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Course name: Summer ACCT2218
Assignment name: Ch 19 ** BluePrint** (12pts) Cost-Volume-Profit
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Blueprint Problem: Absorption Costing and Variable Costing
Absorption Costing versus Variable Costing
The cost of manufactured products consists of direct materials, direct labor, and factory
overhead. The reporting of all these costs in financial statements is called absorption
costing. Absorption costing is required under generally accepted accounting principles for
financial statements distributed to external users. However, alternative reports may be
prepared for decision-making purposes by managers and other internal users. One such
alternative reporting is variable costing or direct costing.
In variable costing, the cost of goods manufactured is composed only of variable costs.
Thus, the cost of goods manufactured consists of direct materials, direct labor, and
variable factory overhead. In a variable costing income statement, fixed factory overhead
costs do not become a part of the cost of goods manufactured. Instead, fixed factory
overhead costs are treated as period expenses.
The primary difference between absorption and variable costing is that absorption
costing considers fixed overhead a product cost and variable costing
considers fixed overhead a period cost . The only item that is a period cost
for both costing methods is selling and administrative expenses .
Question: wrfm11h/1Blueprint Problem: Absorption Costing, and Variable Costing Blueprint Problem:
Absorption Costing, and Variable Costing
1. 1.50
2. 1.50
3. 1.50
4. 1.50
5. 1.50
6. 1.50
7. 1.50
8. 1.50
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Hover each of the underlined terms with your mouse to understand the
relationship between absorption and variable costing.
Determining Costs under Absorption and Variable Costing
Kalis Company began its operations in the current year. It manufactures and sells only
one product. During the year, Kalis produced 210,000 units and sold 170,000 units at
$400 each.
At the beginning of the year, Kalis estimated that it would produce 220,000 units.
Determine the unit cost for Kalis under both absorption and variable costing.
Because fixed overhead allocation is based on a predetermined rate, which is set during
planning at the beginning of the period, the amount to be allocated per unit will be based
on planned production, but only in the case of fixed overhead being classified as
a product cost.
Variable Costs
Direct materials $64
Direct labor 48
Variable overhead 16
Fixed Costs
Fixed overhead costs $7,040,000
Fixed selling and administrative
expenses
8,800,000
If an amount is zero, enter "0".
Absorption-
Costing
Unit Cost
Variable-
Costing
Unit Cost
Direct materials $
64
$
64

Direct labor
48

48

Variable overhead
16

16

Fixed overhead
32

0

Unit cost $
160
$
128

The difference between unit costs under absorption costing and variable costing is the
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classification of what cost? Fixed overhead
Under variable costing, this cost is classified as a period cost.
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Based on the absorption costing and variable costing definitions from the
previous section, determine which of unit costs should be carried down for each
case. Sum them up to arrive at the total unit cost.
How many units did Kalis have in ending inventory? 40000 units
What is the value of Kalis's ending inventory under absorption costing? $ 6400000
What is the value of Kalis's ending inventory under variable costing? $ 5120000
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Assume that this company had no beginning inventory, so everything that they
produced that was NOT sold will become its ending inventory.
Based on the unit costs you calculated in the previous section, determine the
total cost of ending inventory based both absorption and variable costing.
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APPLY THE CONCEPTS: Construct the absorption-costing and variable-costing
income statements
Using the data from above, complete the following income statements.
Kalis Company
Absorption-Costing Income Statement

Sales $ 68000000
Less: cost of goods sold 27200000
Gross margin $ 40800000
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Less: selling and administrative expenses 8800000
Operating income
$ 32000000

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The Absorption Costing Income Statement is the traditional statement format.
Both fixed and variable product costs are included in the cost of goods sold based
on your earlier calculation.
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Kalis
Variable-Costing Income Statement

Sales $ 68000000
Less variable expenses:
Variable cost of goods sold $ 21760000
Variable selling and administrative expenses $ 0 21760000
Gross margin $ 46240000
Less fixed expenses:
Fixed overhead $ 7040000
Fixed selling and administrative 8800000 15840000
Operating income
$ 30400000

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The Variable Costing Income Statement differs from the one in the prior section
by getting all variable costs above the gross margin, and all fixed costs below it.
Use the variable cost per unit calculated in the prior section to determine the total
variable costs in the products sold.
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wrfm11h/1Blueprint Problem: Absorption Costing, and Variable Costing Blueprint Problem:
Absorption Costing, and Variable Costing
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