13-B3 Comparison of Variable Costing and Absorption Costing Consider the followi
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13-B3 Comparison of Variable Costing and Absorption CostingConsider the following information pertaining to a year’s operations of Youngstown Manufacturing:
Units sold 1,400
Units produced 1,600
Direct labor $4,200
Direct materials used 3,500
Fixed manufacturing overhead 2,200
Variable manufacturing overhead 300
Selling and administrative expenses (all fixed) 700
Beginning inventories 0
Contribution margin 5,600
Direct-material inventory, end 800
There are no work-in-process inventories.
1. What is the ending finished-goods inventory cost under absorption costing?
2. What is the ending finished-goods inventory cost under variable costing?
13-45 Variable and Absorption Costing
Chan Manufacturing Company data for 20X7 follow:
Sales: 12,000 units at $17 each
Actual production 15,000 units
Expected volume of production 18,000 units
Manufacturing costs incurred
Variable $120,000
Fixed 63,000
Nonmanufacturing costs incurred
Variable $ 24,000
Fixed 18,000
1. Determine operating income for 20X7, assuming the firm uses the variable-costing approach to
product costing. (Do not prepare a statement.)
2. Assume that there is no January 1, 20X7, inventory; no variances are allocated to inventory; and
the firm uses a “full absorption” approach to product costing. Compute (a) the cost assigned to
December 31, 20X7, inventory; and (b) operating income for the year ended December 31, 20X7.
Do not prepare statement....
Appendix 13: Comparisons of Production-Volume Variance with
Other Variances
The only new variance introduced in this chapter is the production-volume variance, which arises
because fixed-overhead accounting must serve two masters: the control-budget purpose and the
product-costing purpose. Let’s examine this variance in perspective by using the approach originally
demonstrated in Exhibit 8-9. The results of the approach appear in Exhibit 13-11, which deserves your
careful study, particularly the two footnotes. Please ponder the exhibit before reading on.
Exhibit 13-12 graphically compares the variable- and fixed-overhead costs analyzed in Exhibit
13-11. Note how the control-budget line and the product-costing line (the applied line) are superimposed
in the graph for variable overhead but differ in the graph for fixed overhead.
Underapplied or overapplied overhead is always the difference between the actual overhead
incurred and the overhead applied. An analysis may then be made:
Accounting Vocabulary
underapplied overhead flexible-budget
varian = ce
production-volume
variance
fo?? ??? ?+?? ??? ?r variable overheadfor f = $30,000 + 0 = $30,000
ixed overhead = $70,000 + $100,000 = $170,000
13-48 Overhead Variances
Study Appendix 13. Consider the following data for the Rivera Company:
Factory Overhead
Fixed Variable
Actual incurred $14,200 $13,300
Budget for standard hours allowed
for output achieved 12,500 11,000
Applied 11,600 11,000
Budget for actual hours of input 12,500 11,400
From the above information, fill in the blanks below. Be sure to mark your variances F for favorable
and U for unfavorable.
a. Flexible-budget variance $______ Fixed $______
Variable $______
b. Production-volume variance $______ Fixed $______
Variable $______
c. Spending variance $______ Fixed $______
Variable $______
d. Efficiency variance $______ Fixed $______
Variable $______
13-49 Variances
Study Appendix 13. Consider the following data regarding factory overhead:
Variable Fixed
Budget for actual hours of input $45,000 $70,000
Applied 41,000 64,800
Budget for standard hours allowed
for actual output achieved ? ?
Actual incurred 48,500 68,500
Using the above data, fill in the following blanks with the variance amounts. Use F for favorable or U
for unfavorable for each variance.
Total Overhead Variable Fixed
1. Spending variance ______ ______ ______
2. Efficiency variance ______ ______ ______
3. Production-volume variance ______ ______ ______
4. Flexible-budget variance ______ ______ ______
5. Underapplied overhead ______ ______ ______
Problems
--------------------------------------------------------------------------------------
(C)
(B) Flexible Budget (D)
(A) Flexible Based on Standard Product
Costs Incurred: Budget Based Inputs Allowed for Costing:
Actual Inputs on Actual Inputs Actual Outputs Achieved Applied
Inputs Actual Price Expected Prices Expected Prices to Product
Direct 100,000 $12.20 $1,220,000 100,000 $12 $1,200,000 (87,500 $12) or (87,500 $12) or
labor (14,000 $75) $1,050,000* (14,000 $75) $1,050,000*
100,000 ($12.20 $12) 12,500 $12
price variance, $20,000 U usage variance, $150,000 U Never a variance
Flexible-budget variance, $170,000 U Never a variance
Variable (given) 100,000 $3.20 (87,500 $3.20 or
factory $310,000 $320,000 14,000 $20)
overhead $280,000* $280,000*
Spending 12,500 $3.20
variance, $10,000 F efficiency variance, $40,000 U Never a variance
Flexible-budget variance, $30,000 U Never a variance
Underapplied overhead, $30,000 U
Fixed 14,000 $100
factory $1,570,000 Lump sum $1,500,000† Lump sum $1,500,000† $1,400,000
overhead Spending variance,
Never a variance
Production-volume
$70,000 U variance, $100,000 U
Flexible-budget Production-volume
variance, $70,000 U variance, $100,000 U
Underapplied overhead, $170,000 U
U Unfavorable, F Favorable.
* Note especially that the flexible budget for variable costs rises and falls in direct proportion to production. Note also that the control-budget purpose and the product-costing purpose harmonize completely.
The total costs in the flexible budget will always agree with the standard variable costs applied to the product because they are based on standard costs per unit multiplied by units produced.
† In contrast with variable costs, the flexible-budget total for fixed costs will always be the same regardless of the units produced. However, the control-budget purpose and the product-costing purpose
conflict; whenever actual production differs from expected production, the standard costs applied to the product will differ from the flexible budget. This difference is the production-volume variance.
In this case, the production-volume variance may be computed by multiplying the $100 rate times the difference between the 15,000 expected volume and the 14,000 units of output achieved.
Exhibit 13-11
Analysis of Variances
(data are from text for 20X8)
614
---------------------------------------------------------------------------------------------------------
Actual $310,000
Budget 280,000
*FBV = Flexible-budget variance
**PVV = Production-volume variance
Control Budget and
Standard Cost
Applied Are Equal
($280,000)
Control Budget and
Product Costing
= $20 per Unit
Cost
Activity or Volume in Units of Output
Variable Overhead
15,000
Fixed Overhead
14,000
Actual $1,570,000
Applied 1,400,000
Budget 1,500,000
Fixed Overhead Applied
= $100 per Unit
Cost
Activity or Volume in Units of Output
15,000
*FBV
*FBV = $30,000
**PVV
Underapplied Overhead
Expected Volume
(Used to Set Fixed
Overhead Rate of $100)
Exhibit 13-12
ISBN: 0-536-47129-0
Introduction to Management Accounting: Chapters 1-17, Fourteenth Edition, by Charles T. Horngren, Gary L. Sundem, William O. Stratton,
David Burgstahler, and Jeff Schatzberg. Published by Prentice Hall. Copyright © 2008 by Pearson Education, Inc.
Explanation / Answer
1. What is the ending finished-goods inventory cost under absorption costing?
$4,200 + $3,500 + $2,200 + $300 = $10,200
per unit cost = $10,200 / 1,600 = $6.375
Ending inventory (units) = Units produced 1,600 - Units Sold 1,400 = 200 units
Cost of ending inventory = 200 units @ $6.375 = $1,275
2. What is the ending finished-goods inventory cost under variable costing?
$4,200 + $3,500 + $300 = $8,000
Per unit cost = $8,000 / 1,600 = $5.00
Cost of ending inventory = 200 units @ $5.00 = $1,000
_________________________________________________________
1. Determine operating income for 20X7, assuming the firm uses the variable-costing approach to
product costing. (Do not prepare a statement.)
Variable manufacturing cost per unit = $120,000 / 15,000 = $8
Variable non-manufacturing cost per unit = $24,000 / 12,000 = $2.00
Operating Income = (12,000 x $17) - (12,000 x $8) - (12,000 x 2.00) - $63,000 - $18,000
= $204,000 - $96,000 - $24,000 - $81,000
= $3000
Compute (a) the cost assigned to December 31, 20X7, inventory.
======================================================
Ending inventory
==============
Units produced 15,000
Less : Units sold 12,000
Ending inventory 3,000
=======
Cost of ending inventory = (3000 units X $8.00) + (3,000 units X $63,000 / 18,000)
= $24,000 + $10,500 = $34,500
(b) Operating income for the year ended December 31, 20X7.
Operating Income
= (12,000 x $17 ) - ($120,000 + $63,000 + $24,000 + $18,000 - $34,500)
= $204,000 - $190,500 = $13,500
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