Module 5 Review Questions
I. Absorption costing and over-production
Under absorption costing, a company had the following per unit costs when 10,000 units were produced.
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1. Compute the companys total production cost per unit if 25,000 units had been produced.
2. Why might a manager of a company using absorption costing produce more units than can currently be sold?
II. Computing contribution margin
AirTel Company sold 10,000 units of its product at a price of $80 per unit. Total variable cost is $50 per unit consisting of $40 in variable production cost and $10 in variable selling and administrative cost. Compute the contribution margin.
III. Computing unit cost under absorption costing
Rajeev Company reports the following information regarding its production costs. Compute its production cost per unit under absorption costing.
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IV. Production level, absorption costing, and gross margin
Tramor Company reports the following cost data for its single product. The company regularly sells 20,000 units of its product at a price of $80 per unit. If Tramor doubles its production to 40,000 units while sales remain at the current 20,000-unit level, by how much would the companys gross profit increase or decrease under absorption costing?
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V. Variable costing income
statement and conversion to absorption costing income
Torres Company began operations this year. During this first year, the company produced 100,000 units and sold 80,000 units. The absorption costing income statement for its first year of operation follows:
Sales (80,000 units x $50 per unit) …………………………………………
$4,000,000
Cost of goods sold
Beginning inventory ….
$
0
Cost of goods manufactured (100,000 units x $30 per unit)
3,000,000
Cost of goods available for sale ….. . .
3,000,000
Ending inventory (20,000 units x $30) …… …
600,000
Cost of goods sold …. ..
2,400,000
Gross margin ….. .
1,600,000
Selling and administrative expenses ……
530,000
Net income ………
$1,070,000
Additional information:
a. Selling and administrative expenses consist of $350,000 in annual fixed expenses and $2.25 per unit in variable selling and administrative expenses.
b. The companys product cost of $30 per unit is computed as follows:
Direct materials $5 per unit
Direct labor $14 per unit
Variable overhead $2 per unit
Fixed overhead ($900,000/100,000 units) … $9 per unit
1. Prepare an income statement for the company under variable costing.
2. Explain any difference between the income under variable costing (from part 1) and the income reported above.
