9-17 Queen Sales, Inc. has just completed its first year of operations.

The company
has not had any sales to date. Queen has incurred the following costs associated with
its production as of December 31, Year 1:

Direct materials $45,000

Production labor 35,000
Bookkeeper salary 28,000
Factory utilities 18,500
Office rent 12,000
Factory supervisor salary 9,600
Machine maintenance contract 7,500

Under absorption costing, what is the inventory amount shown on the balance sheet at
December 31, Year 1?
a. $155,600
b. $115,600
c. $98,500
d. $80,000

9-19 The following information relates to Drexler Inc.’s Year 3 financials:

Direct labor $420,000

Direct materials 210,000
Variable overhead 205,000
Fixed overhead 355,000
Variable SG&A expenses 150,000
Fixed SG&A expenses 195,000

Year 3 period costs for Drexler, under both the absorption and variable cost methods,
will be

Absorption Cost Method Variable Cost Method

a. $345,000 $700,000
b. $345,000 $905,000
c. $550,000 $700,000
d. $550,000 $905,000
9-26 Absorption and variable costing. (CMA) Osawa, Inc., planned and actually
manufactured 200,000 units of its single product in 2014, its first year of operation.
Variable manufacturing cost was $20 per unit produced. Variable operating
(nonmanufacturing) cost was $10 per unit sold. Planned and actual fixed
manufacturing costs were $600,000. Planned and actual fixed operating
(nonmanufacturing) costs totaled $400,000. Osawa sold 120,000 units of product at
$40 per unit.

Required:
1. Osawa’s 2014 operating income using absorption costing is (a) $440,000, (b)
$200,000, (c) $600,000, (d) $840,000, or (e) none of these. Show supporting
calculations.
2. Osawa’s 2014 operating income using variable costing is (a) $800,000, (b)
$440,000, (c) $200,000, (d) $600,000, or (e) none of these. Show supporting
calculations.

9-25 Variable versus absorption costing. The Zeta Company manufactures trendy,
good-looking, moderately priced umbrellas. As Zeta’s senior financial analyst, you
are asked to recommend a method of inventory costing. The CFO will use your
recommendation to prepare Zeta’s 2017 income statement. The following data are for
the year ended December 31, 2017:

Beginning inventory, January 1, 2017 100,000 units

Ending inventory, December 31, 2017 50,000 units
2017 sales 400,000 units
Selling price (to distributor) $25 per unit
Variable manufacturing cost per unit, including direct $6 per unit
materials
Variable operating (marketing) cost per unit sold $2 per unit sold
Fixed manufacturing costs $1,625,000
Denominator-level machine-hours 6,500
Standard production rate 50 units per machine-
hour
Fixed operating (marketing) costs $1,100,000

Required:
Assume standard costs per unit are the same for units in beginning inventory and units
produced during the year. Also, assume no price, spending, or efficiency variances.
Any production-volume variance is written off to cost of goods sold in the month in
which it occurs.
1. Prepare income statements under variable and absorption costing for the year
ended December 31, 2017.
2. What is Zeta’s operating income as percentage of revenues under each costing
method?
3. Explain the difference in operating income between the two methods.
4. Which costing method would you recommend to the CFO? Why?