CHAPTER 9
INVENTORY COSTING AND CAPACITY ANALYSIS
9-17 Queen Sales, Inc. has just completed its first year of operations. The company has not had
any sales to date. Queen has incurred the following costs associated with its production as of
December 31, Year 1:
Direct materials $45,000
Production labor 35,000
Bookkeeper salary 28,000
Factory utilities 18,500
Office rent 12,000
Factory supervisor salary 9,600
Machine maintenance contract 7,500
Under absorption costing, what is the inventory amount shown on the balance sheet at December
31, Year 1?
a. $155,600
b. $115,600
c. $98,500
d. $80,000
9-19 The following information relates to Drexler Inc.’s Year 3 financials:
Direct labor $420,000
Direct materials 210,000
Variable overhead 205,000
Fixed overhead 355,000
Variable SG&A expenses 150,000
Fixed SG&A expenses 195,000
Year 3 period costs for Drexler, under both the absorption and variable cost methods, will be
Absorption Cost Method Variable Cost Method
a. $345,000 $700,000
Absorption Cost Method Variable Cost Method
b. $345,000 $905,000
c. $550,000 $700,000
d. $550,000 $905,000
9-21 Variable and absorption costing, explaining operating-income differences. Nascar
Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to
April and May 2017 are as follows:
The selling price per vehicle is $24,000. The budgeted level of production used to calculate the
budgeted fixed manufacturing cost per unit is 500 units. There are no price, efficiency, or
spending variances. Any production-volume variance is written off to cost of goods sold in the
month in which it occurs.
Required:
1. Prepare April and May 2017 income statements for Nascar Motors under (a) variable costing
and (b) absorption costing.
2. Prepare a numerical reconciliation and explanation of the difference between operating
income for each month under variable costing and absorption costing.
9-22 Throughput costing (continuation of 9-21). The variable manufacturing costs per unit
of Nascar Motors are as follows:
Required:
1. Prepare income statements for Nascar Motors in April and May 2017 under throughput
costing.
2. Contrast the results in requirement 1 with those in requirement 1 of Exercise 9-21.
3. Give one motivation for Nascar Motors to adopt throughput costing.
9-26 Absorption and variable costing. (CMA) Osawa, Inc., planned and actually
manufactured 200,000 units of its single product in 2014, its first year of operation. Variable
manufacturing cost was $20 per unit produced. Variable operating (nonmanufacturing) cost was
$10 per unit sold. Planned and actual fixed manufacturing costs were $600,000. Planned and
actual fixed operating (nonmanufacturing) costs totaled $400,000. Osawa sold 120,000 units of
product at $40 per unit.
Required:
1. Osawa’s 2014 operating income using absorption costing is (a) $440,000, (b) $200,000, (c)
$600,000, (d) $840,000, or (e) none of these. Show supporting calculations.
2. Osawa’s 2014 operating income using variable costing is (a) $800,000, (b) $440,000, (c)
$200,000, (d) $600,000, or (e) none of these. Show supporting calculations.
9-27 Absorption versus variable costing. Regina Company manufacturers a professional-
grade vacuum cleaner and began operations in 2017. For 2017, Regina budgeted to produce and
sell 20,000 units. The company had no price, spending, or efficiency variances and writes off
production-volume variance to cost of goods sold. Actual data for 2017 are given as follows:
Required:
1. Prepare a 2017 income statement for Regina Company using variable costing.
2. Prepare a 2017 income statement for Regina Company using absorption costing.
3. Explain the differences in operating incomes obtained in requirements 1 and 2.
4. Regina’s management is considering implementing a bonus for the supervisors based on
gross margin under absorption costing. What incentives will this bonus plan create for the
supervisors? What modifications could Regina management make to improve such a plan?
Explain briefly.
