Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations:

46. Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations:

           

		Year 1	Year 2
	Units (spice racks) produced.................................	40,000	40,000
	Units (spice racks) sold.........................................	37,000	41,000
	Absorption costing net operating income.............	$44,000	$52,000
	Variable costing net operating income..................	$38,000	???

            Pungent's cost structure and selling price were the same for both years. What is Pungent's variable costing net operating income for Year 2?

            A)      $48,000

            B)      $50,000

            C)      $54,000

            D)      $56,000

           

            Ans:  C     Level:  Hard

            Solution:

          

Unit fixed manufacturing overhead = Difference in net income ÷ Change in inventory = ($44,000 – $38,000) ÷ (40,000 – 37,000) = $6,000 ÷ 3,000 = $2

Variable costing net operating income = Absorption costing net income − Difference in net operating income

= $52,000 − [(40,000 − 41,000) × $2)]

= $52,000 − ($2,000) = $54,000

      47. Sipho Corporation manufactures a variety of products. Last year, the company's variable costing net operating income was $90,900. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $21,900. What was the absorption costing net operating income last year?

            A)      $69,000

            B)      $90,900

            C)      $21,900

            D)      $112,800

           

            Ans:  A    

            Solution:

            Absorption costing net income = Variable costing net income – fixed manufacturing overhead costs released from inventory

            = $90,900 – $21,900 = $69,000

      48. Last year, Kirsten Corporation's variable costing net operating income was $63,400. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $10,700. What was the absorption costing net operating income last year?

            A)      $10,700

            B)      $74,100

            C)      $63,400

            D)      $52,700

           

            Ans:  D    

            Solution:

            Absorption costing net income = Variable costing net income – fixed manufacturing overhead costs released from inventory

            = $63,400 – $10,700 = $52,700

      49. Bellue Inc. manufactures a variety of products. Variable costing net operating income was $96,300 last year and ending inventory decreased by 2,600 units. Fixed manufacturing overhead cost was $1 per unit. What was the absorption costing net operating income last year?

            A)      $2,600

            B)      $93,700

            C)      $96,300

            D)      $98,900

           

            Ans:  B    

            Solution:

           

Absorption costing net income = Variable costing net income − fixed manufacturing overhead costs released from inventory

= $96,300 − [2,600 × $1] = $96,300 − $2,600 = $93,700

      50. Last year, Tinklenberg Corporation's variable costing net operating income was $52,400 and its ending inventory decreased by 1,400 units. Fixed manufacturing overhead cost was $8 per unit. What was the absorption costing net operating income last year?

            A)      $41,200

            B)      $11,200

            C)      $63,600

            D)      $52,400

           

            Ans:  A    

            Solution:

           

Absorption costing net income = Variable costing net income − fixed manufacturing overhead costs released from inventory

= $52,400 − [1,400 × $8] = $52,400 − $11,200 = $41,200

Use the following to answer questions 51-53:

Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000 units and sold 12,000 units. Production costs for the year were as follows:

	Direct materials.....................................................	$150,000
	Direct labor............................................................	$180,000
	Variable manufacturing overhead.........................	$135,000
	Fixed manufacturing overhead..............................	$210,000

Sales totaled $840,000 for the year, variable selling expenses totaled $60,000, and fixed selling and administrative expenses totaled $180,000. There were no units in the beginning inventory. Assume that direct labor is a variable cost.

      51. The contribution margin per unit would be:

            A)      $25

            B)      $39

            C)      $34

            D)      $35

           

            Ans:  C     LO:  2     Level:  Hard

            Solution:

           

	Unit selling price ($840,000 ÷ 12,000).................		$70
	Less direct materials ($150,000 ÷ 15,000)............	$10
	Less direct labor ($180,000 ÷ 15,000)..................	12
	Less variable manufacturing overhead ($135,000 ÷ 15,000)............................................................	9
	Less variable selling and administrative ($60,000 ÷ 12,000)............................................................	5	36
	Contribution margin..............................................		$34

      52. Under absorption costing, the carrying value on the balance sheet of the ending inventory for the year would be:

            A)      $135,000

            B)      $93,000

            C)      $105,000

            D)      $0

           

            Ans:  A    

            Solution:

Unit fixed manufacturing overhead = $210,000 ÷ 15,000 = $14

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= $10 + $12 + $9 + $14 = $45

Carrying value = Unit product cost × Ending inventory in units

= $45 × (15,000 − 12,000) = $45 × 3,000 = $135,000

      53. Under variable costing, the company's net operating income for the year would be:

            A)      $42,000 higher than under absorption costing

            B)      $30,000 higher than under absorption costing

            C)      $30,000 lower than under absorption costing

            D)      $42,000 lower than under absorption costing

           

            Ans:  D     LO:  2    

            Solution:

           

Unit fixed manufacturing overhead × Change in inventory in units

= $14 × (15,000 − 12,000) = $14 × 3,000 = $42,000

Since the units produced are greater than the units sold (inventory increased), net income under absorption costing will be higher than net income under variable costing.

Use the following to answer questions 54-61:

Abdi Company, which has only one product, has provided the following data concerning its most recent month of operations:

	Selling price..............................................	$81
	Units in beginning inventory.....................	0
	Units produced..........................................	7,300
	Units sold..................................................	7,000
	Units in ending inventory..........................	300
	Variable costs per unit:
	Direct materials......................................	$20
	Direct labor............................................	$30
	Variable manufacturing overhead..........	$7
	Variable selling and administrative.......	$11
	Fixed costs:
	Fixed manufacturing overhead..............	$65,700
	Fixed selling and administrative............	$21,000

      54. What is the unit product cost for the month under variable costing?

            A)      $77

            B)      $66

            C)      $68

            D)      $57

           

            Ans:  D    

            Solution:

            Direct materials + Direct labor + Variable manufacturing overhead

            = $20 + $30 + $7 = $57

      55. What is the unit product cost for the month under absorption costing?

            A)      $66

            B)      $77

            C)      $57

            D)      $68

           

            Ans:  A    

            Solution:

            Unit fixed manufacturing overhead = $65,700 ÷ 7,300 = $9

            Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $20 + $30 + $7 + $9 = $66

      56. The total contribution margin for the month under the variable costing approach is:

            A)      $91,000

            B)      $168,000

            C)      $105,000

            D)      $25,300

           

            Ans:  A     LO:  2    

            Solution:

           

	Unit selling price...................................................		$81
	Less unit variable costs:
	Direct materials..................................................	$20
	Direct labor........................................................	30
	Variable manufacturing overhead......................	7
	Variable selling and administrative...................	11	68
	Contribution margin..............................................		$13

Total contribution margin = $13 × 7,000 = $91,000

      57. The total gross margin for the month under the absorption costing approach is:

            A)      $105,000

            B)      $124,800

            C)      $7,000

            D)      $91,000

           

            Ans:  A     LO:  2    

            Solution:

           

Unit fixed manufacturing overhead = $9

Unit product cost under absorption costing = $20 + $30 + $7 + $9 = $66

	Sales revenue ($81 × 7,000)..................................	$567,000
	Cost of goods sold ($66 × 7,000)..........................	462,000
	Gross margin.........................................................	$105,000

      58. What is the total period cost for the month under the variable costing approach?

            A)      $65,700

            B)      $163,700

            C)      $98,000

            D)      $86,700

           

            Ans:  B     LO:  2     Level:  Hard

            Solution:

           

Variable selling and administrative cost + Fixed costs

= ($11 × 7,000) + ($65,700 + $21,000)

= $77,000 + $86,700 = $163,700

      59. What is the total period cost for the month under the absorption costing approach?

            A)      $98,000

            B)      $65,700

            C)      $21,000

            D)      $163,700

           

            Ans:  A     LO:  2     Level:  Hard

            Solution:

           

            Variable selling and administrative cost + Fixed selling and administrative cost

= $11 × 7,000 + $21,000

= $77,000 + $21,000 = $98,000

      60. What is the net operating income for the month under variable costing?

            A)      $2,700

            B)      $4,300

            C)      $7,000

            D)      $(12,800)

           

            Ans:  B     LO:  2    

            Solution:

           

	Sales revenue ($81 × 7,000)..................................		$567,000
	Variable costs:
	Product cost ($57 × 7,000).................................	$399,000
	Variable selling and administrative ($11 × 7,000)..............................................................	77,000	476,000
	Contribution margin..............................................		91,000
	Fixed costs:
	Fixed manufacturing overhead..........................	$ 65,700
	Fixed selling and administrative........................	21,000	86,700
	Contribution margin..............................................		$   4,300

      61. What is the net operating income for the month under absorption costing?

            A)      $7,000

            B)      $4,300

            C)      $(12,800)

            D)      $2,700

           

            Ans:  A     LO:  2    

            Solution:

           

	Sales revenue ($81 × 7,000)..................................		$567,000
	Cost of goods sold ($66 × 7,000)..........................		462,000
	Gross margin.........................................................		105,000
	Selling and administrative expenses:
	Variable selling and administrative ($11 × 7,000)..............................................................	$77,000
	Fixed selling and administrative........................	21,000	98,000
	Net operating income............................................		$   7,000