Absorption and Variable Income Statements

The main difference between absorption costing and variable costing is how we treat

Fixed Overhead

When converting variable net income to absorption net income, what do you subtract from variable net income?

Fixed overhead in absorption beginning inventory

When converting variable net income to absorption net income, what do you add to variable net income?

Fixed overhead in absorption ending inventory

In variable costing, variable sales and administrative costs are treated as a

period cost

On an absorption costing income statement, costs are split between

product and period

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is Gel Shell's Contribution Margin under variable costing?

1,360,000

In years where we produce more units than we sell, which costing method will produce a higher net income?

Absorption Costing

In years where we sell more units than we produce, which costing method will produce a higher net income?

Variable Costing

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. Did Gel Shell's inventory balance increase or decrease compared to last year?

decrease

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. Will Gel Shell's Net Income be higher under absorption costing or variable costing?

variable

On a variable costing income statement, costs are split between

variable and fixed

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What are Gel Shell's total variable costs for the period?

1,700,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is Gel Shell's product cost per unit under absorption costing?

14

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. How much fixed overhead is in ending inventory under absorption costing?

150,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is Gel Shell's Cost of Goods Sold under absorption costing?

2,380,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is the value of fixed overhead in beginning inventory under absorption costing?

200,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is the value of Gel Shell's ending inventory under variable costing?

270,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. How many units did Gel Shell have in beginning inventory?

40,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is the value of Gel Shell's ending inventory under absorption costing?

420,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is Gel Shell's Net Income under absorption costing?

430,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is Gel Shell's Net Income under variable costing?

480,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. How much is the difference between Gel Shell's absorption net income and variable net income?

50,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is Gel Shell's Gross Profit under absorption costing?

680,000

Gel Shell makes gel nail polish, which they sell for $18/bottle. Gel Shell has the following costs Gel Shell's Costs ---------------------------------------------------------------------------- Type of Cost | Amount ---------------------------------------------------------------------------- Direct Materials | $2/unit ---------------------------------------------------------------------------- Direct Labor | $3/unit ---------------------------------------------------------------------------- Variable Overhead | $4/unit ---------------------------------------------------------------------------- Fixed Overhead | $800,000/year ---------------------------------------------------------------------------- Variable sales and administrative | $1/unit ---------------------------------------------------------------------------- Fixed sales & administrative | $80,000/year In the current year, Gel Shell produced 160,000 bottles of nail polish and sold $170,000 bottles of nail polish. The ended the year with 30,000 unsold bottles of nail polish. What is Gel Shell's product cost per unit under variable costing?

9