Answer to Part 1 Practice Questions Answer: Question 1.1-Barton Industries 1. Production was less than budget, and fixed overhead costs were under-applied. This caused an unfavorable volume variance that was charged to cost of goods sold. 2. Barton’s operating income using variable costing: Sales Variable cost of goods sold: 600,000 units (inventory) @$5.00 400,000 units (production) @$5.50 Contribution margin Fixed costs of operations: Factory overhead Selling and administrative Operating income 3. Reconciliation: Variable costing income Absorption costing income Difference Beginning inventory reduction: 600,000 units @$3.00 Ending inventory: 450,000 units @$3.30 Difference
$11,200 $3,000 2,200
$3,300 1,500
5,200 $ 6,000
4,800 $ 1,200
$1,200 885 $ 315 $1,800 1,485 $ 315
4. Advantages of variable costing for internal reporting: • Aids in reporting and forecasting contribution margin. • Because fixed costs are period costs, they are more predictable and controllable. • Profits vary directly with sales volume and are unaffected by inventory changes. • Aids CVP analysis/can determine breakeven point. Disadvantages of using variable costing for internal reporting: • Fixed costs may be overlooked as part of the decision-making process. • Lacks acceptability for external reporting. • Cannot be used as a basis for income tax calculations. • Sometimes the distinction between fixed and variable costs is arbitrary.
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