Chapter 8Absorption and Variable Costing, and Inventory Management

TRUE/FALSE
1. Variable costing and absorption costing income statements may differ because of their treatment of
fixed factory overhead.
2. Inventory costs under variable costing include only direct materials, direct labor, and variable factory
overhead.
3. Inventory under absorption costing includes only direct materials and direct labor.
4. If the number of units produced in a period is larger than the number of units sold in a period,
absorption costing income will be higher than variable costing income.
5. If the number of units produced in a period is smaller than the number of units sold in period,
absorption costing income will be higher than variable costing income.
6. Product cost includes all costs of the company.
7. On a segmented income statement, fixed costs are broken down into direct fixed costs and common
fixed costs.
8. The costs of not having a product available when demanded by a customer are called stockout costs.
9. Total inventory-related cost consists of ordering cost and carrying cost.
10. JIT relies on a push system to control finished good inventory.
11. A major drawback to the JIT inventory approach is that it increases carrying costs.
MATCHING
On which type of income statement does each of the following costs appear?
a. Variable costing income statement
b. Absorption costing income statement
c. Both types of income statements
1.
2.
3.
4.
5.
6.
7.
8.

Direct materials for units sold

Direct labor for units sold
Variable overhead for units sold
Fixed factory overhead for the period
Only fixed factory overhead for units sold
Variable selling expense
Fixed selling expense
Administrative expense

Match each statement with the correct item below.

a.
b.
c.
d.
e.
9.
10.
11.
12.
13.

the costs of not having a product available when demanded by a customer

the costs of carrying inventory
approach that maintains goods should be pulled through the system by present demand
the number of units in the order quantity that minimizes the total cost
the costs of placing and receiving an order

Carrying costs
Economic order quantity
Just-in-time
Ordering costs
Stockout costs

COMPLETION
1. _______________ assigns all manufacturing costs to the product.
2. When using _______________ a company only assigns variable manufacturing costs to the product.
3. Generally accepted accounting principles require ______________ for external reporting.
4. The ___________________ income statement groups expenses according to function.
5. The _______________ income statement groups expenses according to cost behavior.
6. Absorption costing treats fixed factory overhead as a ____________.
7. Variable costing treats fixed factory overhead as a ______________.
8. For internal reporting ________________ is an important managerial tool because it provides vital
cost information for decision making and control.
9. Expenses that persist even if one of the segments to which they relate is eliminated are known as
________________.
10. A ____________ is a subunit of a company of sufficient importance to warrant the production of
performance reports.
11. On a segmented income statement, fixed expenses are broken down into _____________ and
______________.
12. The profit contribution each segment makes toward covering a companys common fixed costs is
called ______________.
13. All ______________ expenses will vanish if a particular segment is eliminated.
14. Inventory taxes, obsolescence, and insurance are examples of _______________.
15. Lost sales and costs of expediting shipments of goods are examples of _______________.
16. The _______________________ is the number of units in the optimal size order quantity.

17. ________________ is the time required to receive the economic order quantity once an order is
placed.
18. When a company needs to place a new order for goods, they have reached the ___________.
19. ______________ is computed by multiplying the lead time by the difference between the maximum
rate of usage and the average rate of usage.
20. The ______________ approach maintains that goods should be pulled through the system by present
demand rather than being pushed through on a fixed schedule based on anticipated demand.
MULTIPLE CHOICE

1. Which of the following types of costs does not appear on a variable costing income statement?
a.
b.
c.
d.
e.

direct materials
direct labor
fixed factory overhead per unit sold
variable selling expense
total administrative expense

2. Which of the following is never included in product cost?

a.
b.
c.
d.
e.

overhead
direct materials
variable selling expense
fixed factory overhead
direct labor

3. Generally Accepted Accounting Principles (GAAP) require the use of which accounting method for
external reporting?
a.
b.
c.
d.
e.

absorption costing.
variable costing.
transfer price costing.
responsibility costing.
all of these are acceptable for GAAP.

4. Variable costing is
a.
b.
c.
d.
e.

a good way to value inventories for the balance sheet.

used for external reporting purposes.
not useful for companies with multiple segments.
a useful tool for management decision making.
can only be used by start-up companies.

5. A disadvantage of absorption costing is

a. that it is not a useful format for decision making.
b. that it assigns only manufacturing costs to the product.

c. all of these
d. none of these

6. Gross margin is to absorption costing as ____ is to variable costing.

a.
b.
c.
d.

gross profit
contribution margin
income
territory margin

7. When monthly production volume is constant and sales volume is less than production, income
determined with variable costing procedures will
a.
b.
c.
d.

always be greater than income determined using absorption costing.

always be less than income determined using absorption costing.
be equal to income determined using absorption costing.
be equal to contribution margin per unit times units sold.

8. When production is less than sales volume, income under absorption costing will be ____ income
using variable costing procedures.
a.
b.
c.
d.

greater than
less than
equal to
randomly different than

9. Inventory values calculated using variable costing as opposed to absorption costing will generally be
a.
b.
c.
d.

equal.
less.
greater.
twice as much.

10. Which of the following statements is true?

a. Absorption costing income exceeds variable costing income when units produced and sold
are equal.
b. Variable costing income exceeds absorption costing income when units produced exceed
units sold.
c. Absorption costing income exceeds variable costing income when units produced are less
than units sold.
d. Absorption costing income exceeds variable costing income when units produced are
greater than units sold.

11. All of the following costs are included in inventory under absorption costing except
a.
b.
c.
d.

direct materials.
direct labor.
fixed selling expenses.
fixed factory overhead.

12. What is the primary difference between variable and absorption costing?
a.
b.
c.
d.

inclusion of fixed selling expenses in product costs

inclusion of variable factory overhead in period costs
inclusion of fixed selling expenses in period costs
inclusion of fixed factory overhead in product costs

NARRBEGIN: Figure 8-1

Figure 8-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of $12. Costs for last
year were as follows:
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Variable selling expense
Fixed selling expense
Fixed administrative expense

$25,000
35,000
12,000
37,000
9,000
7,500
15,500

Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce
20,000 units.
NARREND

13. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending
inventory under absorption costing?
a.
b.
c.
d.
e.

$5,480
$4,500
$10,900
$12,600
$5,750

14. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending
inventory under variable costing?
a.
b.
c.
d.
e.

$3,300
$2,500
$5,000
$3,720
$7,200

15. Refer to Figure 8-1. What is operating income for last year under absorption costing?
a.
b.
c.
d.
e.

$41,000
$67,520
$85,900
$111,300
$45,000

16. Refer to Figure 8-1. What is operating income for last year under variable costing?
a.
b.
c.
d.
e.

$111,800
$91,780
$82,200
$78,400
$66,350

NARRBEGIN: Figure 8-2

Figure 8-2.
Loring Company had the following data for the month:
Variable costs per unit:
Direct materials
Direct labor
Variable overhead
Variable selling expenses

$4.00
3.20
1.00
.40

Fixed overhead is $4,000 per month; it is applied to production based on normal activity of 2,000
units. During the month, 2,000 units were produced. Loring started the month with 300 units in
beginning inventory, with unit product cost equal to this month's unit product cost. A total of 2,100
units were sold during the month at price of $14. Selling and administrative expense for the month, all
fixed, totaled $3,600.
NARREND

17. Refer to Figure 8-2. What is the unit product cost under absorption costing?
a.
b.
c.
d.
e.

$8.60
$10.60
$8.20
$10.20
$7.20

18. Refer to Figure 8-2. What is operating income under variable costing?
a.
b.
c.
d.
e.

$3,540
$7,980
$11,340
$540
$3,740

19. Refer to Figure 8-2. What is the unit product cost under variable costing?
a.
b.
c.
d.
e.

$8.60
$10.60
$8.20
$10.20
$7.20

20. Refer to Figure 8-2. What is operating income under absorption costing?

a.
b.
c.
d.
e.

$3,540
$7,980
$11,340
$540
$3,740

NARRBEGIN: Figure 8-4

Figure 8-4.
The following information pertains to Mayberry Corporation:
Beginning inventory
Ending inventory
Direct labor per unit
Direct materials per unit
Variable overhead per unit
Fixed overhead per unit
Variable selling and admin. costs per unit
Fixed selling and admin. costs per unit

1,000 units
6,000 units
$40
20
10
30
6
14

NARREND

21. Refer to Figure 8-4. What is the value of the ending inventory using the absorption costing method?
a.
b.
c.
d.

$240,000
$360,000
$600,000
$420,000

22. Refer to Figure 8-4. Absorption costing income would be ____ variable costing income.
a.
b.
c.
d.

$150,000 greater than

$150,000 less than
$240,000 less than
$240,000 greater than

23. Refer to Figure 8-4. What is the value of the ending inventory using the variable costing method?
a.
b.
c.
d.

$240,000
$360,000
$350,000
$420,000

NARRBEGIN: Figure 8-5

Figure 8-5.
Sanders Company has the following information for 2011:
Selling price
Variable production costs
Variable selling and admin. expenses
Fixed production costs

$190 per unit

$52 per unit produced
$18 per unit sold
$240,000

Fixed selling and admin. expenses

Units produced
Units sold

$180,000
12,000
7,000

There were no beginning inventories.

NARREND

24. Refer to Figure 8-5. What is the value of ending inventory for Sanders using the absorption costing
method?
a.
b.
c.
d.

$360,000
$280,000
$220,000
$380,000

25. Refer to Figure 8-5. What is the income for Sanders using the absorption costing method?
a.
b.
c.
d.

$520,000
$480,000
$1,200,000
$500,000

26. Refer to Figure 8-5. What is the cost of ending inventory for Sanders using the variable costing
method?
a.
b.
c.
d.

$300,000
$280,000
$120,000
$260,000

27. Refer to Figure 8-5. What is the income for Eastwood using the variable costing method?
a.
b.
c.
d.

$420,000
$480,000
$520,000
$500,000

NARRBEGIN: Figure 8-6

Figure 8-6.
Bailey Company incurred the following costs in manufacturing desk calculators:
Direct materials
Indirect materials (variable)
Direct labor
Indirect labor (variable)
Other variable factory overhead
Fixed factory overhead
Variable selling expenses
Fixed selling expenses

$18
3
9
7
13
34
26
12

During the period, the company produced and sold 2,000 units.
NARREND

28. Refer to Figure 8-6. What is the inventory cost per unit using absorption costing?
a.
b.
c.
d.

$104
$77
$84
$32

29. Refer to Figure 8-6. What is the inventory cost per unit using variable costing?
a.
b.
c.
d.

$52
$66
$72
$50

NARRBEGIN: Figure 8-7

Figure 8-7.
Ramon Company reported the following units of production and sales for June and July 2011:
Month
June 2011
July 2011

Units
Produced
100,000
100,000

Sold
90,000
105,000

Income under absorption costing for June was $40,000; income under variable costing for July was
$50,000. Fixed costs were $600,000 for each month.
NARREND

30. Refer to Figure 8-7. How much was income for July using absorption costing?
a.
b.
c.
d.

$50,000
$20,000
$80,000
$40,000

31. Refer to Figure 8-7. How much was income for June using variable costing?
a.
b.
c.
d.

$40,000
$20,000
$(40,000)
$(20,000)

NARRBEGIN: Figure 8-8

Figure 8-8.
Steele Corporation has the following information for January, February, and March 2011:
January

February

March

Units produced
Units sold

10,000
7,000

10,000
8,500

10,000
10,500

Production costs per unit (based on 10,000 units) are as follows:

Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Variable selling and admin. expenses
Fixed selling and admin. expenses

$12
8
6
4
10
4

There were no beginning inventories for January 2011, and all units were sold for $50. Costs are stable
over the three months.
NARREND

32. Refer to Figure 8-8. What is the February ending inventory for Steele Corporation using the absorption
costing method?
a.
b.
c.
d.

$39,000
$45,000
$135,000
$300,000

33. Refer to Figure 8-8. What is the January ending inventory for Steele Corporation using the variable
costing method?
a.
b.
c.
d.

$260,000
$78,000
$108,000
$90,000

34. Refer to Figure 8-8. What is the March ending inventory for Steele Corporation using the variable
costing method?
a.
b.
c.
d.

$120,000
$104,000
$260,000
$15,000

35. Refer to Figure 8-8. What is the February contribution margin for Steele Corporation using the
variable costing method?
a.
b.
c.
d.

$240,000
$170,000
$119,000
$204,000

NARRBEGIN: Figure 8-9

Figure 8-9.

The following information pertains to Stark Corporation:

Beginning inventory
Ending inventory
Direct labor per unit
Direct materials per unit
Variable overhead per unit
Fixed overhead per unit
Variable selling costs per unit
Fixed selling costs per unit

0 units
5,000 units
$20
16
4
10
12
16

NARREND

36. Refer to Figure 8-9. What is the value of ending inventory using the variable costing method?
a.
b.
c.
d.

$310,000
$250,000
$200,000
$390,000

37. Refer to Figure 8-9. Absorption costing income would be ____ the variable costing income.
a.
b.
c.
d.

$50,000 greater than

$70,000 greater than
$70,000 less than
$50,000 less than

38. Refer to Figure 8-9. What is the value of ending inventory using the absorption costing method?
a.
b.
c.
d.

$310,000
$250,000
$200,000
$390,000

39. Redding Company has two divisions with the following segment margins for the current year:
Northern, $200,000; Southern, $400,000. Common expenses of the company are $50,000. What is
Redding Company's income?
a.
b.
c.
d.

$150,000
$550,000
$600,000
$650,000

40. Segment margin is equal to segment sales revenue minus

a.
b.
c.
d.

variable cost of goods sold, variable selling expense, and direct fixed costs.
variable cost of goods sold, variable selling expense, and common fixed costs.
variable cost of goods sold, total selling expense, and direct fixed costs.
variable cost of goods sold, variable selling expense, administrative expense, and direct
fixed costs.
e. cost of goods sold, variable selling expense, and fixed factory overhead.

41. Which of the following could be considered a segment?

a.
b.
c.
d.

Division
product-line
sales territory
all of these

42. Consider the following portion of a segmented income statement for the year just ended. Assume fixed
expenses of Division X include $30,000 of direct expenses and that the discontinuance of the
department will not affect the sales of the other departments nor reduce the common expenses.
Sales
Variable costs
Gross profit
Fixed expenses (direct and selling and administrative)
Operating income (loss)

Division X
$100,000
60,000
$ 40,000
50,000
$ (10,000)

What is X's divisional segment margin?

a.
b.
c.
d.

($10,000)
$40,000
$10,000
$100,000

43. Grass Valley Mining mines three products. Gold ore sells for $1,000 per ton, variable costs are $400
per ton, and fixed mining costs are $250,000. The segment margin for 2011 was $(100,000).
What were the sales (in tons) for 2011?
a.
b.
c.
d.

375 tons
1,000 tons
250 tons
200 tons

NARRBEGIN: Figure 8-10

Figure 8-10.
Nauman Company has the following information pertaining to its two divisions for 2011:
Variable selling and admin. expenses
Direct fixed expenses
Sales
Direct fixed selling and admin. expenses
Variable expenses

Division X
$ 70,000
35,000
200,000
30,000
40,000

Common expenses are $24,000 for 2011.

NARREND
44. Refer to Figure 8-10. What is the segment margin for Division Y?
a. $310,000

Division Y
$ 90,000
100,000
400,000
70,000
100,000

b. $210,000
c. $240,000
d. $40,000
45. Refer to Figure 8-10. What is the income for Nauman Company?
a. $65,000
b. $325,000
c. $300,000
d. $41,000
NARRBEGIN: Figure 8-11
Figure 8-11.
Tyler Company has the following information pertaining to its two product lines for 2011:

Variable selling and admin. expenses

Direct fixed expenses
Sales
Direct fixed selling and admin. expenses
Variable expenses
Operating income

Product A Product B
$38,000
$31,000
19,500
34,500
250,000
210,000
38,000
22,000
42,000
31,000
$112,500
$91,500

Common expenses are $105,000 for 2011.

NARREND
46. Refer to Figure 8-11. What is the segment margin for Product B?
a.
b.
c.
d.

$155,000
$105,000
$85,000
$91,500

47. Refer to Figure 8-11. What is the income for Tyler Company?
a.
b.
c.
d.

$101,000
$120,500
$99,000
$102,500

NARRBEGIN: Figure 8-12

Figure 8-12.
Assume the following information for a product line:
Sales
Variable expenses
Direct fixed expenses
Variable selling and administrative expenses
Direct fixed selling and admin. expenses
NARREND

$700,000
185,000
115,000
70,000
90,000

48. Refer to Figure 8-12. What is the contribution margin of the product line?
a.
b.
c.
d.

$400,000
$525,000
$445,000
$515,000

49. Refer to Figure 8-12. What is the segment margin of the product line?
a.
b.
c.
d.

$200,000
$325,000
$350,000
$240,000

50. The two major costs associated with inventory are

a.
b.
c.
d.
e.

ordering costs and setup costs.

setup costs and stockout costs.
stockout costs and carrying costs.
ordering costs and carrying costs.
none of these.

51. The inventory cost that can include insurance, inventory taxes, and obsolescence is called
a.
b.
c.
d.
e.

ordering cost.
carrying cost.
stockout cost.
setup cost.
storing cost.

52. The inventory cost that can include processing costs, cost of insurance for shipping, and unloading is
called
a.
b.
c.
d.
e.

ordering cost.
carrying cost.
stockout cost.
setup cost.
storing cost.

53. The inventory cost that can include lost sales, cost of expediting, and cost of interrupted production is
called
a.
b.
c.
d.
e.

ordering cost.
carrying cost.
stockout cost.
setup cost.
storing cost.

54. Which of the following is not a traditional reason for carrying inventory?

a.
b.
c.
d.
e.

to satisfy customer demand

to avoid shutting down manufacturing facilities
to buffer against unreliable production processes
to hedge against future price increases
all of these are traditional reasons for carrying inventory

55. The formula for ordering cost is the

a.
b.
c.
d.
e.

number of orders per year cost of placing an order.

number of orders per year/cost of placing an order.
average number of units in inventory cost of carrying one unit in inventory.
average number of units in inventory/cost of carrying one unit in inventory.
ordering cost + carrying cost.

56. The formula for total carrying cost is

a.
b.
c.
d.
e.

number of orders per year cost of placing an order.

number of orders per year/cost of placing an order.
average number of units in inventory cost of carrying one unit in inventory.
average number of units in inventory/cost of carrying one unit in inventory.
ordering cost + carrying cost.

57. The economic order quantity (EOQ) is the quantity that

a.
b.
c.
d.
e.

minimizes total ordering cost.

maximizes total profit.
minimizes total inventory-related costs.
maximizes carrying costs.
maximizes ease of ordering.

58. Carter Company orders 250 units at a time, and places 15 orders per year. Total ordering cost is $1,600
and total carrying cost is $1,250. Which of the following statements is true?
a.
b.
c.
d.
e.

the economic order quantity (EOQ) is 250

the economic order quantity (EOQ) is more than 250
the economic order quantity (EOQ) is less than 250
total inventory-related cost is lower than it would be at the economic order quantity (EOQ)
none of these

59. Carter Company orders 250 units at a time, and places 15 orders per year. Total ordering cost is $1,100
and total carrying cost is $1,750. Which of the following statements is true?
a.
b.
c.
d.
e.

the economic order quantity (EOQ) is 250

the economic order quantity (EOQ) is more than 250
the economic order quantity (EOQ) is less than 250
total inventory-related cost is lower than it would be at the economic order quantity (EOQ)
none of these

60. Carter Company orders 250 units at a time, and places 15 orders per year. Total ordering cost is $1,100
and total carrying cost is $1,100. Which of the following statements is true?
a.
b.
c.
d.
e.

the economic order quantity (EOQ) is 250

the economic order quantity (EOQ) is more than 250
the economic order quantity (EOQ) is less than 250
total inventory-related cost is lower than it would be at the economic order quantity (EOQ)
none of these

61. When the economic order quantity (EOQ) model is applied to units produced within the company,
ordering costs become
a.
b.
c.
d.
e.

setup costs.
stockout costs.
carrying costs.
safety-stock costs.
production costs.

62. Under a JIT system,

a.
b.
c.
d.
e.

customer demand pulls units through the production line.

safety stock is set at relatively high levels.
stockouts are never a problem.
inventory levels are set at 10% of total production levels.
production is set at a level to maximize factory output.

63. JIT responds to the problems traditionally solved by carrying inventories by

a.
b.
c.
d.
e.

ensuring that sufficient inventory is on hand to prevent stockouts.

purchasing extra materials when price discounts are offered.
negotiating long-term contracts with supplier to lock in low prices.
selecting an inventory level that minimizes the total of ordering and carrying costs.
choosing a wide number of suppliers to increase the chance of receiving quantity
discounts.

NARRBEGIN: Figure 8-3

Figure 8-3.
Martin Company uses 625 units of a part each year. The cost of placing one order is $8; the cost of
carrying one unit in inventory for a year is $4.
NARREND
64. Refer to Figure 8-3. Martin has decided to begin ordering 40 units at a time. What is the average
annual carrying cost of Martin's new policy?
a.
b.
c.
d.
e.

$80
$60
$160
$4
$90

65. Refer to Figure 8-3. Martin has decided to begin ordering 40 units at a time. What is the average
annual ordering cost of Martin's new policy?
a.
b.
c.
d.
e.

$190
$150
$125
$100
$145

66. Refer to Figure 8-3. What is the EOQ for Martin?

a.
b.
c.
d.
e.

100
50
45
30
20

PROBLEM
1. Baker Company produced 30,000 units and sold 28,000 units in 2011. Beginning inventory was zero.
During the period, the following costs were incurred:
Indirect labor (variable)
Indirect materials (variable)
Other variable overhead
Fixed manufacturing overhead
Fixed administrative expenses
Fixed selling expenses
Variable selling expenses, per unit
Direct labor, per unit
Direct materials, per unit

$ 60,000
30,000
90,000
180,000
150,000
120,000
40
80
20

Required: Compute the dollar amount of ending inventory using:

A.
B.

Absorption costing
Variable costing

2. During the most recent year, Boston Corp. had the following data:
Beginning inventory in units
Units produced
Units sold ($125 per unit)
Variable costs per unit:
Direct materials
Direct labor
Variable overhead
Fixed costs:
Fixed overhead per unit produced
Fixed selling and administrative

15,400
8,200
$
$
$

13
16
8

$
23
$ 185,000

Required:
A. How many units are in ending inventory?
B. Using absorption costing, calculate the per-unit product cost. What is the value of ending
inventory?
C. Using variable costing, calculate the per-unit product cost. What is the value of ending inventory?
D. Prepare an income statement using absorption costing.
E. Prepare an income statement using variable costing.
3. The variable costing income statement for Jackson Company for 2011 is as follows:
Sales (5,000 units)
Variable expenses:
Cost of goods sold
Selling (10% of sales)
Contribution margin
Fixed expenses:
Manufacturing overhead
Administrative
Operating income

$100,000
$30,000
10,000

40,000
$ 60,000

$24,000
14,400

38,400
$ 21,600

Selected data for 2011 concerning the operations of the company are as follows:
Beginning inventory
Units produced

-0- units
8,000 units

Manufacturing costs:
Direct labor
Direct materials
Variable overhead

$3.00 per unit

1.60 per unit
1.40 per unit

Required: Prepare an absorption costing income statement for 2011.

4. Prepare a segmented income statement for Mario Co. for the coming year, using variable costing.

Sales
Variable cost of goods sold
Direct fixed overhead

Leather jackets
450,000
134,000
29,000

Suede jackets
542,000
213,000
38,000

A sales commission of 2% of sales is paid for each of the two product lines. Direct fixed selling and
administrative expense was estimated to be $32,000 for the leather jackets and $66,000 for the suede
jackets. Common fixed overhead for the factory was estimated to be $83,000 and common selling and
administrative expense was estimated to be $14,000.
Required: Prepare a segmented income statement for Mario Co. for the coming year, using variable
costing.

5. Mario Co. produces three products: LMC, DMC, KPC. For the coming year they expect to produce
160,000 units. Of these, 65,000 will be LMC, 40,000 will be DMC and 55,000 will be KPC. The
following information was provided for the coming year:
LMC
Price
Unit direct materials
Unit direct labor
Unit variable overhead
Unit variable selling expense
Total direct fixed overhead

DMC

550
250
180
60
45
240,000

860
405
210
72
60
425,000

KPC
$

625
300
205
55
58
400,000

Common fixed overhead is $984,000 and fixed selling and administrative expenses for Mario Co. is
$881,000 per year.
Required:
A. Calculate the unit variable cost under variable costing.
B. Calculate the unit variable product cost.
C. Prepare a segmented variable-costing income statement for next year.
D. Should Mario Co. keep all product lines?
6. Ellie Manufacturing Company produces three products: A, B, and C. The income statement for 2011 is
as follows:
Sales
Less: Variable cost
Contribution margin
Less fixed cost:
Manufacturing
Selling and administrative
Operating income

$200,000
127,000
$ 73,000
$20,000
14,000

34,000
$ 39,000

The sales, contribution margin ratios, and direct fixed expenses for the three types of products are as
follows:
Sales
Contribution margin ratio
Direct fixed expenses of products

A
$60,000
35%
$ 8,000

B
$40,000
30%
$ 5,000

C
$100,000
40%
$4,000

Required: Prepare income statements segmented by products. Include a column for the entire firm in
the statement.
7. Laird Company uses 405 units of a part each year. The cost of placing one order is $5; the cost of
carrying one unit in inventory for a year is $2. Laird currently orders 81 units at a time.
A.
B.

The annual ordering cost of Laird's current policy is $__________________.

The annual carrying cost of Laird's current policy is $__________________.

C.
D.
E.

The total cost of Laird's current policy is $__________________.

What is the EOQ for Laird?
What is the total inventory-related cost at the EOQ?

8. Simon Company sells 900 units of its deluxe product each year. The cost of setting up for one
production run is $150; the cost of carrying one unit in inventory for a year is $3.
A.
B.
C.
D.

What is the economic order quantity?

What is the annual setup cost of the EOQ policy?
What is the annual carrying cost of the EOQ policy?
What is the total inventory-related cost of the EOQ policy?

9. Simon Company sells 900 units of its deluxe product each year. The cost of setting up for one
production run is $150; the cost of carrying one unit in inventory for a year is $3. Simon currently
produces 100 deluxe units in one production run.
A.
B.
C.
D.

What is the annual setup cost of the current policy?

What is the annual carrying cost of the current policy?
What is the total inventory-related cost of the current policy?
Do you suppose that the current production run is smaller or larger than the EOQ? Why?

10. Rudd Company uses 40,000 micro-chips each year in its production of digital cameras. The cost of
placing an order is $75. The cost of holding one unit of inventory for one year is $8. Currently Rudd
places 20 orders of 2,000 units per order.
Required:
A. Compute the annual ordering cost.
B. Compute the annual carrying cost.
C. Compute the total cost of Rudd's current inventory policy.
D. Compute the economic order quantity.
E. Compute the order cost and the carrying cost for the EOQ.
F. How much money does using the EOQ policy save the company over the policy of purchasing 2,000
micro-chips per order?
11. McKay Company produces curling irons. The plastic handles used to produce the curling irons are
purchased from an outside supplier. Each year, 45,000 handles are used at the rate of 150 handles per
day. Some days as many as 180 handles are used. On average it takes 4 days after an order is placed
for the inventory to arrive at McKay Company.
Required:
A. Calculate the reorder point without safety stock.
B. Calculate the amount of safety stock.
C. Calculate the reorder point with safety stock.

ESSAY
1. What is the difference between absorption-costing income and variable-costing income?

NARRBEGIN: you decide

You decide
NARREND
2. You have just become the controller for Artisan Industries. Artisan produces three different products
and upon review of their internal reports you notice that they have never prepared a segmented income
statement. Explain to the vice president what a segmented income statement consists of and why it
can be useful in decision making.
3. List three problems inventory was meant to solve. How does the JIT producer handle these problems?