Variable Costing

Stronghold Vaults Company manufacturers vaults for safekeeping. For the year ended

December 31, 2014 the following information was available regarding production for the year:

Beg. Inventory =

10,000

The actual quantity of vaults manufactured =

20,000

Actual quantity of vaults sold in the year =

22,000

Ending inventory =

Actual costs incurred as follows (fill in blanks before moving on):

Manufacturing Costs

Cost Per Unit

for 20,000 manufactured

Total Factory Overhead

Total Amount

Absorption Method

Variable Method

V

Direct materials

$ 2,200,000

V

Direct labor

$ 1,500,000

Total variable direct costs

$ 3,700,000

V

Indirect Materials

$ 252,000

V

Indirect labor

$ 375,000

V

Machinery repairs

$ 100,000

75%

V

Utilities

$ 105,000

Total variable FOH costs

$ 832,000

F

Depreciation

$ 36,000

N/A

F

Rent

$ 184,000

N/A

25%

F

Utilities

$ 35,000

N/A

Total fixed FOH costs

$ 255,000

Total FOH costs

$ 1,087,000

Total manufacturing costs

$ 4,787,000

Selling and Administrative Costs

Cost per Unit

Total

for 22,000 sold

Selling expenses:

V

Sales commissions

$ 1.00

F

Sales salaries

$ 105,000

F

Store rent

$ 36,400

F

Store utilities

$ 12,600

Administrative expenses:

V

Administrative salaries - overtime

$ 0.35

F

Administrative salaries

$ 112,000

F

Office rent

$ 28,000

F

Office utilities

$ 9,100

Using the data provided above, complete the following pages.

1. Complete the following Variable Costing Income Statement:

STRONGHOLD VAULTS COMPANY

Variable Costing Income Statement

For the Year Ended December 31, 2014

Sales

$

11,000,000

Variable cost of goods sold:

Beginning inventory

10,000

X

$

Variable cost of goods manufactured:

Direct materials

Direct labor

Indirect materials

Indirect labor

Machinery repairs

Factory utilities (75%)

Variable cost of goods manufactured

Less ending inventory

8,000

X

Variable cost of goods sold

Variable selling and administrative expenses:

Sales commissions

Administrative salaries-overtime

Total variable selling and admin. expenses

Contribution margin

Fixed costs:

Fixed manufacturing costs:

Factory depreciation

Factory rent

Factory utilities (25%)

Fixed selling and administrative expenses:

Sales salaries

Store rental

Store utilities

Administrative salaries

Office rent

Office utilities

Total fixed costs

Income from operations

$

2.

After you prepare the Income Statement using Absorption Costing (GAAP) the operating income will be different

than the operating income using Variable Costing. Complete the blanks below to explain the source of this difference.

It comes from the fixed manufacturing costs contained in beginning and ending inventory:

Units in beginning inventory =

Total fixed manufacturing cost per vault =

x

Fixed costs in beginning inventory under absorption costing

that increase COGS under absorption costing

Units in ending inventory =

Total fixed manufacturing cost per vault =

x

Fixed costs in ending inventory under absorption costing

that decrease COGS under absorption costing

Fixed manufacturing costs that are transferred into COGS under absorption costing

costing, will cause net income to be

lower

higher

by

3. Complete the following Absorption Costing Income Statement:

STRONGHOLD VAULTS COMPANY

Absorption Costing Income Statement

For the Year Ended December 31, 2014

Sales

$

11,000,000

Cost of goods sold:

Beginning inventory

10,000

X

$

Variable cost of goods manufactured:

Direct materials

Direct labor

Indirect materials

Indirect labor

Machinery repairs

Factory utilities (75%)

Factory depreciation

Factory rent

Factory utilities (25%)

Variable cost of goods manufactured

Less ending inventory

8,000

X

Cost of goods sold

Gross Profit

Selling and administrative expenses:

Selling expenses:

Sales commissions

Sales salaries

Store rental

Store utilities

Total selling expenses

Administrative expenses:

Administrative salaries-overtime

Administrative salaries

Office rent

Office utilities

Total administrative expenses

Total selling and administrative expenses

Income from operations

$

Check

4.

What conditions must exist to achieve accurate short-run pricing decisions (such as special orders) using variable costing:

a.

b.

c.