Less variable expenses
Production costs ($12 × 17,000) 204,000
Selling costs ($3 × 17,000) 51,000 255,000
Less fixed expenses
Manufacturing overhead 160,000
Selling and administrative 80,000 240,000
Profit $15,000
119. A company has a variable manufacturing cost of $3.00 per unit, a variable selling cost of
$1.00 per unit; a fixed manufacturing cost of $100,000 per year; and a fixed selling and
administrative cost of $60,000 per year. The selling price is $9.00 per unit. During the year,
50,000 units are produced and 42,000 units are sold.
a. What is the cost per unit of inventory using variable costing?
b. What is the cost per unit of inventory using full costing?
c. Prepare an income statement without report titles using variable costing.
d. Prepare an income statement without report titles using full costing.
Answer:
a. $3.00
b. $3.00 + (100,000 / 50,000) = $5.00
c. Sales (42,000 × $9) $378,000

Variable Mfg Cost (42,000 × $3) $126,000
Variable Selling Cost (42000 × $1) 42,000 168,000
Contribution Margin $210,000
Fixed Production Costs 100,000
Fixed Selling & Admin Costs 60,000 $160,000
Net Income $ 50,000
d. Sales (42,000 × $9) $378,000

Cost of Goods Sold (42,000 × $5) 210,000
Gross Profit $168,000
Selling & Admin [$60,000 + ($1 × 42,000)] 102,000
Net Income $ 66,000
production are:

Direct labor 100

During the year, Raeon produces 1,000 car radios and sells 800 radios. What is the value of
ending inventory using full costing?
Answer
Variable cost per unit $250
Fixed manufacturing overhead per unit
($250,000 ÷ 1,000 units) 250
Full cost per unit $500
Ending inventory under full costing: $500 × 200 units = $100,000
production are:

Direct labor 100
Fixed manufacturing overhead per year 250,000

Fixed administrative costs per year 75,000
During the year, Raeon produces 1,000 car radios and sells 800 radios. How much is profit
using full costing?
Answer
Sales ($1,000 × 800 pairs) $800,000
Less: Cost of goods sold ($500 × 800 pairs) 400,000
Gross margin 400,000
Less: Selling expenses 175,000
Profit $150,000
122. Superior Electronics produces a wireless home security device that allows consumers to
arm/disarm their security system from their cars. Information on the first three years of
business is as follows:
2011 2012 2013 Total

Units sold 20,000 20,000 20,000 60,000
Units produced 20,000 25,000 15,000 60,000
Fixed production costs $500,000 $500,000 $500,000
Variable production costs per unit $100 $100 $100
Selling price per unit $200 $200 $200
Fixed selling and administrative
expense $150,000 $150,000 $150,000
a. Calculate profit and the value of ending inventory for each year using full costing.
b. Explain why profit fluctuates from year to year even though the number of units
sold, the selling price, and the cost structure remain constant.
Answer
2011 2012 2013
Fixed production overhead $500,000 $500,000 $500,000
Divided by units produced 20,000 25,000 15,000
Fixed production overhead per unit $25.00 $20.00 $33.33
Variable production costs per unit 100.00 100.00 100.00
Full cost per unit $125.00 $120.00 $133.33
Sales ($200 × 20,000 units) $4,000,000 $4,000,000 $4,000,000

($125 × 20,000) 2,500,000
($120 × 20,000) 2,400,000
($120 × 5,000) + ($133.33 × 15,000) 2,599,950
Gross margin 1,500,000 1,600,000 1,400,050

Less selling and admin expense 150,000 150,000 150,000
Net income $1,350,000 $1,450,000 $1,250,050
Ending inventory($120 × 5,000) $0 $600,000 $0
b. Even though sales revenue amounts are the same in each period, profit fluctuates. This
results because different quantities are produced each period which affects the fixed
manufacturing overhead in cost of goods sold versus ending inventory.
123. Last month, RainRunner produced 90,000 buckets and sold 85,000 of them at a price of $30
per bucket. Manufacturing costs consisted of direct materials of $200,000, direct labor of
$320,000, variable manufacturing overhead of $155,000 and fixed manufacturing overhead
of $396,000. General and administrative fixed costs totaled $60,000.
a. Calculate RainRunner’s net income using full costing.

b. Calculate RainRunner’s net income using variable costing.
Answer
a. Revenue = 85,000 × $30 = $2,550,000
Cost of goods sold = ($7.5 × 85,000) + ($4.4 × 85,000) = $1,011,500
Net income = $2,550,000 – $1,011,500 – $60,000 = $1,478,500
b. Revenue = 85,000 × $30 = $2,550,000
Cost of goods sold = ($7.50 × 85,000) = $637,500
Net income = $2,550,000 – $637,500 – $396,000 – $60,000 = $1,456,500
124. A company has $8.00 per unit in variable production costs and $3.00 per unit in variable
selling and administrative costs. The annual fixed production cost is $180,000. The annual
fixed selling and administrative cost is $20,000.
a. Complete the table below for the number of units and dollar value of ending
inventory for each year. Assume a FIFO flow.
2010 2011 2012 2013

Units Produced 60,000 70,000 80,000 90,000
Units Sold 55,000 72,000 82,000 91,000
Units in ending inventory
Ending inventory using
variable costing
Ending inventory using
full costing
b. Assume that the selling price and cost structure stayed the same over the 4 year
period. How would the total income compare over the period between variable and
full costing?
Answer
a.
2010 2011 2012 2013
Units Produced 60,000 70,000 80,000 90,000
Units Sold 55,000 72,000 82,000 91,000
Units in ending inventory 5,000 3,000 1,000 0
Ending inventory using variable costing
$3 × 5,000 = $15,000
$3 × 3000 = $9,000
$3 × 1,000 = $3,000 $0
Ending inventory using full costing
$6 × 5,000 = $30,000
$5.57 × 3,000 = $16,710
($5.25 × 1,000) - $5,250 $0
b. Since sales equals production for the 4 year period, income would be the same.
SHORT-ANSWER ESSAYS
125. Explain the significant difference between variable costing and full costing.
Answer
The significant difference between variable costing and full costing is the treatment of fixed
manufacturing overhead. In variable costing, fixed manufacturing overhead is treated as a
period cost and expensed as it is incurred. In full costing, fixed manufacturing overhead is
considered a cost that becomes part of inventory and is not expensed until the goods are
sold.
126. Why is a variable costing income statement more useful for internal purposes?
Answer
The format separates fixed and variable costs facilitating cost-volume-profit analysis. Also,
it discourages over-production since managers cannot increase income by increasing
production.
127. Under full costing, how does increasing production increase income? Does this work under
variable costing? Why or why not?
Answer
Since fixed production costs are included in the unit cost using full costing, increasing
production will reduce unit costs. When these reduced costs are included in cost of goods
sold, income will be higher. Variable costing treats fixed production costs as a period cost,
and expenses the same amount regardless of production. Thus, income is unaffected by
increasing production.
128. Can a company continue to increase income indefinitely by using full costing?
Answer
It is possible that a growing company can do this. The only way to do this is to produce
more than is sold in each year. This will result in a continuous buildup of inventory. For
most companies, that would not be a good strategy as it would lead to expensive cash
outflow for buildups of inventories along with all the associated carrying costs.
129. What is the implication of a company being JIT on the full costing versus variable costing
discussion?
Answer
JIT companies have very little inventory and so there is very little difference between full
and variable costing income.

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CH APTE R 5

Marginal or Variable Costing

6. Variable costing income is more useful for decision making.

8. Full costing defers fixed costs of production into ending inventory.

10. In variable costing, fixed manufacturing overhead is considered a period cost.

14. Contribution margin is reported on a variable costing income statement.

25. Variable costing facilitates C-V-P analysis.

26. Full costing

28. Which of the following is treated as a product cost in variable costing?

29. Which of the following is treated as a product cost in full costing?

30. Full costing is

33. In variable costing, which of the following would be included in inventory?

34. In full costing, which of the following would be included in inventory?

35. Noth Company’s manufacturing costs for 2010 are as follows:

Direct materials $86,000

Period Costs Product Costs

37. West Company’s manufacturing costs for 2010 are as follows:

Direct materials $100,000

Period Costs Product Costs

Direct Material per unit $20

41. Variable costing income is a function of:

44. Nilsan Company experienced the following costs in 2010:

Direct materials $2.25 / unit

45. Washington Supply Company experienced the following costs in 2010:

Direct materials $3.50 / unit

46. Spacet Excavating Company experienced the following costs in 2010:

Direct materials $1.75 / unit

47. Data from Madison Company for 2010 is as follows:

Sales $20 / unit

Fixed manufacturing overhead $550,000

Direct material per unit $20

Direct material per unit $20

Units produced 100,000

Multiple Choice Answers

Bud Cooling Company

Bud Cooling Company

Reconcile the difference in profit between the two income statements.

Amount of fixed manufacturing overhead in ending inventory:

Selling price per unit $8,000 $8,000

Variable manufacturing overhead per unit $600 $600

a. Calculate profit for both years using variable costing.

Sales ($8,000 × 18,000 units) $144,000,000 $144,000,000

Ending inventory ($5,200 × 2,000) $10,400,000 $0

Direct material $100

In addition, the company has fixed selling and administrative costs:

Fixed selling costs per year $175,000

Direct material $100

In addition, the company has fixed selling and administrative costs:

Fixed selling costs per year $175,000

Direct material $100

In addition, the company has fixed selling and administrative costs:

Fixed selling costs per year $175,000

$750 × 800 = $600,000

b. $250 × 200 = $50,000

Wilner Glass Company

(Incremental sales × CMR) – incremental salaries = incremental profit

2011 2012 2013 Total

Ending inventory ($100 × 5,000) $0 $500,000 $0

Variable manufacturing overhead per unit $600 $600

Calculate profit for both years using full costing.

Sales ($8,000 × 18,000 units) $144,000,000 $144,000,000

Units produced 20,000

a. Prepare an income statement using full costing.