50.a.

Akron Aviation
Income Statement
For the Year Ended December 31, 2011

Sale 1,015,000.00
Less: variable cost of goods sold
Work in process, beg 46,400.00
Finished goods, beg 16,950.00
Manufacturing costs incurred 650,600.00
Total costs available 713,950.00
Less: work in process, end 61,900.00
Less: finished goods, end 13,180.00 638,870.00
Product contribution margin 376,130.00
Less: variable selling expenses 50,750.00
Contribution margin 325,380.00
Less: fixed expenses
Factory overhead 42,300.00
Selling 44,250.00
Administrative 75,000.00 161,550.00
Operating Income 163,830.00

Supporting calculations:

Absorption work in process

48,000.00
inventory
Less: fixed overhead
Direct labor hours 1,600
Multiply: direct labor rate 1.00 1,650.00
Variable work in process, beg. 46,400.00

Absorption finished goods inventory 18,000.00

Less: fixed overhead
Direct labor hours 1,050
Multiply: direct labor rate 1.00 1,050.00
Variable finished goods, beg. 16,950.00

Direct material 370,000.00

Direct labor
Direct labor hours 23,000
Multiply: direct labor rate 6.00 138,000.00
 Variable overhead
Direct labor hours 23,000
Variable overhead rate 6.20 142,600.00
Variable manufacturing costs 650,600.00

Direct labor rate = Direct labor costs/Direct labor hours

= 150,000.00/25,000
= 6.00 per hour
Variable overhead = Variable factory overhead/Direct labor hours
rate
= 155,000.00/25,000
= 6.20 per hour

Absorption work in process inventory 64,000.00

Less: fixed overhead
Direct labor hours 2,100
Multiply: direct labor rate 1.00 2,100.00
Variable work in process inventory, end 61,900.00

Absorption finished goods inventory 14,000.00

Less: fixed overhead
Direct labor hours 820
Multiply: direct labor rate 1.00 820.00
Variable work in process inventory, end 13,180.00

Sales 1,015,000.00
Multiply: 5%
Variable selling expenses 50,750.00

Total selling expenses 95,000.00

Less: variable selling expenses 50,750.00
Fixed selling expenses 44,250.00

50.b.

The major advantage of variable costing is that it reflects the production's marginal cost. Variable
costing, in other words, makes it easier to make decisions regarding price, changes in volume,
and cost structure changes. The break-even point can also be identified more easily with variable
costing. Consequently, variable costing does not allow for itself to managerial manipulation of
income. One of most significant disadvantage of variable costing is that it treats fixed overhead
as a period cost, which could also violate the matching principle if fixed manufacturing is
considered a product cost.