1) ABC Company has no beginning and ending inventories, and reports the following

information about its only product:

Direct materials used $29,000

Direct labor $17,000
Variable indirect production $13,000
Fixed indirect production $18,000
Variable selling and administrative expenses $22,000
Fixed selling and administrative expenses $11,000
Units produced and sold 10,000 units
Selling price per unit $25
Required:
A) Prepare an income statement using the contribution approach.
B) Prepare an income statement using the absorption approach.

Answer
A) contribution approach
Sales (10,000 × $25) $250,000
Variable expenses:
Direct materials $29,000
Direct labor 17,000
Variable indirect production 13,000
Variable manufacturing cost of goods sold 59,000
Variable selling and admin. Expenses 22,000
Total variable expenses 81,000
Contribution margin 169,000
Fixed expenses:
Indirect production 18,000
Selling and admin. 11,000
Total fixed expenses 29,000
Operating income $140,000
--------------------------------------------------------------------------------------
B) absorption approach
Sales $250,000
Manufacturing cost of goods sold:
Direct materials $29,000
Direct labor 17,000
Variable indirect production 13,000
Fixed indirect production 18,000
Manufacturing cost of goods sold 77,000
Gross margin 173,000
Selling and administrative expenses 33,000
Operating income $140,000
2) ABC Company has been producing and selling 100,000 units per year. They have
excess capacity, and there are no beginning and ending inventories.
Selling price per unit $11.00
Direct materials per unit $5.00
Direct labor per unit $3.00
Variable manufacturing overhead per unit $1.00
Variable selling and administrative per unit $0.25
Total fixed manufacturing overhead costs $50,000
Total fixed selling and administrative $15,000
Required:
A) Prepare an income statement using the contribution approach.
B) Prepare an income statement using the absorption approach.

Answer
A) contribution approach
Sales (100,000 × $11.00) $1,100,000
Variable expenses:
Direct materials 500,000
Direct labor 300,000
Variable overhead 100,000
Variable manufacturing cost of goods sold 900,000
Variable selling and admin. expense 25,000
Total variable expenses 925,000
Contribution margin 175,000
Fixed expenses:
Manufacturing 50,000
Selling and admin. expense 15,000
Total fixed expenses 65,000
Operating income $110,000

B) absorption approach
Sales $1,100,000
Manufacturing cost of goods sold:
Direct materials $500,000
Direct labor 300,000
Variable overhead 100,000
Fixed overhead 50,000
Manufacturing cost of goods sold 950,000
Gross margin 150,000
Selling and administrative expense 40,000
Operating income $110,000
3) ABC Manufacturing Company sells its products for $33 each. The current production
level is 50,000 units, although only 40,000 units are anticipated to be sold.
Unit manufacturing costs are:
Direct materials $6.00
Direct manufacturing labor $9.00
Variable manufacturing costs $4.50
Total fixed manufacturing costs $180,000
Marketing expenses $3.00 per unit, plus $100,000 per year

Required:
a. Prepare an income statement using absorption costing.
b. Prepare an income statement using variable costing.
Answer:
a. Absorption-costing income statement:

Sales (40,000 × $33) $1,320,000

Cost of goods sold (40,000 × $23.10*) 924,000
Gross margin 396,000
Marketing:
Variable (40,000 × $3) $120,000
Fixed 100,000 220,000

Operating income $176,000

* $6.00 + $9.00 + $4.50 + ($180,000/50,000) = $23.10

b. Variable-costing income statement:

Sales (40,000 × $33) $1,320,000

Variable costs:
Cost of goods sold (40,000 × $19.50*)$780,000
Marketing (40,000 × $3) 120,000 900,000

Contribution margin 420,000

Fixed costs:
Manufacturing $180,000
Marketing 100,000 280,000

Operating income $140,000

* $6.00 + $9.00 + $4.50 = $19.50
4) For 2017, ABC, Inc., had sales of 150,000 units and production of 200,000 units. Other
information for the year included:
Direct manufacturing labor $197,500
Variable manufacturing overhead 100,000
Direct materials 160,000
Variable selling expenses 100,000
Fixed administrative expenses 100,000
Fixed manufacturing overhead 250,000
There was no beginning inventory.
Required:
a. Compute the ending finished goods inventory under both absorption and variable costing.
b. Compute the cost of goods sold under both absorption and variable costing.
Answer:
a. Absorption Variable
Direct materials $160,000 $160,000
Direct manufacturing labor 197,500 197,500
Variable manufacturing overhead 100,000 100,000
Fixed manufacturing overhead 250,000 0
Total $707,500 $457,500

Unit costs:
$707,500/200,000 units $3.5375
$457,500/200,000 units $2.2875

Ending inventory:
50,000 units × $3.5375 $176,875
50,000 units × $2.2875 $114,375

b. Cost of goods sold:

150,000 × $3.5375 $530,625
150,000 × $2.2875 $343,125
MULTIPL CHOICE

1) Fast Track Auto produces and sells an auto part for $60 per unit. In 2017, 120,000 parts were
produced and 75,000 units were sold. Other information for the year includes:
Direct materials $20 per unit
Direct manufacturing labor $5 per unit
Variable manufacturing costs $3 per unit
Sales commissions $7 per part
Fixed manufacturing costs $760,000 per year
Administrative expenses, all fixed$270,000 per year
What is the inventoriable cost per unit using variable costing?
A) $20
B) $25
C) $28
D) $35
Answer: C
Explanation: Variable costing considers all variable manufacturing costs as inventoriable
costs. Therefore, in this case, direct materials, direct manufacturing labor, and variable
manufacturing costs will be considered as inventoriable cost. The total inventoriable cost is
$28 ($20 + $5 + $3).

2) Fast Track Auto produces and sells an auto part for $85 per unit. In 2017, 110,000 parts
were produced and 90,000 units were sold. Other information for the year includes:
Direct materials $23 per unit
Direct manufacturing labor $6 per unit
Variable manufacturing costs $1 per unit
Sales commissions $6 per part
Fixed manufacturing costs $790,000 per year
Administrative expenses, all fixed $310,000 per year

What is the inventoriable cost per unit using absorption costing?

A) $30.00
B) $36.00
C) $37.18
D) $40.00
Answer: C
Explanation: Absorption costing considers all variable manufacturing costs and all fixed
manufacturing costs as inventoriable costs. Therefore, in this case, direct materials, direct
manufacturing labor, variable manufacturing costs, and fixed manufacturing costs will be
considered as inventoriable cost. The total inventoriable cost is $37.18 ($23 + $6 + $1 +
$7.18*).
* $790,000/110,000= $7.18 per unit
3) Santana Company has no beginning and ending inventories, and reports the following
information for its only product:
Direct materials used $250,000
Direct labor $120,000
Fixed indirect manufacturing $60,000
Variable indirect manufacturing $20,000
Variable selling and administrative$50,000
Fixed selling and administrative $10,000

Units produced and sold 40,000

Santana Company uses the absorption approach to prepare the income statement. What is
the product cost per unit?
A) $11.00
B) $11.25
C) $12.00
D) $12.75
Answer: B

4) Camile Company has no beginning and ending inventories, and reports the following data
about its only product:

Direct materials used $100,000

Direct labor $80,000
Fixed indirect manufacturing $50,000
Fixed selling and administrative $220,000
Variable indirect manufacturing $20,000
Variable selling and administrative$75,000
Selling price(per unit) $84

Units produced and sold 10,000

Camile Company uses the absorption approach to prepare the income statement. What is
the product cost per unit?
A) $20
B) $25
C) $27.50
D) $32.50
Answer: B
5) Sanchez Company has no beginning and ending inventories, and reports the following
data about its only product:

Direct materials used $100,000

Direct labor $80,000
Fixed indirect manufacturing $100,000
Fixed selling and administrative $170,000
Variable indirect manufacturing $20,000
Variable selling and administrative$90,000
Selling price(per unit) $100
Units produced and sold 12,000

Sanchez Company uses the absorption approach to prepare the income statement. What is
the manufacturing cost of goods sold?
A) $270,000
B) $300,000
C) $390,000
D) $500,000
Answer: B

6) Garcia Company has no beginning and ending inventories, and reports the following data
about its only product:

Direct materials used $270,000

Direct labor $180,000
Fixed indirect manufacturing $130,000
Fixed selling and administrative $150,000
Variable indirect manufacturing $120,000
Variable selling and administrative$60,000
Selling price(per unit) $99

Units produced and sold 30,000

Garcia Company uses the absorption approach to prepare the income statement. What is
the operating income?
A) $2,060,000
B) $2,120,000
C) $2,240,000
D) $2,970,000
Answer: A
7) Gomez Company has no beginning and ending inventories, and reports the following data
about its only product:

Direct materials used $470,000

Direct labor $180,000
Fixed indirect manufacturing $130,000
Fixed selling and administrative $150,000
Variable indirect manufacturing $120,000
Variable selling and administrative$60,000
Selling price(per unit) $100

Units produced and sold 30,000

Gomez Company uses the contribution approach to prepare the income statement. What is
the operating income?
A) $1,890,000
B) $2,100,000
C) $2,190,000
D) $2,250,000
Answer: A

8) Winter Company has no beginning and ending inventories, and reports the following data
about its only product:

Direct materials used $200,000

Direct labor $80,000
Fixed indirect manufacturing $100,000
Fixed selling and administrative $300,000
Variable indirect manufacturing $20,000
Variable selling and administrative$60,000
Selling price(per unit) $150

Units produced and sold 10,000

Winter Company uses the absorption approach to prepare the income statement. What is
the gross margin?
A) $740,000
B) $1,040,000
C) $1,100,000
D) $1,160,000
Answer: C
9) Latinovich Company has no beginning and ending inventories, and reports the following
data about its only product:

Direct materials used $200,000

Direct labor $80,000
Fixed indirect manufacturing $180,000
Fixed selling and administrative $150,000
Variable indirect manufacturing $130,000
Variable selling and administrative$160,000
Selling price(per unit) $150

Units produced and sold 10,000

Latinovich Company uses the contribution approach to prepare the income statement. What
is the contribution margin?
A) $600,000
B) $910,000
C) $930,000
D) $1,090,000
Answer: C

10) Schaefer Company has no beginning and ending inventories, and reports the following
data about its only product:

Direct materials used $200,000

Direct labor $80,000
Fixed indirect manufacturing $100,000
Fixed selling and administrative $150,000
Variable indirect manufacturing $20,000
Variable selling and administrative$60,000
Selling price(per unit) $50

Units produced and sold 10,000

Schaefer Company uses the contribution approach to prepare the income statement. What
is the contribution margin?
A) $100,000
B) $140,000
C) $200,000
D) $220,000
Answer: B